CITIZENS, INC. - Quarter Report: 2011 June (Form 10-Q)

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

___________________

x Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011

o Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from _____ to ____

Commission File Number: 000-16509

CITIZENS, INC.

(Exact name of registrant as specified in its charter)


Colorado		84-0755371
(State of other jurisdiction of incorporation or organization		I.R.S. Employer Identification No.)

400 East Anderson Lane, Austin, TX		78752
(Address of principal executive offices)		(Zip Code)

(512) 837-7100

(Registrant's telephone number, including area code

N/A

(Former name, former address and former fiscal year,

if changed since last report)

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 requirements for the past 90 days. x Yes o No

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

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

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

As of August 4, 2011, the Registrant had 48,946,546 shares of Class A common stock, no par value, outstanding and 1,001,714 shares of Class B common stock outstanding.

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TABLE OF CONTENTS

Part I.	Financial Information		Page Number


	Item 1.	Financial Statements

		Consolidated Statements of Financial Position, June 30, 2011 (Unaudited) and December 31, 2010	2

		Consolidated Statements of Operations, Three Months Ended June 30, 2011 and 2010 (Unaudited)	4

		Consolidated Statements of Operations, Six Months Ended June 30, 2011 and 2010 (Unaudited)	5

		Consolidated Statements of Cash Flows, Six Months Ended June 30, 2011 and 2010 (Unaudited)	6

		Notes to Consolidated Financial Statements	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

	Item 4.	Controls and Procedures	46

Part II.	Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	47

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

	Item 3.	Defaults Upon Senior Securities	47

	Item 4.	(Reserved)	47

	Item 5.	Other Information	47

	Item 6.	Exhibits	48

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position

(In thousands)

Assets	June 30, 2011		December 31, 2010
	(Unaudited)
Investments:
Fixed maturities available-for-sale, at fair value (cost: $574,094 and $578,412 in 2011 and 2010, respectively)	$	583,108		575,737
Fixed maturities held-to-maturity, at amortized cost (fair value: $108,608 and $79,103 in 2011 and 2010, respectively)		109,744		80,232
Equity securities available-for-sale, at fair value (cost: $20,551 and $19,844 in 2011 and 2010, respectively)		24,593		23,304
Mortgage loans on real estate		1,466		1,489
Policy loans		36,919		35,585
Real estate held for investment (less $1,082 and $1,017 accumulated depreciation in 2011 and 2010, respectively)		9,152		9,200
Other long-term investments		144		148
Total investments		765,126		725,695

Cash and cash equivalents		58,376		49,723
Accrued investment income		8,615		7,433
Reinsurance recoverable		9,440		9,729
Deferred policy acquisition costs		131,970		125,684
Cost of customer relationships acquired		30,083		31,631
Goodwill		17,160		17,160
Other intangible assets		970		1,019
Federal income tax receivable		847		1,914
Property and equipment, net		7,940		7,101
Due premiums, net (less $1,489 and $1,568 allowance for doubtful accounts in 2011 and 2010, respectively)		7,989		8,537
Prepaid expenses		1,463		474
Other assets		689		406
Total assets	$	1,040,668		986,506

See accompanying notes to consolidated financial statements.

(Continued)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Financial Position

(In thousands, except share amounts)

Liabilities and Stockholders' Equity	June 30, 2011			December 31, 2010
	(Unaudited)
Liabilities:
Policy liabilities:
Future policy benefit reserves:
Life insurance	$	661,534			637,140
Annuities		44,241			42,096
Accident and health		5,634			5,910
Dividend accumulations		10,028			9,498
Premiums paid in advance		25,282			23,675
Policy claims payable		9,507			10,540
Other policyholders' funds		8,137			8,191
Total policy liabilities		764,363			737,050

Commissions payable		2,564			2,538
Deferred federal income tax		13,695			9,410
Payable for securities in process of settlement		10,078			-
Warrants outstanding		372			1,587
Other liablities		9,047			8,287
Total liabilities		800,119			758,872

Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock:
Class A, no par value, 100,000,000 shares authorized, 51,825,079 shares isued in 2011 and 51,822,497 shares issued in 2010,including shares in treasury of 3,135,738 in 2011 and 2010		256,720			256,703
Class B, no par value, 2,000,000 shares authorized, 1,001,714 shares issued and outstanding in 2011 and 2010		3,184			3,184
Accumulated deficit		(17,558	)		(22,581	)
Accumulated other comprehensive income:
Unrealized gains on securities, net of tax		9,214			1,339
Treasury stock, at cost		(11,011	)		(11,011	)
Total stockholders' equity		240,549			227,634
Total liabilities and stockholders' equity	$	1,040,668			986,506

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations

Three Months Ended June 30,

(In thousands, except share amounts)

(Unaudited)

	2011			2010
Revenues:
Premiums:
Life insurance	$	38,231			35,085
Accident and health insurance		396			409
Property insurance		1,259			1,182
Net investment income		7,717			8,275
Realized investment gains (losses), net		(13	)		692
Decrease in fair value of warrants		816			366
Other income		104			151
Total revenues		48,510			46,160
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		14,905			15,094
Increase in future policy benefit reserves		13,000			9,783
Policyholders' dividends		1,920			1,777
Total insurance benefits paid or provided		29,825			26,654

Commissions		9,930			9,028
Other general expenses		6,919			7,122
Capitalization of deferred policy acquisition costs		(7,884	)		(6,978	)
Amortization of deferred policy acquisition costs		4,229			5,218
Amortization of cost of customer relationships acquired		751			754
Total benefits and expenses		43,770			41,798

Income before federal income tax		4,740			4,362
Federal income tax expense (benefit)		1,497			1,177
Net income (loss)	$	3,243			3,185

Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.07			0.07
Basic earnings per share of Class B common stock		0.03			0.03
Diluted earnings per share of Class A common stock		0.07			0.07
Diluted earnings per share of Class B common stock		0.03			0.03

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Operations

Six Months Ended June 30,

(In thousands, except per share amounts)

(Unaudited)

	2011			2010
Revenues:
Premiums:
Life insurance	$	73,842			68,681
Accident and health insurance		768			823
Property insurance		2,504			2,362
Net investment income		15,231			16,624
Realized investment gains (losses), net		6			751
Decrease in fair value of warrants		1,215			252
Other income		227			499
Total revenues		93,793			89,992
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		29,784			30,671
Increase in future policy benefit reserves		25,318			19,328
Policyholders' dividends		3,582			3,347
Total insurance benefits paid or provided		58,684			53,346

Commissions		19,002			17,156
Other general expenses		13,529			13,975
Capitalization of deferred policy acquisition costs		(15,049	)		(12,973	)
Amortization of deferred policy acquisition costs		8,749			10,162
Amortization of cost of customer relationships acquired		1,405			1,592
Total benefits and expenses		86,320			83,258

Income before federal income tax		7,473			6,734
Federal income tax expense (benefit)		2,450			1,944
Net income (loss)	$	5,023			4,790

Per Share Amounts:
Basic earnings per share of Class A common stock	$	0.10			0.10
Basic earnings per share of Class B common stock		0.05			0.05
Diluted earnings per share of Class A common stock		0.08			0.10
Diluted earnings per share of Class B common stock		0.04			0.05

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows

Six Months Ended June 30,

(In thousands)

(Unaudited)

	2011			2010
Cash flows from operating activities:
Net income	$	5,023			4,790
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Realized (gains) losses on sale of investments and other assets		(6	)		(751	)
Net deferred policy acquisition costs		(6,300	)		(2,811	)
Amortization of cost of customer relationships acquired		1,405			1,592
Increase (decrease) in fair value of warrants		(1,215	)		(252	)
Depreciation		451			524
Amortization of premiums and discounts on fixed maturities and short-term investments		2,243			1,377
Deferred federal income tax expense (benefit)		45			27
Change in:
Accrued investment income		(1,182	)		276
Reinsurance recoverable		289			1,185
Due premiums and other receivables		548			1,037
Future policy benefit reserves		24,942			18,903
Other policyholders' liabilities		1,050			2,833
Federal income tax receivable		1,067			746
Commissions payable and other liabilities		786			(3,492	)
Other, net		(1,101	)		(1,945	)
Net cash provided by (used in) operating activities		28,045			24,039
Cash flows from investing activities:
Sale of fixed maturities, available-for-sale		-			6,866
Maturity and calls of fixed maturities, available-for-sale		61,186			86,600
Maturity and calls of fixed maturities, held-to-maturity		27,000			51,250
Purchase of fixed maturities, available-for-sale		(51,507	)		(105,524	)
Purchase of fixed maturities, held-to-maturity		(54,174	)		(31,140	)
Sale of equity securities, available-for-sale		-			591
Calls of equity securities, available-for-sale		432			50
Purchase of equity securities, available-for-sale		(1,000	)		(136	)
Principal payments on mortgage loans		23			24
Increase in policy loans		(1,334	)		(1,877	)
Sale of other long-term investments		3			-
Purchase of other long-term investments		(17	)		(261	)
Purchase of property and equipment		(1,342	)		(1,071	)
Maturity of short-term investments		-			2,500
Net cash provided by (used in) investing activities		(20,730	)		7,872

See accompanying notes to consolidated financial statements.

(Continued)

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30,

(In thousands)

(Unaudited)

	2011			2010
Cash flows from financing activities:
Warrants exercised	$	17			-
Annuity deposits		3,162			2,458
Annuity withdrawals		(1,841	)		(1,669	)
Net cash provided by (used in) financing activities		1,338			789

Net increase (decrease) in cash and cash equivalents		8,653			32,700
Cash and cash equivalents at beginning of year		49,723			48,625
Cash and cash equivalents at end of period	$	58,376			81,325
Supplemental disclosures of operating activities:
Cash paid during the period for income taxes	$	1,338			1,171

Supplemental Disclosures of Non-Cash Investing Activities:

In 2010, the Company sold a parcel of real estate and issued a mortgage loan for $102,000.

