##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2008
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For
the transition period from  to
 Commission File Number: 000-16509
 CITIZENS, INC.
  Colorado
    
    84-0755371(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
  o þ o o
  o þ




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##### 



INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position, March 31,
2008, (Unaudited) and December 31, 2007
    
    
    2Consolidated Statements of Operations, Three Months
Ended March 31, 2008 and 2007(Unaudited)
    
    
    4Consolidated Statements of Cash Flows, Three Months
Ended March 31, 2008 and 2007 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis
of Financial Condition and Results
of Operations
    
    
    16Item 3. Quantitative and Qualitative
Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26Part II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 1A Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
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PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
(In thousands)
 (Unaudited)March 31,
    
    
    December 31,2008
    
    
    2007AssetsInvestments:Fixed maturities available-for-sale, at fair value
(cost: $498,061 and
$502,635 in 2008 and
2007, respectively)
    
    $
    496,031
    
    
    
    500,426Equity securities available-for-sale, at fair value
(cost: $49,784 and
$36,696 in 2008 and 2007,
respectively)
    
    
    45,088
    
    
    
    35,669Mortgage loans on real estate
    
    
    282
    
    
    
    291Policy loans
    
    
    26,030
    
    
    
    25,490Real estate held for investment
(less $261 and $249
accumulated depreciation
in 2008 and 2007,
respectively)
    
    
    5,236
    
    
    
    5,152Other long-term investments
    
    
    691
    
    
    
    618Short-term investments
    
    
    17,854
    
    
    
    17,650Total investments
    
    
    591,212
    
    
    
    585,296Cash and cash equivalents
    
    
    20,728
    
    
    
    21,123Accrued investment income
    
    
    5,891
    
    
    
    7,115Reinsurance recoverable
    
    
    12,857
    
    
    
    13,492Deferred policy acquisition costs
    
    
    101,948
    
    
    
    100,655Cost of customer relationships acquired
    
    
    30,879
    
    
    
    31,636Goodwill
    
    
    11,386
    
    
    
    11,386Other intangible assets
    
    
    1,059
    
    
    
    1,066Federal income tax receivable
    
    
    1,122
    
    
    
    715Property and equipment, net
    
    
    6,610
    
    
    
    6,795Due premiums, net
(less $1,919 and $1,780 allowance for
doubtful accounts in 2008 and 2007, respectively)
    
    
    7,775
    
    
    
    7,656Prepaid expenses
    
    
    1,833
    
    
    
    Other assets
    
    
    909
    
    
    
    974Total assets
    
    $
    794,209
    
    
    
    787,909
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    514,775
    
    
    
    508,209Annuities
    
    
    23,132
    
    
    
    22,792Accident and health
    
    
    7,920
    
    
    
    8,293Premiums paid in advance
    
    
    17,514
    
    
    
    16,140Policy claims payable
    
    
    8,166
    
    
    
    6,908Dividend accumulations
    
    
    4,801
    
    
    
    4,825Other policyholders funds
    
    
    4,375
    
    
    
    4,357Total policy liabilities
    
    
    580,683
    
    
    
    571,524Commissions payable
    
    
    1,712
    
    
    
    2,385Deferred Federal income tax
    
    
    5,379
    
    
    
    4,810Payable for securities in process of settlement
    
    
    3,359
    
    
    
    7,000Warrants outstanding
    
    
    1,506
    
    
    
    1,003Funds held in trust and other liabilities
    
    
    10,727
    
    
    
    10,810Total liabilities
    
    
    603,366
    
    
    
    597,532Commitments and contingencies (Note 7)Cumulative convertible preferred stock  Series A
(Series A-1 - $500 stated value per share, 25,000 shares authorized, issued
and outstanding in 2008 and 2007; Series A-2 - $935 stated value per share,
5,000 shares authorized, 4,014 issued and outstanding in 2008 and 2007)
    
    
    14,554
    
    
    
    14,220Stockholders Equity:Common stock:Class A, no
par value,100,000,000 shares
authorized,
46,232,379 shares
issued in 2008 and
46,205,830 shares
issued in 2007,
including shares in
treasury of 3,135,738
in 2008 and 2007
    