See accompanying notes to consolidated financial statements.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2011

(Unaudited)

(1) Financial Statements

Basis of Presentation and Consolidation

The accompanying consolidated financial statements of Citizens, Inc. and its wholly-owned subsidiaries have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP").

The consolidated financial statements include the accounts and operations of Citizens, Inc. ("Citizens"), a Colorado corporation, and its wholly-owned subsidiaries, CICA Life Insurance Company of America ("CICA"), Computing Technology, Inc. ("CTI"), Insurance Investors, Inc. ("III"), Citizens National Life Insurance Company ("CNLIC"), Security Plan Life Insurance Company ("SPLIC"), and Security Plan Fire Insurance Company ("SPFIC"). Integrity Capital Corporation and Integrity Capital Life Insurance Company were merged into CICA effective April 1, 2011. All significant inter-company accounts and transactions have been eliminated. Citizens and its wholly-owned subsidiaries are collectively referred to as "the Company, "we," or "our."

The consolidated statements of financial position for June 30, 2011, the consolidated statements of operations for the three and six-month periods ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six-month period then ended have been prepared by the Company without audit. In the opinion of management, all adjustments to present fairly the financial position, results of operations, and changes in cash flows at June 30, 2011, and for comparative periods have been made.

We provide primarily life insurance policies through three of our subsidiaries - CICA, SPLIC, and CNLIC, as well as a small amount of health insurance policies through CICA and CNLIC. CICA and CNLIC issue ordinary whole-life policies, burial insurance, pre-need policies, and accident and health related policies, throughout the Midwest and southern United States. CICA also issues ordinary whole-life policies to non-U.S. residents. SPLIC offers final expense and home service life insurance in Louisiana, Arkansas and Mississippi and SPFIC, a wholly-owned subsidiary of SPLIC, writes a limited amount of property insurance in Louisiana.

CTI provides data processing systems and services, as well as furniture and equipment, to the Company. III provides aviation transportation to the Company.

The Company recorded adjustments in the first quarter of 2011 related to the reserve calculation of certain SPLIC policies as of December 31, 2010, that resulted in a pre-tax decrease in reserves of $0.2 million. In addition, the Company utilized system-generated information to refine estimates from December 31, 2010, which resulted in a decrease of deferred acquisition costs of $0.3 million and a reserve decrease of $0.1 million reflected in the first quarter reporting period. The resulting net income impact totaled $50,237 in the first three months of 2011.

Use of Estimates

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

The most significant estimates include those used in the evaluation of other-than-temporary impairments on debt and equity securities and valuation allowances on investments, actuarially determined liabilities and assumptions, goodwill impairment, valuation allowance on deferred tax assets, and contingencies relating to litigation and regulatory matters. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements.

Reclassification

Reclassifications have been made in the current year related to certain prior year reported amounts to provide consistent presentation. The Company recorded reclassifications related to DAC amounts capitalized and amortized to properly reflect the amount used to develop the DAC asset balance and to provide consistent presentation with the current year. We recorded increases to DAC capitalized of $1.1 million and $1.7 million and an increase in amortization for the same amounts for the three months ended and the first six months of 2010.

Significant Accounting Policies

For a description of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included in our 2010 Form 10-K Annual Report, which should be read in conjunction with these accompanying Consolidated Financial Statements.

(2) Accounting Pronouncements

Accounting Standards Not Yet Adopted

In October 2010, the FASB issued guidance modifying the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The guidance specifies that the costs must be based on successful efforts. The guidance also specifies that advertising costs should be included as deferred acquisition costs only when the direct-response advertising accounting criteria are met. If application of the guidance would result in the capitalization of acquisition costs that had not been capitalized prior to adoption, the entity may elect not to capitalize those additional costs. The new guidance is effective for reporting periods beginning after December 15, 2011, and should be applied prospectively, with retrospective application permitted. The Company is in the process of evaluating the impact of adoption of the guidance on the results of operations and financial position.

Accounting Standards Recently Adopted

In December 2010, the FASB issued disclosure guidance for entities that enter into business combinations that are material. The guidance specifies that if an entity presents comparative financial statements, the entity should disclose pro forma revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The Company will apply the guidance to any business combinations entered into on or after January 1, 2011.

ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

(3) Segment Information

The Company has three reportable segments: Life Insurance, Home Service Insurance, and Other Non-Insurance enterprises. The accounting policies of the segments are in accordance with U.S. GAAP and are the same as those used in the preparation of the consolidated financial statements. The Company evaluates profit and loss performance based on U.S. GAAP income before federal income taxes for its three reportable segments.

The Company has no reportable differences between segments and consolidated operations.

	Three Months Ended June 30, 2011
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	29,016			10,870			-		39,886
Net investment income		4,272			3,275			170		7,717
Realized investment gains (losses), net		4			(17	)		-		(13	)
Decrease in fair value of warrants		-			-			816		816
Other income		77			6			21		104
Total revenue		33,369			14,134			1,007		48,510

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		10,456			4,449			-		14,905
Increase in future policy benefit reserves		12,015			985			-		13,000
Policyholders' dividends		1,901			19			-		1,920
Total insurance benefits paid or provided		24,372			5,453			-		29,825

Commissions		6,058			3,872			-		9,930
Other general expenses		2,999			3,173			747		6,919
Capitalization of deferred policy acquisition costs		(6,060	)		(1,824	)		-		(7,884	)
Amortization of deferred policy acquisition costs		3,772			457			-		4,229
Amortization of cost of customer relationships acquired		276			475			-		751
Total benefits and expenses		31,417			11,606			747		43,770
Income (loss) before income tax expense	$	1,952			2,528			260		4,740

	Six Months Ended June 30, 2011
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises		Consolidated
	(In thousands)
Revenues:
Premiums	$	55,536			21,578			-		77,114
Net investment income		8,353			6,512			366		15,231
Realized investment gains (losses), net		4			2			-		6
Decrease in fair value of warrants		-			-			1,215		1,215
Other income		164			14			49		227
Total revenue		64,057			28,106			1,630		93,793

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		19,857			9,927			-		29,784
Increase in future policy benefit reserves		23,824			1,494			-		25,318
Policyholders' dividends		3,544			38			-		3,582
Total insurance benefits paid or provided		47,225			11,459			-		58,684

Commissions		11,400			7,602			-		19,002
Other general expenses		5,953			6,255			1,321		13,529
Capitalization of deferred policy acquisition costs		(11,487	)		(3,562	)		-		(15,049	)
Amortization of deferred policy acquisition costs		7,610			1,139			-		8,749
Amortization of cost of customer relationships acquired		499			906			-		1,405
Total benefits and expenses		61,200			23,799			1,321		86,320
Income (loss) before income tax expense	$	2,857			4,307			309		7,473

	Three Months Ended June 30, 2010
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	26,081			10,595			-			36,676
Net investment income		4,635			3,475			165			8,275
Realized investment gains (losses), net		144			548			-			692
Decrease in fair value of warrants		-			-			366			366
Other income		132			4			15			151
Total revenue		30,992			14,622			546			46,160

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		10,247			4,847			-			15,094
Increase in future policy benefit reserves		8,773			1,010			-			9,783
Policyholders' dividends		1,760			17			-			1,777
Total insurance benefits paid or provided		20,780			5,874			-			26,654

Commissions		5,239			3,789			-			9,028
Other general expenses		2,654			3,794			674			7,122
Capitalization of deferred policy acquisition costs		(5,219	)		(1,759	)		-			(6,978	)
Amortization of deferred policy acquisition costs		5,001			217			-			5,218
Amortization of cost of customer relationships acquired		275			479			-			754
Total benefits and expenses		28,730			12,394			674			41,798
Income (loss) before income tax expense	$	2,262			2,228			(128	)		4,362

	Six Months Ended June 30, 2010
	Life Insurance			Home Service Insurance			Other Non-Insurance Enterprises			Consolidated
	(In thousands)
Revenues:
Premiums	$	50,850			21,016			-			71,866
Net investment income		9,346			7,007			271			16,624
Realized investment gains (losses), net		115			681			(45	)		751
Decrease in fair value of warrants		-			-			252			252
Other income		409			53			37			499
Total revenue		60,720			28,757			515			89,992

Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		20,146			10,525			-			30,671
Increase in future policy benefit reserves		17,435			1,893			-			19,328
Policyholders' dividends		3,302			45			-			3,347
Total insurance benefits paid or provided		40,883			12,463			-			53,346

Commissions		9,744			7,412			-			17,156
Other general expenses		5,631			7,435			909			13,975
Capitalization of deferred policy acquisition costs		(9,683	)		(3,290	)		-			(12,973	)
Amortization of deferred policy acquisition costs		9,660			502			-			10,162
Amoritzation of cost of customer relationships acquired		605			987			-			1,592
Total benefits and expenses		56,840			25,509			909			83,258
Income (loss) before income tax expense	$	3,880			3,248			(394	)		6,734

(4) Total Comprehensive Income

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)

Net income (loss)	$	3,243			3,185			5,023			4,790
Other comprehensive income (loss) net of effects of deferred acquisiton costs and taxes:
Unrealized gains (losses) on available-for-sale securities		10,508			3,815			12,115			10,266
Tax (expense) benefit		(3,678	)		(2,646	)		(4,240	)		(4,435	)
Other comprehensive income (loss)		6,830			1,169			7,875			5,831
Total comprehensive income (loss)	$	10,073			4,354			12,898			10,621

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2011

(Unaudited)

(5)	Earnings Per Share

The following tables set forth the computation of basic and diluted earnings per share.