    
    225,478
    
    
    
    225,812Class B, no
par value,2,000,000 shares
authorized, 1,001,714
shares issued and
outstanding in 2008
and 2007
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (36,990
    )
    
    
    (39,725
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (4,372
    )
    
    
    (2,103
    )187,300
    
    
    
    187,168Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    176,289
    
    
    
    176,157Total liabilities and stockholders equity
    
    $
    794,209
    
    
    
    787,909
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
Three Months Ended March 31
(In thousands, except per share amounts)
(Unaudited)
 2008
    
    
    2007Revenues:Premiums:Life insurance
    
    $
    30,850
    
    
    
    29,840Accident and health insurance
    
    
    384
    
    
    
    422Property insurance
    
    
    1,436
    
    
    
    1,179Net investment income
    
    
    7,464
    
    
    
    7,067Realized gains (losses), net
    
    
    16
    
    
    
    (13
    )Increase in fair value of warrants
    
    
    (503
    )
    
    
    (427
    )Other income
    
    
    279
    
    
    
    352Total revenues
    
    
    39,926
    
    
    
    38,420Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    13,078
    
    
    
    13,180Increase in future policy benefit reserves
    
    
    6,997
    
    
    
    6,935Policyholdersdividends
    
    
    1,377
    
    
    
    1,230Total insurance benefits paid or provided
    
    
    21,452
    
    
    
    21,345Commissions
    
    
    7,711
    
    
    
    8,389Other underwriting, acquisition and insurance expenses
    
    
    6,911
    
    
    
    6,900Capitalization of deferred policy acquisition costs
    
    
    (4,855
    )
    
    
    (6,124
    )Amortization of deferred policy acquisition costs
    
    
    3,562
    
    
    
    3,151Amortization of cost of customer relationships
acquired and other intangibles
    
    
    764
    
    
    
    841Total benefits and expenses
    
    
    35,545
    
    
    
    34,502Income before Federal income tax
    
    
    4,381
    
    
    
    3,918Federal income tax expense
    
    
    1,646
    
    
    
    1,479Net income
    
    $
    2,735
    
    
    
    2,439Net income applicable to common stock
    
    $
    2,223
    
    
    
    1,936Per Share Amounts:Basic and diluted earnings per share of Class A common stock
    
    $
    0.05
    
    
    $
    0.05Basic and diluted earnings per share of Class B common stock
    
    $
    0.03
    
    
    $
    0.02
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
Three Months Ended March 31
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    2,735
    
    
    
    2,439Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses (gains) on sale of investments
and other assets
    
    
    (16
    )
    
    
    13Net deferred policy acquisition costs
    
    
    (1,293
    )
    
    
    (2,973
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    764
    
    
    
    841Increase in fair value of warrants
    
    
    503
    
    
    
    427Depreciation
    
    
    273
    
    
    
    199Amortization of premiums and discounts on
fixed maturities and short-term investments
    
    
    (2
    )
    
    
    269Deferred Federal income tax expense (benefit)
    
    
    1,791
    
    
    
    (220
    )Change in:Accrued investment income
    
    
    1,224
    
    
    
    994Reinsurance recoverable
    
    
    635
    
    
    
    1,495Due premiums and other receivables
    
    
    5
    
    
    
    (173
    )Future policy benefit reserves
    
    
    6,460
    
    
    
    5,626Other policy liabilities
    
    
    2,626
    
    
    
    626Federal income tax receivable
    
    
    (407
    )
    
    
    (695
    )Commissions payable and other liabilities
    
    
    (756
    )
    
    
    (375
    )Other, net
    
    
    (1,893
    )
    
    
    (1,657
    )Net cash provided by operating activities
    
    
    12,649
    
    
    
    6,836Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    
    
    
    
    3,344Maturity and calls of fixed maturities, available-for-sale
    
    
    65,572
    
    
    
    24,023Purchase of fixed maturities, available-for-sale
    
    
    (64,843
    )
    
    
    (25,600
    )Sale of equity securities, available-for-sale
    
    
    
    
    
    
    20Purchase of equity securities, available-for-sale
    
    
    (13,088
    )
    
    
    (10,016
    )Principal payments on mortgage loans
    
    
    9
    
    
    
    10Sale of other long-term investments and property
and equipment
    
    
    50
    
    
    
    28Increase in policy loans
    
    
    (540
    )
    
    
    (522
    )Purchase of other long-term investments and property and
equipment
    
    
    (277
    )
    
    
    (2,846
    )Net cash used in investing activities
    
    
    (13,117
    )
    
    
    (11,559
    )
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Cash Flows, Continued
Three Months Ended March 31
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from financing activities:Annuity deposits
    
    $
    574
    
    
    
    610Annuity withdrawals
    
    
    (501
    )
    
    
    (429
    )Net cash provided by financing activities
    
    
    73
    
    
    
    181Net decrease in cash and cash equivalents
    
    
    (395
    )
    
    
    (4,542
    )Cash and cash equivalents at beginning of period
    
    
    21,123
    
    
    
    24,521Cash and cash equivalents at end of period
    
    $
    20,728
    
    
    
    19,979Supplemental disclosures of operating activities:Cash paid during the period for income taxes
    
    $
    262
    
    
    
    2,394
 Supplemental Disclosures of Non-Cash Financing Activities:
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2008
 (Unaudited)
 (1)
    
    Financial StatementsThe interim consolidated financial statements include the accounts and operations of
Citizens, Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977, and its
wholly-owned subsidiaries, CICA Life Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc.
(III), Citizens National Life Insurance Company (CNLIC), Security Plan Life Insurance Company
(SPLIC), and Security Plan Fire Insurance Company (SPFIC). Citizens and its consolidated
subsidiaries are collectively referred to as the Company, we, or our.The consolidated statement of financial position for March 31, 2008, the consolidated
statements of operations for the three-month periods ended March 31, 2008 and 2007, and the
consolidated statements of cash flows for the three-month periods 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
March 31, 2008, and for comparative periods presented have been made.Certain information and footnote disclosures normally included in financial statements
prepared in accordance with United States of America (U.S.) generally accepted accounting
principles (U.S. GAAP) have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and
Exchange Commission. The results of operations for the three months ended March 31, 2008,
are not necessarily indicative of the operating results for the full year.During the first quarter of 2008, the Company discovered an overstatement of life reserves,
due to the use of an incorrect reserve factor going back several years, in the amount of
$796,000. The error was corrected during the quarter, resulting in an increase to net income
of $517,000.The Company has previously accounted for the conversion of a policy that goes from premium
paying to extended term insurance (ETI) as the surrender of the premium paying policy for its
cash value, with the cash value being applied as a single premium to purchase the ETI policy.
Thus, premiums and surrenders were overstated by the amount of this single premium.
Beginning in the first quarter of 2008, the Company will no longer show the conversion of a
premium paying policy to ETI as a surrender of one policy and simultaneous purchase of a
single premium policy. To effect this change, prior year life premiums have been reduced by
$976,000 with a corresponding reduction in claims and surrenders for the three months ended
March 31, 2007. For the full year 2007, the amount was $4,157,000.(2)
    
    Accounting PronouncementsAs of January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements.
The adoption of SFAS No. 157 did not have a material impact on our consolidated financial
statements. Additionally, on January 1, 2008, we elected the partial adoption of SFAS
No. 157 under the provisions of Financial Accounting Standards Board (FASB) Staff Position
(FSP) FAS 157-2, which amends SFAS No. 157 to allow an entity to delay the application of
this statement until January 1, 2009 for certain non-financial assets and liabilities.
 Under the provisions of the FSP, we will delay the application of SFAS No. 157 for fair
value measurements used in the impairment testing of goodwill and indefinite-lived intangible
assets and eligible non-financial assets and liabilities included within a business
combination.  In January 2008,
 7