	Three Months Ended June 30,
	2011		2010
	(In thousands, except per share amounts)
Basic and diluted earnings per share:
Numerator:
Net income	$	3,243		3,185

Net income allocated to Class A common stock	$	3,210		3,153
Net income allocated to Class B common stock		33		32
Net income available to common stockholders	$	3,243		3,185
Denominator:
Weighted average shares of Class A outstanding - basic and diluted		48,689		48,687
Weighted average shares of Class B outstanding - basic and diluted		1,002		1,002

Basic and diluted earnings per share of Class A common stock	$	0.07		0.07
Basic and diluted earnings per share of Class B common stock		0.03		0.03

	Six Months Ended June 30,
	2011		2010
	(In thousands, except per share amounts)

Basic and diluted earnings per share:
Numerator:
Net income	$	5,023		4,790

Net income allocated to Class A common stock	$	4,972		4,741
Net income allocated to Class B common stock		51		49
Net income available to common stockholders	$	5,023		4,790
Denominator:
Weighted average shares of Class A outstanding - basic		48,688		48,687
Weighted average shares of Class A outstanding - diluted		48,704		48,687
Weighted average shares of Class B outstanding - basic and diluted		1,002		1,002

Basic earnings per share of Class A common stock	$	0.10		0.10
Basic earnings per share of Class B common stock		0.05		0.05
Diluted earnings per share of Class A common stock		0.08		0.10
Diluted earnings per share of Class B common stock		0.04		0.05

The diluted earnings per share calculation has assumptions regarding the exercise of the warrants issued to investors of the Class A-1 and A-2 preferred stock. For the three months ended June 30, 2011, the calculation assumes the issue of 1,282 additional shares, causing a reduction in net income of $35,000 as those shares would no longer be outstanding. The calculation produces no change in earnings per share. The calculation for the six months ended June 30, 2011, assumes the issue of 16,173 additional shares with a reduction in net income of $1.1 million. This calculation results in dilution of $0.02 per share of Class A common stock and $0.01 per share of Class B common stock for earnings per share of $0.08 per share of Class A common stock and $0.04 per share of Class B common stock.

TABLE OF CONTENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2011

(Unaudited)

(6)	Investments

The Company invests primarily in fixed maturity securities, which totaled 84.1% of total investments and cash and cash equivalents at June 30, 2011.

	June 30, 2011				December 31, 2010
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)

Fixed maturity securities	$	692,852		84.1	$	655,969		84.6
Equity securities		24,593		3.0		23,304		3.0
Mortage loans		1,466		0.2		1,489		0.2
Policy loans		36,919		4.5		35,585		4.6
Real estate		9,152		1.1		9,200		1.2
Other long-term investments		144		-		148		-
Cash and cash equivalents		58,376		7.1		49,723		6.4
Total cash, cash equivalents and investments	$	823,502		100.0	$	775,418		100.0

Cash balances fluctuate as excess available funds are pending investment into fixed maturity securities.

The following tables represent gross unrealized gains and losses for fixed maturities and equity securities as of the periods indicated.

	June 30, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Fixed maturities available-for-sale:
U.S. Treasury securities	$	10,455		2,040		-		12,495
U.S. Government-sponsored enterprises		262,470		696		2,850		260,316
States of the United States and political subdivisions of the states		132,740		3,104		2,701		133,143
Foreign governments		105		28		-		133
Corporate		158,250		8,860		782		166,328
Securities not due at a single maturity date		10,074		632		13		10,693
Total fixed maturities available-for-sale		574,094		15,360		6,346		583,108

Fixed maturities held-to-maturity
U.S. Government-sponsored enterprises		80,734		206		779		80,161
States of the United States and political subdivisions of the states		29,010		3		566		28,447
Total fixed maturities held-to-maturity		109,744		209		1,345		108,608
Total fixed maturities	$	683,838		15,569		7,691		691,716
Total equity securities	$	20,551		4,042		-		24,593

	December 31, 2010
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Fixed maturities available-for-sale:
U.S. Treasury securities	$	10,908		1,917		-		12,825
U.S. Government-sponsored enterprises		290,904		441		6,390		284,955
States of the United States and political subdivisions of the states		107,214		539		6,034		101,719
Foreign governments		106		26		-		132
Corporate		155,277		7,237		1,216		161,298
Securities not due at a single maturity date		14,003		833		28		14,808
Total fixed maturities available-for-sale		578,412		10,993		13,668		575,737

Fixed maturities held-to-maturity
U.S. Government-sponsored enterprises		80,232		272		1,401		79,103
Total fixed maturities	$	658,644		11,265		15,069		654,840
Total equity securities	$	19,844		3,460		-		23,304

Almost 92% or $9.2 million of the Company's mortgage-backed security holdings, based on amortized cost, totaling $10.1 million are residential U.S. Government-sponsored issues. Mortgage-backed securities are also referred to as securities not due at a single maturity date throughout this report. The majority of the Company's equity securities are diversified mutual funds.

Valuation of Investments in Fixed Maturity and Equity Securities

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

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

The Company evaluates whether a credit impairment exists for debt securities by considering primarily the following factors: (a) changes in the financial condition of the security's underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) changes in the financial condition, credit rating and near-term prospects of the issuer, (d) the extent to which the fair value has been less than the amortized cost of the security, and (e) the payment structure of the security. The Company's best estimate of expected future cash flows used to determine the credit loss amount is a quantitative and qualitative process. Quantitative review includes information received from third party sources such as financial statements, pricing and rating changes, liquidity and other statistical information. Qualitative factors include judgments related to business strategies, economic impacts on the issuers and overall judgment related to estimates and industry factors. The Company's best estimate of future cash flows involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries, which may include estimating the underlying collateral value. In addition, projections of expected future debt security cash flows may change based upon new information regarding the performance of the issuer.

The primary factors considered in evaluating whether an impairment exists for an equity security include, but are not limited to: (a) the length of time and the extent to which the fair value has been less than the cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated payments, and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery.

The Company did not recognize any other-than-temporary impairments ("OTTI") during the six months ended June 30, 2011, and June 30, 2010.

The tables below present the fair values and gross unrealized losses of fixed maturities and equity securities that have remained in a continuous unrealized loss position for the periods indicated.

	June 30, 2011
	Less than 12 months						Greater than 12 months						Total
	Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities
	(In thousands, except for # of securities)

Available-for-sale securities:
U.S. Treasury securities	$	-		-		-		-		-		-		-		-		-
U.S. Government-sponsored enterprises		183,732		2,850		131		-		-		-		183,732		2,850		131
Securities issued by states and political subdivisions		25,695		454		24		10,139		2,247		8		35,834		2,701		32
Corporate		14,754		486		13		6,157		296		5		20,911		782		18
Securities not due at a single maturity date		-		-		-		187		13		4		187		13		4
Total available-for-sale securities		224,181		3,790		168		16,483		2,556		17		240,664		6,346		185
Held to-maturity securities:
U.S. Government-sponsored enterprises		58,920		779		28		-		-		-		58,920		779		28
Securities issued by states and political subdivisions		26,979		566		22		-		-		-		26,979		566		22
Total held-to-maturity securities		85,899		1,345		50		-		-		-		85,899		1,345		50
Total fixed maturities	$	310,080		5,135		218		16,483		2,556		17		326,563		7,691		235

	December 31, 2010
	Less than 12 months						Greater than 12 months						Total
	Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities
	(In thousands, except for # of securities)

Available-for-sale securities:
U.S. Government-sponsored enterprises	$	234,994		6,390		170		-		-		-		234,994		6,390		170
Securities issued by states and political subdivisions		66,836		3,270		60		9,626		2,764		8		76,462		6,034		68
Corporate		28,072		1,040		21		2,443		176		7		30,515		1,216		28
Securities not due at a single maturity date		569		8		2		201		20		5		770		28		7
Total available-for-sale securities		330,471		10,708		253		12,270		2,960		20		342,741		13,668		273
Held to-maturity securities:
U.S. Government-sponsored enterprises		45,699		1,401		18		-		-		-		45,699		1,401		18
Total fixed maturities	$	376,170		12,109		271		12,270		2,960		20		388,440		15,069		291

As of June 30, 2011 and December 31, 2010, there were no unrealized losses on the Company's equity securities.

As of June 30, 2011, the Company had 17 available-for-sale securities in an unrealized loss position for greater than 12 months, which were municipal, corporate and mortgage-backed securities. The Company has reviewed these securities and determined that no other-than-temporary impairment exists based on our evaluations of the credit worthiness of the issuers and due to the fact that we do not intend to sell the investments, nor is it likely that we would be required to sell these investments before recovery of their amortized cost bases, which may be maturity.

The amortized cost and fair value of fixed maturity securities at June 30, 2011 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. The Company has experienced significant issuer calls over the past two years as a result of the declining interest rate environment.

	June 30, 2011
	Amortized Cost		Fair Value
	(In thousands)
Available-for-sale securities:
Due in one year or less	$	4,770		4,919
Due after one year through five years		34,212		36,045
Due after five years through ten years		116,642		120,342
Due after ten years		408,396		411,109
Total available-for-sale securities		564,020		572,415
Held-to-maturity securities:
Due after five years through ten years		16,889		16,596
Due after ten years		92,855		92,012
Total held-to-maturity securities		109,744		108,608
Securities not due at a single maturity date		10,074		10,693
Total fixed maturities	$	683,838		691,716

The securities not due at a single maturity date are primarily mortgage-backed obligations of U.S. Government-sponsored enterprises and corporate securities.

The Company uses the specific identification method to determine the cost basis used in the calculation of realized gains and losses related to security sales. Proceeds and gross realized gains from sales of securities for the three and six months ended June 30, 2011 and 2010 are summarized as follows.