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FASB also issued proposed FSP FAS 157-c that would amend SFAS No. 157 to clarify the
principles on fair value measurement of liabilities.  Management is monitoring the status of
this proposed FSP for any impact on our consolidated financial statements. See Note 6 for
additional disclosures about fair value measurement.As of January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This Statement provides an option, on specified election
dates, to report selected financial assets and liabilities, including insurance contracts, at
fair value. Subsequent changes in fair value for designated items are reported in income in
the current period. The adoption of SFAS No. 159 did not impact our consolidated financial
statements, as no items were elected for measurement at fair value upon initial adoption. We
will continue to evaluate eligible financial assets and liabilities on their election dates.
Any future elections will be disclosed in accordance with the provisions outlined in the
statement.(3)
    
    Segment InformationThe 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 net income
before federal income taxes for its three reportable segments.The measurement of segment profit and loss and segment assets do not include material
transactions between segments. The Company has no reportable differences between segments and
consolidated operations.
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The following summary presents the Companys profit (loss) measurement from continuing operations
for each reportable segment, along with certain components of that profit (loss) measurement, for
the periods indicated.
 Three Months Ended March 31,2008
    
    
    2007(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    3,092
    
    
    
    1,808Home Service Insurance
    
    
    1,473
    
    
    
    2,168Other Non-Insurance Enterprises
    
    
    (184
    )
    
    
    (58
    )Total consolidated pretax income
    
    $
    4,381
    
    
    
    3,918Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    26,687
    
    
    
    25,551Home Service Insurance
    
    
    13,204
    
    
    
    13,004Other Non-Insurance Enterprises
    
    
    35
    
    
    
    (135
    )Total consolidated revenue
    
    $
    39,926
    
    
    
    38,420Premiums:Life Insurance
    
    $
    22,551
    
    
    
    21,610Home Service Insurance
    
    
    10,119
    
    
    
    9,831Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    32,670
    
    
    
    31,441Net investment income:Life Insurance
    
    $
    4,062
    
    
    
    3,798Home Service Insurance
    
    
    3,084
    
    
    
    3,167Other Non-Insurance Enterprises
    
    
    318
    
    
    
    102Total consolidated net investment income
    
    $
    7,464
    
    
    
    7,067Amortization expense:Life Insurance
    
    $
    3,686
    
    
    
    3,240Home Service Insurance
    
    
    640
    
    
    
    752Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    4,326
    
    
    
    3,992Realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    
    
    
    
    (7
    )Home Service Insurance
    
    
    (2
    )
    
    
    6Other Non-Insurance Enterprises
    
    
    18
    
    
    
    (12
    )Total consolidated realized gains (losses)
    
    $
    16
    
    
    
    (13
    )
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March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Assets:Life Insurance
    
    $
    449,465
    
    
    
    449,719Home Service Insurance
    
    
    311,097
    
    
    
    305,997Other Non-Insurance Enterprises
    
    
    33,647
    
    
    
    32,193Total consolidated assets
    
    $
    794,209
    
    
    
    787,909
 (4)
    
    Total Comprehensive Income
 Three Months Ended March 31,2008
    
    
    2007(In thousands)Net income
    
    $
    2,735
    
    
    
    2,439Other comprehensive income (loss) net of tax:Unrealized net gains (losses) on investments
in fixed maturities available for sale and
equity securities
    
    
    (2,269
    )
    
    
    1,707Total comprehensive income
    
    $
    466
    
    
    
    4,146
 (5)
    
    Earnings per ShareThe following table sets forth the computation of basic and dilutive earnings per share:
 Three Months Ended March 31,2008
    
    
    2007(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    2,735
    
    
    
    2,439Less: Preferred stock dividend
    
    
    (178
    )
    
    
    (168
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (334
    )
    
    
    (335
    )Net income available to common stockholders
    
    $
    2,223
    
    
    
    1,936Net income allocated to Class A common stock
    
    $
    2,197
    
    
    
    1,912Net income allocated to Class B common stock
    
    
    26
    
    
    
    24Net income available to common stockholders
    
    $
    2,223
    
    
    
    1,936Denominator:Weighted average shares of Class A outstanding -
basic and diluted
    
    
    43,070
    
    
    
    40,290Weighted average shares of Class B outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding -
basic and diluted
    
    
    44,072
    
    
    
    41,292Basic and diluted earnings per share of
Class A common stock
    
    $
    0.05
    
    
    