	Fixed Maturities Available-for-Sale								Equity Securities
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010		2011		2010		2011		2010
	(In thousands)

Proceeds	$	-		4,740		-		6,866		-		487		-		591
Gross realized gains	$	-		615		-		742		-		141		-		166

No securities were sold for realized losses for the periods reported and there were no securities sold from the held-to-maturity portfolio during the three and six months ended June 30, 2011 and 2010.

TABLE OF CONTENTS

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

June 30, 2011

(Unaudited)

(7)	Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We hold available-for-sale fixed maturity securities and equity securities, which are carried at fair value.

Fair value measurements are generally based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are required to be classified and disclosed in one of the following three categories:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or whose significant value drivers are observable.

Level 3 - Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as U.S. Treasury securities and actively traded stock and mutual fund investments.

Level 2 includes those financial instruments that are valued by independent pricing services or broker quotes. These models are primarily industry-standard models that consider various inputs, such as interest rates, credit spreads and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include corporate fixed maturity securities, U.S. Government-sponsored enterprise securities, municipal securities and certain mortgage and asset-backed securities.

Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker prices utilizing significant inputs not based on or corroborated by readily available market information. This category consists of two private placement mortgage-backed securities where we cannot corroborate the significant valuation inputs with market observable data.

The following tables set forth our assets and liabilities that are measured at fair value on a recurring basis as of the dates indicated.

	June 30, 2011
	Level 1		Level 2		Level 3		Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities available-for-sale:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,495		260,316		-		272,811
Corporate		-		166,328		-		166,328
Municipal bonds		-		133,143		-		133,143
Mortgage-backed		-		10,210		483		10,693
Foreign governments		-		133		-		133
Total fixed maturities, available-for-sale		12,495		570,130		483		583,108
Total equity securities, available-for-sale		24,593		-		-		24,593
Total financial assets	$	37,088		570,130		483		607,701
Financial liabilities:
Warrants outstanding	$	-		372		-		372

	December 31, 2010
	Level 1		Level 2		Level 3		Total Fair Value
	(In thousands)
Financial assets:
Fixed maturities available-for-sale:
U.S. Treasury and U.S. Government-sponsored enterprises	$	12,825		284,955		-		297,780
Corporate		-		161,298		-		161,298
Municipal bonds		-		101,719		-		101,719
Mortgage-backed		-		14,289		519		14,808
Foreign governments		-		132		-		132
Total fixed maturities, available-for-sale		12,825		562,393		519		575,737
Total equity securities, available-for-sale		23,304		-		-		23,304
Total financial assets	$	36,129		562,393		519		599,041
Financial liabilities:
Warrants outstanding	$	-		1,587		-		1,587

Financial Instruments Valuation

Fixed maturity securities, available-for-sale. At June 30, 2011, the fixed maturities, valued using a third-party pricing source, totaled $570.1 million for Level 2 assets and comprised 93.8% of total reported fair value. Fair values for Level 3 assets are based upon unadjusted broker quotes that are non-binding. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models, other third party pricing services, and back tested to recent trades. For the six months ended June 30, 2011, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received.

Equity securities, available-for-sale. Fair values of these securities are based upon quoted market price and are classified as Level 1 assets.

Warrants outstanding. Fair value of our warrants are based upon industry standard models that consider various observable inputs and are classified as Level 2 liabilities.

The following table presents additional information about fixed maturity securities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value.

	Six Months Ended June 30,
	2011			2010
	(In thousands)

Balance at beginning of period	$	519			577
Total realized and unrealized losses:
Included in net income		-			-
Included in other comprehensive income		-			(2	)
Principal paydowns		(36	)		(28	)
Transfer in and (out) of Level 3		-			-
Balance at end of period	$	483			547

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

(Unaudited)

Financial Instruments not Carried at Fair Value

Estimates of fair values are made at a specific point in time, based on relevant market prices and information about the financial instruments. The estimated fair values of financial instruments presented below are not necessarily indicative of the amounts the Company might realize in actual market transactions.

The carrying amount and fair value for the financial assets and liabilities on the consolidated balance sheets not otherwise disclosed for the periods indicated are as follows:

	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Financial assets:
Fixed maturities, held-to-maturity	$	109,744		108,608		80,232		79,103
Mortgage loans		1,466		1,407		1,489		1,433
Policy loans		36,919		36,919		35,585		35,585
Cash and cash equivalents		58,376		58,376		49,723		49,723
Financial liabilities:
Annuities		44,241		40,084		42,096		38,619

Fair values for fixed income 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 and commercial properties. Weighted average interest rates for these loans were approximately 6.7% per year as of June 30, 2011 and December 31, 2010, with maturities ranging from one to thirty years. Fair value is estimated using a discount rate of 6.25% applied to current cash flows projected.

Policy loans have a weighted average annual interest rate of 7.7% as of June 30, 2011 and December 31, 2010, respectively, and have no specified maturity dates. The aggregate fair value of policy loans approximates the carrying value reflected on the consolidated balance sheet. These loans typically carry an interest rate that is at or above the crediting rate applied to the related policy and contract reserves. Policy loans are an integral part of the life insurance policies we have in force and cannot be valued separately and are not marketable; therefore, the fair value of policy loans approximates the carrying value.

The fair value of the Company's liabilities under annuity contract policies was estimated at June 30, 2011, using discounted cash flows. The fair value of liabilities under all insurance contracts are taken into consideration in the overall management of interest rate risk, which seeks to minimize exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts.

(8)	Legal Proceedings

We are a defendant in a lawsuit filed on August 6, 1999, in the Texas District Court, Austin, Texas, now styled Delia Bolanos Andrade, et al., Plaintiffs, v. Citizens Insurance Company of America, et al., Defendants in which a class was originally certified by the trial court and reversed by the Texas Supreme Court in 2007 with an order to the trial court to conduct further proceedings consistent with its ruling. The underlying lawsuit alleged that certain life insurance policies CICA made available to non-U.S. residents, when combined with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts for the purpose of accumulating ownership of our Class A common stock, along with allowing the policyholders to make additional contributions to the trusts, were actually offers and sales of securities that occurred in Texas by unregistered dealers in violation of the Texas securities laws. The remedy sought was rescission and return of the insurance premium payments. On December 9, 2009, the trial court denied the recertification of the class after conducting additional proceedings in accordance with the Texas Supreme Court's ruling. The remaining plaintiffs must now proceed individually, and not as a class, if they intend to pursue their cases against us. We intend to maintain a vigorous defense in any remaining proceedings.

SPFIC is vigorously defending a number of matters in various stages of development filed in the aftermath of Hurricane Katrina, including a number of individual lawsuits that are immaterial to the companies financial statements and a statewide putative class action in Louisiana styled The State of Louisiana v. AAA Insurance, or Road Home Litigation, ("Road Home Litigation"), which was filed in the Civil District Court for the Parish of Orleans on August 23, 2007. The Louisiana Attorney General filed the Road Home Litigation, in part, as a putative class action lawsuit in state court against SPFIC and approximately 200 other insurers on behalf of Road Home fund recipients alleging that the insurers have failed to pay all damages owed under their policies. The insurers removed the matter to federal court. The district court denied plaintiffs’ first motion to remand the matter to state court and the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) affirmed that ruling. The defendants filed a motion to dismiss and the plaintiffs filed a second motion to remand the claims involving a Road Home subrogation agreement. In March 2009, the district court denied the State’s second request that its claims be remanded to state court. As for the defendant insurers’ motion, the judge granted it in part and denied it in part in April 2009. Dismissal of all of the extra-contractual claims, including the bad faith and breach of fiduciary duty claims, was granted. Dismissal also was granted of all claims based on the Valued Policy Law and all flood loss claims based on the levee breaches finding that the insurers flood exclusions precluded coverage. The dismissal of those claims was not appealed. After these dismissals were granted, the remaining claims were for breach of contract and for declaratory relief on the alleged underpayment of claims by the insurers. Due to these rulings and the strength of SPFIC's defenses to the remaining claims, SPFIC no longer believed an adverse ruling in the Road Home Litigation would have a material impact on its financial statements. We reported this opinion in our 2009 Form 10-K. Consequently, subsequent 10-Q's and the 2010 Form 10-K no longer discussed the Road Home Litigation.

On July 20, 2011, the Fifth Circuit ruled there was no public policy which precludes an anti-assignment clause from applying to post loss assignments, but the language of the anti-assignment language must be evaluated on a policy by policy basis. We now anticipate the State will vigorously pursue the matter in the district court and are uncertain as to the impact a case by case analysis of claims will have on SPFIC. SPFIC intends to maintain a vigorous defense in any remaining proceedings.

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

disputes over insurance coverage or claims adjudication;

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

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

disputes regarding our tax liabilities;

disputes relative to reinsurance and coinsurance agreements; and

disputes relating to businesses acquired and operated by us.

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

(9)	Convertible Preferred Stock

In July 2004, the Company completed a private placement of Series A-1 Convertible Preferred Stock ("Series A-1 Preferred") to four unaffiliated institutional investors. The investors were also issued unit warrants to purchase Series A-2 Convertible Preferred Stock. In 2005, three of the four investors exercised their right to purchase the Series A-2 Convertible Preferred Stock. We also issued to the investors warrants to purchase shares of our Class A common stock at various exercise prices that range from $6.72 to $7.93, with most of them striking at $6.95. The conversion, exercise and redemption prices, along with the number of shares and warrants, were adjusted for stock dividends paid on December 31, 2004 and 2005.

On July 13, 2009, the Company converted all of its outstanding Series A-1 and Series A-2 Convertible Preferred Stock into Class A common shares in accordance with the mandatory redemption provision of the preferred shareholder agreement dated July 12, 2004. The total amount of Class A common shares issued as part of the conversion was 1,706,682, inclusive of pro rata dividends due through the conversion date. Warrants to purchase shares of Class A common stock are still outstanding until July 2011 and 2012.

There are outstanding warrants to purchase the Company's stock at prices ranging from $6.72 to $7.93, which were issued to investors of the Class A-1 and A-2 preferred stock.

As of June 30, 2011
Warrants Outstanding		Expiration Date	Strike Price		Fair Value
					(In thousands)
	1,022,471	7/12/11	$	6.95	$	174
	63,961	7/12/12		6.72		83
	55,963	9/30/12		7.93		57
	56,463	10/6/12		7.86		58
	1,198,858				$	372

The fair value of the warrants is calculated using the Black-Scholes option pricing model and is classified as a liability on the balance sheet in the amount of $0.4 million and $1.6 million at June 30, 2011, and December 31, 2010, respectively. The change in fair value of warrants is reported as a component of revenue in the income statement. The change in fair value of warrants for the six months ended June 30 caused an increase in revenues of $1.2 million and $0.3 million in 2011 and 2010, respectively.

On July 12, 2011, 255,216 warrant shares were exercised for cash totaling $1.8 million. The remaining shares were exercised by a cashless provision that resulted in the issuance of 1,989 Class A shares by the Company to the warrant holders.

(10)	Income Taxes

The effective tax rate was 31.6% and 27.0% for the second quarter of 2011 and 2010, respectively, and 32.8% and 28.9% for the six months ended June 30, 2011 and 2010, respectively. In 2011 and 2010, rates were lower than the statutory rate of 35%, primarily due to gains and losses from the change in fair value of outstanding warrants for the purchase of Class A common stock. The change in fair value of outstanding warrants, which is not taxable, resulted in an increase to income, as previously noted, of $1.2 million and $252,000 for the six months ended June 30, 2011 and 2010, respectively.

(11)	Related Party Transactions

The Company previously filed a plan of merger with the Departments of Insurance of Colorado and Indiana related to the planned merger of Integrity Capital Corporation and the merger of the down-line subsidiary Integrity Capital Insurance Company into CICA. The Company received approval from the respective state insurance departments to merge Integrity Capital Insurance Company into CICA as of April 1, 2011. The capital contribution did not impact the overall consolidated financial position or results of operations of the Company. However, the Company does anticipate the elimination of duplicative overhead and annual regulatory reporting expenses. Integrity Capital Corporation and Integrity Capital Insurance Company were merged into CICA as of April 1, 2011.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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

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

Changes in foreign and U.S. general economic, market, and political conditions, including the performance of financial markets and interest rates;

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

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

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

The performance of our investment portfolio, which may be adversely affected by changes in interest rates, adverse developments and ratings of issuers whose debt securities we may hold, and other adverse macroeconomic events;

Results of litigation we may be involved in;

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

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

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

Our success at managing risks involved in the foregoing;

Changes in tax laws;

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

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

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

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Overview

Citizens, Inc. is an insurance holding company serving the life insurance needs of individuals in the United States since 1969 and internationally since 1975. Through our insurance subsidiaries, we pursue a strategy of offering traditional insurance products in niche markets where we believe we are able to achieve competitive advantages. We had approximately $1.0 billion of total assets at June 30, 2011 and 2010, and approximately $5.2 billion of insurance in force. Our core insurance operations include issuing and servicing:

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

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

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

We were formed in 1969 by our Chairman, Harold E. Riley. Prior to our formation, Mr. Riley had many years of experience in the international and domestic life insurance business. Our Company has experienced significant growth through acquisitions in the domestic market and through market expansion in the international market. We seek to capitalize on the experience of our management team in marketing and operations as we strive to generate bottom line return using knowledge of our niche markets and our well-established distribution channels. We believe our underwriting processes, policy terms, pricing practices and proprietary administrative systems enable us to be competitive in our current markets, while protecting our shareholders and servicing our policyholders.

Current Financial Highlights

Our assets grew from $986.5 million as of December 31, 2010, to $1.0 billion as of June 30, 2011. Total stockholders' equity increased from $227.6 million at December 31, 2010, to $240.5 million at June 30, 2011.

Financial highlights for the three and six month periods ended June 30, 2011, compared to the same periods in 2010:

Insurance revenues rose 8.8% and 7.3% for the three and six month periods from $36.7 million and $71.9 million to $39.9 million and $77.1 million, primarily from life segment sales which increased $2.9 million and $4.7 million from amounts reported in 2010.

Net investment income decreased 6.7% and 8.4% to $7.7 million for the three month period and $15.2 million for the six month period due to lower yielding debt securities in our investment portfolio compared to 2010.

Claim and surrender expense decreased 1.3% and 2.9% for the comparable three and six month periods as a result of favorable development.

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June 30, 2011

Our Operating Segments

Our business is comprised of three operating business segments, as detailed below.

Life Insurance

Home Service Insurance

Other Non-Insurance Enterprises

Our insurance operations are the primary focus of the Company, as those segments generate the majority of our income. See the discussion under Segment Operations for detailed analysis. The amount of insurance, number of policies, and average face amounts of policies issued during the periods indicated are shown below.

	Six Months Ended June 30,
	2011						2010
	Amount of Insurance Issued		Number of Policies Issued		Average Policy Face Amount Issued		Amount of Insurance Issued		Number of Policies Issued		Average Policy Face Amount Issued

Life	$	181,852,410		2,765	$	65,769	$	156,427,532		2,446	$	63,953
Home Service		106,882,545		14,726		7,258		105,447,173		13,932		7,569

Note: All discussions below compare or state 2011 results for the three and six months ended June 30, 2011, compared to 2010 results.

Consolidated Results of Operations

Revenues

Revenues are generated primarily by insurance premiums and investment income on invested asset holdings.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Revenues:
Premiums:
Life insurance	$	38,231			35,085			73,842			68,681
Accident and health insurance		396			409			768			823
Property insurance		1,259			1,182			2,504			2,362
Net investment income		7,717			8,275			15,231			16,624
Realized investment gains (losses), net		(13	)		692			6			751
Decrease in fair value of warrants		816			366			1,215			252
Other income		104			151			227			499
Total revenues		48,510			46,160			93,793			89,992
Exclude fair value adjustments		(816	)		(366	)		(1,215	)		(252	)
Total revenues excluding fair value adjustments	$	47,694			45,794			92,578			89,740

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Net investment income performance is summarized as follows.

	Six Months Ended June 30,			Year Ended December 31,			Six Months Ended June 30,
	2011			2010			2010
	(In thousands, except for %)

Net investment income, annualized	$	30,462			30,077			33,248
Average invested assets, at amortized cost		738,490			696,134			668,182
Annualized yield on average invested assets		4.13	%		4.32	%		4.98	%

We have traditionally invested in fixed maturity securities with a large percent held in callable issues. We experienced significant call activity related to fixed maturity security holdings due to the historically low interest rate environment over the past few years, and these call proceeds were invested in lower yielding securities resulting in the lowering of 2011 investment results.

Investment income from debt securities accounted for approximately 85.6% of total investment income for the six months ended June 30, 2011. We continue to hold investment in bonds of U.S. Government-sponsored enterprises, such as FNMA and FHLMC, which comprised 50.2% of the total fixed maturity portfolio based on amortized cost at June 30, 2011. We have increased our investment purchases of corporate and municipal securities over the past several quarters, focusing on utility service sectors in these corporate securities.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Gross investment income:
Fixed maturity securities	$	6,733			7,263			13,250			14,649
Equity securities		378			183			575			332
Mortgage loans		24			18			51			36
Policy loans		709			657			1,419			1,313
Long-term investments		54			287			107			580
Other investment income		8			180			83			377
Total investment income		7,906			8,588			15,485			17,287
Investment expenses		(189	)		(313	)		(254	)		(663	)
Net investment income	$	7,717			8,275			15,231			16,624

The increased call activity of bonds in our portfolio combined with lower yields on reinvested assets is likely to result in lower investment income going forward, despite higher levels of invested assets, unless interest rates increase. The decrease in fixed maturity investment income in 2011 resulted from the declining yields, as previously noted. The increase in the asset balance of policy loans, which represents policyholders utilizing their accumulated policy cash value, has resulted in a correlating increase to investment income.

Realized Gains (Losses), Net. Net realized gains in the portfolio during the first six months of 2011 resulted primarily from issuer calls. The Company realized net gains of $0.7 million and $0.8 million for the three and six months ended June 30, 2010. The net realized gains in the second quarter of 2010 were primarily the result of sales of several available-for-sale debt and equity securities, including some securities that had previously been impaired. The Company recorded a valuation allowance of $45,000 during the first quarter of 2010 on a non-performing mortgage loan.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Change in Fair Value of Warrants. The Company adjusts the liability related to its outstanding warrants to purchase shares of Class A common stock at each reporting date to reflect the current fair value of warrants computed based upon the Class A common stock value calculated using the Black-Scholes option pricing model. As the stock value increases and decreases, the change in the warrant liability also increases and decreases in inverse order. The adjustment to fair value is recorded as an increase or decrease in fair value of warrants on the consolidated statement of operations.

See Note 9 of the accompany financial statements for further discussion.