    0.05Basic and diluted earnings per share of
Class B common stock
    
    $
    0.03
    
    
    
    0.02
 10




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The effects of Series A-1 and A-2 Convertible Preferred Stock and warrants are anti-dilutive;
therefore, diluted income per share is reported the same as basic income per share. The
Series A-1 and A-2 Convertible Preferred Stock is anti-dilutive because the amount of the
dividend and accretion of deferred issuance costs and discounts for the three months ended
March 31, 2008 per Class A common stock share obtainable on conversion exceeds basic income
per share available to common stockholders. The warrants are anti-dilutive because the
exercise price is in excess of the average Class A common stock market price for the three
months ended March 31, 2008.(6)
    
    Fair Value MeasurementsAs defined in SFAS No. 157, 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 fixed maturity 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. SFAS No. 157 requires all assets and liabilities carried at fair
value 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 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 rate, credit spread 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 table sets forth our assets that are measured at fair value on a recurring
basis as of the date indicated:
 March 31, 2008(In thousands)Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Financial Assets:Fixed Maturities Available-for-Sale:
    
    $
    496,031
    
    
    
    13,249
    
    
    
    482,082
    
    
    
    700Equity Securities Available-for-Sale
    
    
    45,088
    
    
    
    45,088
    
    
    
    
    
    
    
    Total Financial Assets
    
    $
    541,119
    
    
    
    58,337
    
    
    
    482,082
    
    
    
    700
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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:
 March 31, 2008(In thousands)Beginning balance at December 31, 2007
    
    $
    700Total realized and unrealized gains (losses):Included in net income
    
    
    Included in other comprehensive income
    
    
    12Principal paydowns
    
    
    (12
    )Transfer in and (out) of Level 3
    
    
    Ending balance at March 31, 2008
    
    $
    700
 We review the fair value hierarchy classifications each reporting period. Change 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.(7)
    
    Legal ProceedingsWe are a defendant in a lawsuit originally filed on August 6, 1999 in the Texas District
Court, Austin, Texas, now styled Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach, Respondent, in which a
class was originally certified by the trial court and affirmed by the Court of Appeals for the
Third District of Texas. We appealed the grant of class status to the Texas Supreme Court,
which on March 2, 2007, reversed the Court of Appeals affirmation of the trial courts class
certification order, decertified the class and remanded the case to the trial court for
further proceedings consistent with the Texas Supreme Courts opinion. As a result, no class
action is presently certified, and plaintiffs counsel is seeking to recertify the class. In
order to recertify the class, the lead plaintiff must establish that he is qualified to
represent the purported class and that the res judicata effect of a class action will not have
a deleterious effect on the putative class members. The underlying lawsuit alleges that
certain life insurance policies that we made available to non-U.S. residents, when combined
with a policy feature that allowed certain cash benefits to be assigned to two non-U.S. trusts
for the purpose of accumulating ownership of our class A common stock, along with allowing the
policyholders to make additional contributions to the trusts, were actually offers and sales
of securities that occurred in Texas by unregistered dealers in violation of the Texas
securities laws. The remedy sought was rescission and return of the insurance premium
payments. We believe the lawsuit is without merit and intend to continue a vigorous defense
in any remaining proceedings, including any class recertification. If the class is
recertified, we could be exposed to costly and time-consuming litigation, and an adverse
judgment could have a material adverse effect on our results of operations and financial
condition. The case is now before the District Court judge for an analysis of the evidence
presented to determine if it warrants recertification of a class.Our wholly-owned Louisiana property insurer, SPFIC, has been named as a defendant in a lawsuit
asserting class allegations, now styled The Master Class Action Insurance Complaint,
originally filed in the United States District Court, Eastern District of Louisiana. Most of
the property and casualty insurers in Louisiana were also named in this lawsuit. The suit
sought payments for claims denied by SPFIC and other declaratory relief related to Hurricane
Katrina. It is unclear from the petition how many plaintiffs are insureds of SPFIC.
Presently, the Master Class Action Insurance Complaintis stayed by order of the court.SPFIC continues to assert that their insurance policies excluded claims for flood damage. On
August 2, 2007, the U.S. Court of Appeals for the Fifth Circuit ruled that the flood exclusion
language in certain property insurance policies was effective to preclude claims for flood
damage by policyholders whose policies include
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such exclusion. On September 30, 2007, the judge presiding over the Master Class Action
Insurance Complaintissued a ruling holding that specific named peril policies that do not
list flooding as one of the
named perils do not provide coverage for flooding. SPFICs policies are named peril policies
that do not list flooding as one of the named perils. As such, SPFIC intends to continue to
vigorously defend any claims resulting from flood damage on the grounds, among others, that
its policies do not cover such damage. The deadline for filing claims against insurers
arising out of property damage from Hurricane Katrina was August 29, 2007. On April 8, 2008,
the Louisiana Supreme Court similarly ruled that the flood exclusion language in certain
property insurance policies was effective to preclude claims for flood damage by policy
holders whose policies include such exclusion. This decision is significant as it relates to
any individual cases filed against SPFIC in Louisiana state court.SPFIC is also a defendant in a suit styled The State of Louisiana v. AAA Insurance, or Road
Home Litigation, which was filed in the Civil District Court for the Parish of Orleans on
August 23, 2007 by the state of Louisiana as subrogee/assignee of the insureds of more than
200 different insurance companies. The suit was filed to recover money that the state of
Louisiana paid to certain insureds under the Louisiana Road Home Program for damages resulting
from Hurricanes Katrina and Rita. The suit was removed to the United States District Court
for the Eastern District of Louisiana on September 11, 2007 and appeals of the removal have
been denied. Responsive pleadings have not yet been filed on behalf of any of the defendant
insurers in this case, nor has any discovery been conducted to date. Responsive pleadings are
due on June 18, 2008.SPFIC was also named as a defendant in a lawsuit filed in the Civil District Court for the
Parish of Orleans on behalf of Karen Cheneau in August 2006. The Cheneausuit stems from
damages Ms. Cheneau sustained during Hurricane Katrina. In November 2007, plaintiff filed a
Motion for Leave to File First Amended Petition to Assert Class Allegations Against SPFIC.
The purported class consists of Louisiana citizens who purchased homeowners insurance
coverage and/or contents insurance coverage from SPFIC, whose homes and/or property covered by
said policies were damaged as a result of Hurricane Katrina and who timely submitted claims to
SPFIC for their losses, and who either received no recovery or received less than the proper
value of their valued policies as a result of their claims. SPFIC has responded to the
Amended Petition by filing Exceptions of No Cause of Action, No Right of Action, Vagueness,
Prescription and Failure to Meet Class Action Requirements.The Exceptions have not yet been set for hearing. SPFIC intends to vigorously defend this
lawsuit. The Master Class Action Insurance Complaint, the Road Home Litigationand Cheneau
are in the early stages of litigation, and no discovery has yet occurred. Therefore, it is
not possible to evaluate how many claims in those cases relate to SPFIC, or the potential
exposure to SPFIC. However, in the event of an adverse outcome, the potential exposure to
SPFIC could be significant.On November 8, 2005, SPLIC was named as a defendant in a suit styled Lilac Todd vs. Security
Plan Life Insurance Company, on behalf of Lilac Todd which alleges that SPLIC failed to pay
Ms. Todds claim for medical expenses arising out of the amputation of one of her limbs. On
December 20, 2007, a Supplemental and Amended Petition for Damages was filed pursuant to which
the plaintiff has asserted class action allegations. The purported class is defined as all
Louisiana insureds of SPLIC whose policies contained an incontestability provision identical
or similar to Ms. Todds policy, and whose claims were denied within 10 years of the petition
filing on the basis of illnesses, injuries or diseases diagnosed or which occurred at any time
preceding the incontestability.SPLIC has responded by filing Exceptions of Vagueness and of Improper Use of the Class Action
Procedure, as well as an Answer to the Supplemental and Amended Petition for Damages. SPLIC
has also recently filed a Motion for Partial Summary Judgment. The Exceptions and Partial
Motion for Summary Judgment have not yet been set for hearing. The Lilac Todd matter is in
the early stages of litigation relative to the class allegations and minimal discovery has
occurred. Plaintiffs have not established how many, if any, individuals are within the class
definition proposed by plaintiff. SPLIC intends to aggressively defend this action. However,
in the event of an adverse outcome, the potential exposure to SPLIC could be significant.
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In addition to the legal proceedings described above, we may from time to time be subject to a
variety of legal and regulatory actions relating to our future, current and past business
operations, including, but not limited to:
 