Benefits and Expenses

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders	$	14,905			15,094			29,784			30,671
Increase in future policy benefit reserves		13,000			9,783			25,318			19,328
Policyholders' dividends		1,920			1,777			3,582			3,347
Total insurance benefits paid or provided		29,825			26,654			58,684			53,346

Commissions		9,930			9,028			19,002			17,156
Other general expenses		6,919			7,122			13,529			13,975
Capitalization of deferred policy acquisition costs		(7,884	)		(6,978	)		(15,049	)		(12,973	)
Amortization of deferred policy acquisition costs		4,229			5,218			8,749			10,162
Amortization of cost of customer relationships acquired		751			754			1,405			1,592
Total benefits and expenses	$	43,770			41,798			86,320			83,258

Claims and Surrenders. A detail of claims and surrender benefits is provided below.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)

Death claims	$	4,588		5,800		10,614		11,935
Surrender benefits		5,387		4,843		9,749		9,737
Endowments		3,618		3,539		7,019		6,830
Property claims		462		307		1,015		871
Accident and health benefits		150		126		255		386
Other policy benefits		700		479		1,132		912
Total claims and surrenders	$	14,905		15,094		29,784		30,671

The Company recorded a $0.5 million decrease in death claims during the three months ended June 30, 2011, due to a decrease related to incurred but not yet reported claims accrual. This liability is estimated using historical claims experience and is reviewed at each reporting period. Property claims increased in the current quarter of 2011 by $0.2 million compared to the same period in 2010, as 2010 claims were lower than historical experience.

Increase in Future Policy Benefit Reserves. Reserves as of June 30, 2011, were impacted by product sales internationally in endowments that produce a faster reserve build-up than whole life products. The first six months of 2011 includes a reserve decrease of $0.2 million related to an adjustment in reserve calculation of certain SPLIC policies. In addition, a reserve decrease of $0.1 million was recorded as certain reserve estimates were refined in the first three months of 2011 related to the home service insurance segment.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Policyholder Dividends. All of our international policies are participating, and the dividends are factored into the premium rates charged. As policy provisioned dividend rates increase each year that a policy is in force, dividend expense is expected to increase as this block of insurance becomes more seasoned.

Commissions. Commission expense is directly related to new and renewal insurance premium fluctuations and production levels by agents and associates. Commission expense increased from the prior year amounts as premium revenues increased. Also, first year premium volume is up, which is associated with higher commission rates than renewal business.

Capitalized and Amortized Deferred Policy Acquisition Costs. Costs capitalized under current accounting guidance include certain commissions, policy issuance costs, and underwriting and agency expenses that relate to and vary with the production of new business. The increase for the three and six month periods of 2011 compared to 2010 is the result of increased premium production in the current year. Amortization of deferred policy acquisition costs is lower for the three and six month periods in 2011 compared to 2010 due to improved persistency in the current year.

Federal Income Tax. The effective tax rate for the three and six months ended June 30, 2011, was 31.6% and 32.8% versus 27.0% and 28.9% for the same periods in 2010. Tax differences impact the enacted tax rate when they result in differences between taxable income and expense that do not affect both the financial reporting and tax bases of accounting. The rate variance from the statutory rate of 35% occurred because change in fair value of our Class A common stock warrants are not taxable items.

Segment Operations

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
	(In thousands)

Life Insurance	$	1,952		2,262			2,857		3,880
Home Service Insurance		2,528		2,228			4,307		3,248
Other Non-Insurance Enterprises		260		(128	)		309		(394	)
Total	$	4,740		4,362			7,473		6,734

Life Insurance

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

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

International Sales

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

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

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

favorable persistency levels and mortality rates compared to our U.S. policies.

International Products

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

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

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

a hedge against local currency inflation;

protection against devaluation of foreign currency;

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

lifetime income guarantees for an insured or for surviving beneficiaries.

Our international products have living benefit features. Every policy contains guaranteed cash values and is participating (i.e., provides for cash dividends as apportioned by the board of directors). Once a policyowner pays the annual premium and the policy is issued, we immediately pay a cash dividend as well as an annual guaranteed endowment, if elected, to the owner. The policyowner has several options with regard to the dividend, including the right to assign dividends to our stock investment plan, registered under the Securities Act of 1933 (the "Securities Act") and administered in the United States by our unaffiliated transfer agent.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
Country
Colombia	$	5,567		5,313		10,589		10,369
Venezuela		5,324		3,993		9,919		7,435
Taiwan		3,721		3,287		8,169		7,481
Ecuador		3,487		3,082		6,516		5,882
Argentina		2,386		2,374		4,272		4,222
Other Non-U.S.		7,250		6,508		13,893		12,588
Total	$	27,735		24,557		53,358		47,977

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Domestic Sales

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

Domestic Products

Our domestic life insurance products focus primarily on living needs and provide benefits focused toward accumulating money for living benefits while providing a modest death benefit for the policyowner. The features of our domestic life insurance products include:

cash accumulation/living benefits;

tax-deferred interest earnings;

guaranteed lifetime income or monthly income options for the policyowner or surviving family members;

accidental death benefit coverage options; and

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

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

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
State
Texas	$	1,584		1,515		2,877		3,080
Indiana		456		443		959		978
Missouri		406		447		794		882
Kentucky		208		255		544		668
Mississippi		271		300		553		635
Other States		810		873		1,648		1,826
Total	$	3,735		3,833		7,375		8,069

A number of domestic life insurance companies we acquired had blocks of accident and health insurance policies, which we did not consider to be a core part of our business. We have ceded this business to an unaffiliated insurance company under a coinsurance agreement, under which it assumes substantially all of our accident and health policies. The premium amounts ceded under the coinsurance agreement for the six months ended June 30, 2011 and 2010, were $2.3 million and $2.8 million, respectively.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

The results of operations for the life segment for the periods indicated are as follows.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Revenue:
Premiums	$	29,016			26,081			55,536			50,850
Net investment income		4,272			4,635			8,353			9,346
Realized investment gains (losses), net		4			144			4			115
Other income		77			132			164			409
Total revenue		33,369			30,992			64,057			60,720
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		10,456			10,247			19,857			20,146
Increase in future policy benefit reserves		12,015			8,773			23,824			17,435
Policyholders' dividends		1,901			1,760			3,544			3,302
Total insurance benefits paid or provided		24,372			20,780			47,225			40,883

Commissions		6,058			5,239			11,400			9,744
Other general expenses		2,999			2,654			5,953			5,631
Capitalization of deferred policy acquisition costs		(6,060	)		(5,219	)		(11,487	)		(9,683	)
Amortization of deferred policy acquisition costs		3,772			5,001			7,610			9,660
Amortization of cost of customer relationships acquired		276			275			499			605
Total benefits and expenses		31,417			28,730			61,200			56,840
Income (loss) before income tax expense	$	1,952			2,262			2,857			3,880

Premiums. Premium revenues increased for the three and six month periods ended June 30, 2011, compared to the same three and six month periods in 2010 due primarily to international renewal business, which experienced strong persistency as this block of insurance matures. In addition, first year premiums increased as a percentage of total premiums in the current year compared to 2010, reflecting improved new business performance.

Life insurance premium breakout is detailed below.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
Premiums:
First year	$	4,623		4,012		8,721		7,224
Renewal		24,393		22,069		46,815		43,626
Total premiums	$	29,016		26,081		55,536		50,850

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Net Investment Income. Net investment income decreased comparing the three and six month periods ended June 30, 2011 to the same three and six month periods of 2010 due to lower prevailing interest rates. The continued call activity and lower yields experienced over the past several years are expected to result in lower investment income in the near term, despite the higher levels of invested assets.

	Six Months Ended June 30,			Year Ended December 31,			Six Months Ended June 30,
	2011			2010			2010
	(In thousands, except for %)

Net investment income, annualized	$	16,706			16,523			18,692
Average invested assets, at amortized cost	$	426,916			396,360			375,616
Annualized yield on average invested assets		3.91	%		4.17	%		4.98	%

Claims and Surrenders. These amounts fluctuate from period to period but were within anticipated ranges based upon management's expectations.

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)

Death claims	$	1,498		2,041		3,346		3,784
Surrender benefits		4,690		4,243		8,436		8,606
Endowment benefits		3,619		3,532		7,014		6,816
Accident and health benefits		86		89		157		283
Other policy benefits		562		342		904		657
Total claims and surrenders	$	10,455		10,247		19,857		20,146

Death claims expense includes an incurred but not reported release of liability for claims totaling $0.2 million related to our claim experience calculation.

Surrender benefits increased for the three months and decreased for the six months ended June 30, 2011, compared to the same periods in 2010. Surrenders as a percent of ordinary whole life insurance in force decreased from 0.6% in the first six months of 2010, to 0.5% in the first six months of 2011. The majority of policy surrender benefits paid is attributable to our international business and was related to policies that have been in force over fifteen years, where surrender charges are no longer applicable.

Endowment benefit expense has increased due to the election by policyholders of a product feature that provides an annual benefit. This is a fixed benefit over the life of the contract and as persistency improves this expense will increase.

Other policy benefits increased in the current year due primarily to interest paid on premium deposits and dividend accumulations, as these policyholder liability accounts have increased.

Increase in Future Policy Benefit Reserves. Policy benefit reserves increased for the three and six months ended June 30, 2011, compared to the same periods in 2010, primarily due to increased sales of endowment products, which build up reserve balances more quickly compared to other life product sales. Endowment sales have become more popular relative to our international sales in the past few years, representing approximately 75% and 63% of total in force for new policies issued through the six months in 2011 and 2010, respectively.

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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

June 30, 2011

Other General Expenses. Current year amounts reflect an increase in expenses based upon a study by segment that resulted in a cost increase in the life segment compared to the prior year allocations. The effect of the allocation change is muted because total consolidated expenses were lower in the current year than in 2010.

Commissions. Commission expense increased for the three and six months ended June 30, 2011, compared to the same periods in 2010, as premium revenues increased. This expense fluctuates directly with premium revenues.

Amortization of Deferred Policy Acquisition Costs ("DAC"). Amortization costs decreased for the three and six months ended June 30, 2011, compared to 2010, primarily because of improved persistency. The Company canceled its contract with a newly recruited, high volume producer in the second quarter of 2009 due to poor experience. Policies sold by this organization lapsed at high rates during the first and second quarter of 2010, which resulted in higher DAC amortization in those periods.