    
    disputes over insurance coverage or claims adjudication;
    
    regulatory compliance with insurance and securities laws in the United States
and in foreign countries;
    
    disputes with our marketing firms, consultants and employee agents over
compensation and termination of contracts and related claims;
    
    disputes regarding our tax liabilities;
    
    disputes relative to reinsurance and coinsurance agreements; and
    
    disputes relating to businesses acquired and operated by us.
 In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not
only attorneys fees and other direct litigation costs, but also the expenditure of
substantial amounts of management time that otherwise would be devoted to our business. If we
suffer an adverse judgment as a result of any claim, it could have a material adverse effect
on our business, results of operations and financial condition. We have not established any
reserve account on our consolidated financial statements for the adverse financial impact of
any of our litigation matters.(8)
    
    Convertible Preferred StockIn July 2004, the Company completed a private placement of $12.5 million of Series A-1
Convertible Preferred Stock (Series A-1 Preferred) to four unaffiliated institutional
investors. The Company also issued to the investors warrants to purchase 544,000 shares of
Class A common stock, at an exercise price of $6.95 per share, and unit warrants to purchase
Series A-2 Convertible Preferred Stock (Series A-2 Preferred). The conversion, exercise and
redemption prices set forth in this Note 8, along with the numbers of shares and warrants
(except for the 25,000 Series A-1 Preferred shares referenced below), have been adjusted for
the respective stock dividends paid December 31, 2004 and December 31, 2005.The 25,000 shares of Series A-1 Preferred carry a 4% per annum dividend, payable quarterly in
cash or, if certain conditions are met, shares of the Companys Class A common stock. The
Company has paid all of the preferred dividends through March 31, 2008 with Class A common
stock.The Company may, at its option, subject to certain conditions, increase the issued Series A-1
Preferred by $12.5 million to $25 million by requiring the investors to make additional
payments for their shares of Series A-1 Preferred. Likewise, the investors may, at their
option, subject to certain conditions, increase the issued Series A-1 Preferred by $12.5
million.The Series A-1 Preferred and Series A-2 Preferred are convertible at the option of the
investors into shares of Class A common stock at a conversion price of $6.33 per share and a
range from $6.11 to $7.26 per share, respectively, and each with a mandatory redemption in
five years after their issuance if not converted prior to the redemption date. The Series A-1
Preferred can be converted into an aggregate of 1,975,000 Class A common shares. The Series
A-2 Preferred can be converted into an aggregate number of shares based on a variable defined
price.The Series A-1 and A-2 Preferred stock is mandatorily redeemable in 2009. Both may also
become redeemable at the option of the holder if certain conditions exist, as described below.
Under either scenario, the shares may be redeemed in cash or shares of Class A common stock
depending on the circumstances. If redeemed in stock, the redemption price is based on a
defined formula.
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The provisions of the Series A Preferred Stock require that if (i) at any time after the
original issue date of the stock, the closing price of our Class A common stock for any 42
trading days, including a period not less than 5 consecutive trading days, is less than $4.80,
or (ii) we issue Class A common stock or common stock equivalents for less than $6.11 per
share, then the holders of the Series A Preferred Stock may require us to redeem their shares
of Series A Preferred Stock at a price equal to the amount of the original holders original
investment, plus all accrued but unpaid dividends thereon to the date of payment and any
applicable penalties. The preferred holders right to require a redemption has not been
triggered under clause (i) or clause (ii) above. If the right were to be triggered, that
right would terminate if the price per share of Class A common stock exceeds certain defined
amounts for certain specified periods of time. Another provision of the Series A Preferred
Stock allows the preferred holders to require the Company to repurchase in cash (1) any shares
of Series A Preferred Stock still held by the preferred shareholders and (2) any shares of
Class A common stock still held by the preferred shareholders pursuant to the provisions of
the Preferred Stock if certain defined Events or other conditions occur and are not cured