Home Service Insurance

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)

State
Louisiana	$	10,249		9,997		20,447		19,967
Arkansas		1,020		1,229		2,037		2,287
Mississippi		87		80		178		165
Other states		262		265		520		549
Total	$	11,618		11,571		23,182		22,968

Home Service Insurance Products

Our home service insurance products consist primarily of small face amount ordinary whole life and pre-need policies, which are designed to fund final expenses for the insured, primarily consisting of funeral and burial costs. To a much lesser extent, our Home Service Insurance segment sells limited-liability, named-peril property policies covering dwellings and contents. We provide $30,000 maximum coverage on any one dwelling and contents, while content only coverage and dwelling only coverage is limited to $20,000.

We provide final expense ordinary life insurance and annuity products primarily to middle and lower income individuals in Louisiana, Mississippi and Arkansas. New products were approved for sale in Mississippi during the current year and we expect to increase sales as we expand our marketing force in this state.

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June 30, 2011

The results of operations for the home service segment for the periods indicated are as follows.

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Revenue:
Premiums	$	10,870			10,595			21,578			21,016
Net investment income		3,275			3,475			6,512			7,007
Realized investment gains (losses), net		(17	)		548			2			681
Other income		6			4			14			53
Total revenue		14,134			14,622			28,106			28,757
Benefits and expenses:
Insurance benefits paid or provided:
Claims and surrenders		4,450			4,847			9,927			10,525
Increase in future policy benefit reserves		985			1,010			1,494			1,893
Policyholders' dividends		18			17			38			45
Total insurance benefits paid or provided		5,453			5,874			11,459			12,463

Commissions		3,872			3,789			7,602			7,412
Other general expenses		3,173			3,794			6,255			7,435
Capitalization of deferred policy acquisition costs		(1,824	)		(1,759	)		(3,562	)		(3,290	)
Amortization of deferred policy acquisition costs		457			217			1,139			502
Amortization of cost of customer relationships acquired		475			479			906			987
Total benefits and expenses		11,606			12,394			23,799			25,509
Income (loss) before income tax expense	$	2,528			2,228			4,307			3,248

Premiums. The premium increases were due to continued marketing efforts, as well as a SPFIC rate increase of 5.7% for named peril policies that became effective January 1, 2011.

Net Investment Income. Net investment income decreased for the three and six months ended June 30, 2011, compared to the same periods in 2010, as the Company experienced significant call activity over the past two years and reinvested proceeds during a declining interest rate environment, which has depressed our investment income and lowered portfolio yields.

Net investment income is summarized as follows.

	Six Months Ended June 30,			Year Ended December 31,			Six Months Ended June 30,
	2011			2010			2010
	(In thousands, except for %)

Net investment income, annualized	$	13,024			13,008			14,014
Average invested assets, at amortized cost		280,835			279,682			276,111
Annualized yield on average invested assets		4.61	%		4.65	%		5.08	%

Realized Gains, Net. Net realized gains of $0.5 million and $0.7 million were recognized for the three and six months ended June 30, 2010. Of this amount, $0.5 million resulted from gross gains from sales of bonds and $0.2 million from sales of stocks for the six months ended June 30, 2010.

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Claims and Surrenders. Claims and surrenders decreased for the three and six months ended June 30, 2011, compared to the same periods in 2010, and were within expected ranges.

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011		2010
	(In thousands)

Death claims	$	3,090			3,759		7,268		8,151
Surrender benefits		697			600		1,313		1,131
Endowment benefits		(1	)		7		5		14
Property claims		462			307		1,015		871
Accident and health benefits		64			38		98		104
Other policy benefits		138			136		228		254
Total claims and surrenders	$	4,450			4,847		9,927		10,525

Death claims expense includes an incurred but not reported release of liability for claims totaling $0.3 million related to our claim experience calculation.

Mortality experience is closely monitored by the Company as a key performance indicator and these amounts were within expected levels.

Surrender benefits have increased in the three and six months ended June 30, 2011, compared to the same periods in 2010, which is consistent with a growing block of business.

Other General Expenses. Other expenses decreased for the three and six months ended June 30, 2011, compared to the same periods in 2010, due to an overall decrease in expenses and a reallocation of expenses that became effective January 1, 2011, which reduced the home service segment allocation and increased the life segment allocation in the current year.

Amortization of Deferred Policy Acquisition Costs. Amortization for the six month period of 2011 includes an adjustment that resulted in an increase of $0.3 million due to a refinement in an estimate using system generated information related to SPLIC assumptions.

Other Non-Insurance Enterprises

Overall, other non-insurance operations are relatively immaterial to the consolidated results, except for the fair value adjustment related to the Company's warrants to purchase Class A common stock. These amounts fluctuate due to the movement in the stock price and fair value calculation using the Black-Scholes valuation model.

Investments

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

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June 30, 2011

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

	June 30, 2011				December 31, 2010
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)

Fixed maturity securities:
U.S. Treasury and U.S. Government-sponsored enterprises	$	353,545		42.9	$	378,012		48.8
Corporate		166,328		20.2		161,298		20.8
Municipal bonds		162,153		19.7		101,719		13.1
Mortgage-backed (1)		10,693		1.3		14,808		1.9
Foreign governments		133		-		132		-
Total fixed maturity securities		692,852		84.1		655,969		84.6

Cash and cash equivalents		58,376		7.1		49,723		6.4
Other investments:
Policy loans		36,919		4.4		35,585		4.6
Equity securities		24,593		3.0		23,304		3.0
Mortgage loans		1,466		0.2		1,489		0.2
Real estate		9,152		1.2		9,200		1.2
Other long-term investments		144		-		148		-
Total cash, cash equivalents and investments	$	823,502		100.0	$	775,418		100.0

(1)	Includes $9.8 million and $13.2 million of U.S. Government-sponsored enterprises at June 30, 2011 and December 31, 2010, respectively.

The Company increased holdings in investment grade municipal securities with higher yields during the first six months of 2011. Cash and cash equivalents increased as of June 30, 2011, based upon timing of cash inflows and investment into fixed maturity securities.

The held-to-maturity portfolio as of June 30, 2011, represented 15.8% of the total fixed maturity securities owned based upon carrying values, with the remaining 84.2% classified as available-for-sale. Held-to-maturity securities are reported in the financial statements at amortized cost and available-for-sale securities are reported at fair value.

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The following table sets forth the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2011, and December 31, 2010.

	June 30, 2011				December 31, 2010
	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
	(In thousands)				(In thousands)

AAA and U.S. Government	$	386,198		55.7	$	428,194		65.3
AA		131,402		19.0		59,454		9.1
A		77,684		11.2		73,341		11.2
BBB		80,508		11.6		84,489		12.9
BB and other		17,060		2.5		10,491		1.6
Totals	$	692,852		100.0	$	655,969		100.0

The increase in fixed maturities with credit ratings of AA as of June 30, 2011, compared to December 31, 2010, is a result of new investments in taxable municipals and corporate bonds, primarily public utility issuers with an average maturity of seven years. The increase in non-investment grade securities was due to downgrades of issuers in the current period, as the Company does not purchase below investment grade securities.

Valuation of Investments

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

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

The Company did not recognize any other-than-temporary impairments for the six months ended 2011 or 2010. The Company recognized a valuation allowance on one mortgage loan totaling $45,000 during the first quarter of 2010.

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 and seeks to ensure stable and reliable sources of cash flows to meet obligations provided by a variety of sources.

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Liquidity requirements of Citizens are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. We historically have not had to liquidate investments to provide cash flow and did not do so during the first six months of 2011. Our investments as of June 30, 2011, consist of 76.2% of marketable debt securities classified as available-for-sale 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.

Cash flows from our insurance operations have been sufficient to meet current needs. Cash flows from operating activities were $28.0 million and $24.0 million for the six months ended June 30, 2011 and 2010, respectively. We have traditionally also had significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows, for the most part, are reinvested in fixed income securities. Net cash outflows from investment activity totaled $20.7 million and inflows of $7.9 million for the six months ended June 30, 2011 and 2010, respectively.

The National Association of Insurance Commissioners ("NAIC") has established minimum capital requirements in the form of Risk-Based Capital ("RBC"). RBC factors the type of business written by an insurance company, the quality of its assets, and various other aspects of an insurance company's business to develop a minimum level of capital called "authorized control level risk-based capital" and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required.

All insurance subsidiaries were above the RBC minimums at June 30, 2011. The ratios of adjusted statutory capital to control level RBC are shown below.

	June 30, 2011

CICA		994	%
CNLIC		2,783	%
SPFIC		325	%
SPLIC		1,298	%

Contractual Obligations and Off-balance Sheet Arrangements

There have been no material changes in contractual obligations from those reported in the Company's Form 10-K for the year ended December 31, 2010. The Company does not have off-balance sheet arrangements at June 30, 2011, and does not expect any future effects on the Company's financial condition related to any such arrangements. We do not utilize special purpose entities as investment vehicles, nor are there any such entities in which we have an investment that engage in speculative activities of any nature, and we do not use such investments to hedge our investment positions.

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Parent Company Liquidity and Capital Resources

We are a holding company and have had minimal operations of our own. Our assets consist primarily of the capital stock of our subsidiaries, cash and investment real estate. Accordingly, our cash flows depend upon the availability of statutorily permissible payments, primarily payments under management agreements from our two primary life insurance subsidiaries, CICA and SPLIC. The ability to make payments is limited by applicable laws and regulations of Colorado, CICA's state of domicile, and Louisiana, SPLIC's state of domicile, which subject insurance operations to significant regulatory restriction. 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.

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 experience. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of policy liabilities and the increase in future policy benefit reserves. Management's judgments and estimates for future policy benefit reserves provide for possible unfavorable deviation.

We continue to use the original assumptions (including a provision for the risk of adverse deviation) in subsequent periods to determine the changes in the liability for future policy benefits (the "lock-in concept") unless a premium deficiency exists. Management monitors these assumptions and has determined that a premium deficiency did not exist as of June 30, 2011. Management believes that our policy liabilities and increase in future policy benefit reserves as of the six months ended June 30, 2011 and 2010, are based upon assumptions, including a provision for the risk of adverse deviation, that do not warrant revision.

Reserving assumptions are reviewed to ensure that our original assumptions at the time of policy issuance related to interest, mortality, withdrawals, and settlement expenses are based upon managements best judgment.

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 an annual premium recognized to the total premium revenue anticipated, using the same assumptions as were used in computing liabilities for future policy benefits.

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

Inherent in the capitalization and amortization of deferred policy acquisition costs are certain management judgments about what acquisition costs are deferred, the ending asset balance and the annual amortization. Approximately 90% of our capitalized deferred acquisition costs are attributed to first year and renewal excess commissions. The remaining 10% are attributed to costs that vary with and are directly related to the acquisition of new insurance business. Those costs generally include costs related to the production, underwriting and issuance of new business.

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A recoverability test that considers, among other things, actual experience and projected future experience is performed at least annually. These annual recoverability tests initially calculate the available premium (gross premium less benefit and expense portion of premium) for the next thirty years. The available premium per policy and the deferred policy acquisition costs per policy are then calculated. The deferred policy acquisition costs are then evaluated over two methods utilizing reasonable assumptions and two other methods using pessimistic assumptions. The two methods using reasonable assumptions illustrate an early-deferred policy acquisition recoverability period. The two methods utilizing pessimistic assumptions still support early recoverability of our aggregate deferred policy acquisition costs. Management believes that our deferred policy acquisition costs and related amortization for the six months ended June 30, 2011 and 2010, limits the amount of deferred costs to its estimated realizable value. This belief is based upon the analysis performed on capitalized expenses that vary with and are primarily related to the acquisition of new and renewal insurance business, utilization of the factor method and annual recoverability testing.

Cost of Customer Relationships Acquired

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

Goodwill

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

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

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

Valuation of Investments in Fixed Maturity and Equity Securities

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

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

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

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

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

Premium Revenue and Related Expenses

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

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

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The following table summarizes net unrealized gains and losses for the periods indicated.

	June 30, 2011							December 31, 2010
	Amortized Cost		Fair Value		Net Unrealized Gains (Losses)			Amortized Cost		Fair Value		Net Unrealized Gains (Losses)
	(In thousands)

Fixed maturities, available-for-sale	$	574,094		583,108		9,014			578,412		575,737		(2,675	)
Fixed maturities, held-to-maturity		109,744		108,608		(1,136	)		80,232		79,103		(1,129	)
Total fixed maturities	$	683,838		691,716		7,878			658,644		654,840		(3,804	)
Total equity securities	$	20,551		24,593		4,042			19,844		23,304		3,460

Market Risk Related to Interest Rates

Our exposure to interest rate changes results from our significant holdings of fixed maturity investments, which comprised 90.6% of our investment portfolio as of June 30, 2011. These investments are mainly exposed to changes in U.S. Treasury rates. Our fixed maturities investments include U.S. Government-sponsored enterprises, U.S. Government bonds, securities issued by government agencies, municipal bonds and corporate bonds. Approximately 51.0% of the fixed maturities at fair value on June 30, 2011, were invested in U.S. Treasury and U.S. Government-sponsored enterprises.

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 annually interest rate sensitivity with respect to our available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward shifts in the prevailing interest rates. The change in fair values of our debt and equity securities as of June 30, 2011, were within the expected range of this analysis.

Changes in interest rates typically have a sizable effect on the fair values of our debt and equity securities. The interest rate of the ten-year U.S. Treasury bond decreased slightly to 3.2% during the quarter ended June 30, 2011, from 3.3% at December 31, 2010. Net unrealized gains on fixed maturity securities totaled $7.9 million at June 30, 2011, compared to losses of $3.8 million at December 31, 2010.

The fixed maturity portfolio is exposed to call risk, as a significant portion of the current bond holdings are callable. A decreasing interest rate environment can result in increased call activity as experienced over the past several years, and an increasing rate environment will likely result in securities being paid at their stated maturity.

There are no fixed maturities or other investments classified as trading instruments. Approximately 84.3% of fixed maturities were held in available-for-sale and 15.7% in held-to-maturity based upon fair value at June 30, 2011. At June 30, 2011, and December 31, 2010, we had no investments in derivative instruments, nor did we have any subprime or collateralized debt obligation risk.

Market Risk Related to Equity Prices

Changes in the level or volatility of equity prices affect the value of equity securities we hold as investments. Our equity investments portfolio represented 3.2% of our total investments at June 30, 2011. We believe that significant decreases in the equity markets would not have a material adverse impact on our total investment portfolio.

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Item 4. CONTROLS AND PROCEDURES

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

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

During the quarter ended June 30, 2011, there were no changes in the Company's internal controls over financial reporting that materially affect or are reasonably likely to affect the Company's internal controls over financial reporting (as defined in rules 13a-15(f) and 15d-15(f) under the Exchange Act).

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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June 30, 2011

disputes over insurance coverage or claims adjudication;

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

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

disputes regarding our tax liabilities;

disputes relative to reinsurance and coinsurance agreements; and

disputes relating to businesses acquired and operated by us.

Item 1A. RISK FACTORS

There are no updates to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. (RESERVED)

Item 5. OTHER INFORMATION

On August 8, 2011, the Company issued a news release (the "Release") reporting, among things, results for its second quarter 2011 earnings. A copy of the Release is furnished as Exhibit 99.1 to this Quarterly Report on Form 10-Q. Citizens also announced that it would hold a conference call to discuss its financial results at 10:00 a.m. Central Daylight Time on Tuesday, August 9, 2011.

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Item 6. EXHIBITS

Exhibit Number	The following exhibits are filed herewith:

3.1	Restated and Amended Articles of Incorporation (a)

3.2	Bylaws (b)

4.1	Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)

10.1	Self-Administered Automatic Reinsurance Agreement - Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (d)

10.2	Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life Insurance Company and Citizens Insurance Company of America, as amended (e)

10.3	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and among Citizens Insurance Company of America, Texas International Life Insurance Company and Wells Fargo Bank, N.A. (f)

10.4	Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company and Wells Fargo Bank, N.A. (g)

10.5(a)	Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and Smithfield Fiduciary LLC (h)

10.5(b)	Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and Smithfield Fiduciary LLC (h)

10.5(c)	Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)

10.5(d)	Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)

10.5(e)	Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)

10.5(f)	Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)

10.5(g)	Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)

10.5(h)	Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)

10.5(i)	Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)

10.5(j)	Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)

10.5(k)	Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July 12, 2004 (h)

10.5(l)	Non-Exclusive Finder's Agreement dated September 29, 2003, between Citizens, Inc. and the Shemano Group, Inc. (h)

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10.6	Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of America and Converium Reinsurance (Germany) Ltd. (i)

10.7	Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of America and Scottish Re Worldwide (England) (j)

10.8	Self-Administered Automatic Reinsurance Agreement between CICA Life Insurance Company of America and Scor Global Life U.S. Re Insurance Company (k)

10.9	Self-Administered Automatic Reinsurance Agreement between CICA Life Insurance Company of America and Mapfre Re Compania de Reaseguros, S.A. (l)

11	Statement re: Computation of per share earnings (see financial statements)

21	Subsidiaries of the Registrant*

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act*

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act*

99.1	News Release reporting second quarter results issued on August 8, 2011 (furnished herewith).

101.INS	XBRL Instance Document (furnished herewith)

101.SCH	XBRL Taxonomy Extension Schema (furnished herewith)

101.CAL	XBRL Taxonomy Extension Calculation Linkbase (furnished herewith)

101.DEF	XBRL Taxonomy Extension Definition Linkbase (furnished herewith)

101.LAB	XBRL Taxonomy Extension Label Linkbase (furnished herewith)

101.PRE	XBRL Taxonomy Extension Presentation Linkbase (furnished herewith)

* Filed herewith.

(a)	Filed on March 15, 2004 with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2003 as Exhibit 3.1 and incorporated herein by reference.

(b)	Filed on March 31, 1999 with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.

(c)	Filed on July 15, 2004, with the Registrant's Current Report on Form 8-K as Exhibit 4.1, and incorporated herein by reference.

(d)	Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, on November 14, 1996 and incorporated herein by reference.

(e)	Filed on April 9, 1997 as Exhibit 10.9 with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1996, Amendment No. 1, and incorporated herein by reference.

(f)	Filed on March 22, 2004 as Exhibit 10.8 of the Registrant's Current Report on Form 8-K, and incorporated herein by reference.

(g)	Filed on March 22, 2004 as Exhibit 10.9 of the Registrant's Current Report on Form 8-K, and incorporated herein by reference.

(h)	Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrant's Current Report on Form 8-K, and incorporated herein by reference.

(i)	Filed on March 31, 2005, with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.

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(j)	Filed on March 31, 2005, with the Registrant's Annual Report on Form 10-K for the Year Ended December 31, 2004, as Exhibit 10.10(n), and incorporated herein by reference.

(k)	Filed on November 6, 2009, with the Registrant's Quarterly Report on Form 10-Q, for the Quarter Ended September 30, 2009, as Exhibit 10.8(k), and incorporated herein by reference.

(l)	Filed on November 6, 2009, with the Registrant's Quarterly Report on Form 10-Q, for the Quarter Ended September 30, 2009, as Exhibit 10.9(l), and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CITIZENS, INC.


	By:	/s/ Harold E. Riley
		Harold E. Riley
		Chairman and Chief Executive Officer


	By:	/s/ Kay E. Osbourn
		Executive Vice President, Chief Financial Officer
		and Treasurer

Date: August 8, 2011