within specified time periods. Those Events or conditions generally relate to the preferred
holders ability to resell their Class A common shares.We will be required to redeem any shares of the Series A Preferred Stock that remain
outstanding on July 12, 2009 at a price equal to the amount of the original holders original
investment, plus all accrued but unpaid dividends thereon to the date of such payment. If the
average price is less than $3.50 per Class A common share, the redemption must be in cash.The unit warrants, which were also issued in July 2004, entitled the investors to purchase
from the Company up to $5 million of Series A-2 Preferred. Three of the four investors
exercised their unit warrants, for an exercise price of approximately $3.75 million, before
the unit warrants expired in October 2005. The Series A-2 Preferred shares are convertible
into Class A common stock at conversion prices equal to 110% of the average market closing
prices of the Class A common stock for the 30 trading days before the respective dates of
issuance of the Series A-2 Preferred to the three investors. The redemption period for the
Series A-2 Preferred expires on July 12, 2009.On July 7, 2005, the first of the three investors exercised its unit warrant and purchased
1,338 shares of Series A-2 Preferred for $1,250,000, convertible into Class A common stock at
$6.11 per common share, and seven-year warrants to purchase 56,000 shares of Class A common
stock at an exercise price of $6.72 per share. On September 30, 2005, the second investor
exercised its unit warrant, purchasing 1,338 shares of Series A-2 Preferred for $1,250,000,
convertible into Class A common stock at $7.26 per common share, and seven-year warrants to
purchase 47,000 shares of Class A common stock at an exercise price of $7.99 per share. In
October 2005, the third investor exercised its unit warrant, purchasing 1,338 shares of Series
A-2 Preferred for $1,250,000, convertible into Class A common stock at $7.20 per common share,
and seven-year warrants to purchase 48,000 shares of Class A common stock at an exercise price
of $7.92 per share. In October 2005, the remaining series A-2 Preferred Stock and associated
warrants expired without the fourth investor exercising its option.In connection with the issuance of Series A-1 Preferred and associated warrants in July 2004,
the finders with respect to these transactions received, as part of the finders compensation,
warrants to purchase 99,000 shares of Series A common stock at an exercise price of $6.95 per
share. In connection with the issuances of Series A-2 Preferred and associated warrants in
2005, the finders received, as part of the finders compensation, warrants to purchase 28,000
shares of Class A common stock at exercise prices ranging from $6.72 to $7.99.The Company initially recognized deferred issuance costs in 2004 of $1,486,000, a discount on
the beneficial conversion feature of $3,073,000 and discounts on fair values of options and
warrants of $2,719,000, respectively, as offsets against the $12.5 million issuance of the
Series A-1 Preferred. This feature represents the difference at July 12, 2004 between the
fair value of the Class A common stock and the effective conversion price, taking into account
embedded warrants based upon the number of shares to be converted. This intrinsic value
reduced the carrying value of the Series A-1 Preferred on the statement of financial
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position with an equal amount credited to the Class A common stock These deferred issuance
costs and discounts have been amortized to the Class A common stock over the period until
redemption using the effective interest method. On July 7, 2005, September 30, 2005 and
October 6, 2005, three of the four unaffiliated investors exercised their right to purchase
the Series A-2 Convertible Preferred Stock. The Company recognized deferred issuance costs of
$247,000 and a premium of $721,000 related to the liability for the option recorded at the
date of the respective exercises.At March 31, 2008 and December 31, 2007, there was $493,000 and $583,000 in unaccreted
deferred issuance costs and $1,205,000 and $1,449,000 in unaccreted net discount costs,
respectively. The redemption value of the series A-1 and A-2 convertible stock was
$16,251,000 at March 31, 2008.The initial July 2004 recognition of the beneficial conversion feature and discounts on fair
values of options and warrants resulted in $3,073,000 of additional paid-in capital for the
Class A common stock and $2,944,000 of liabilities for warrants. Changes in the fair value of
warrants are recognized in the statement of operations with a corresponding change in the
liabilities for warrants.
 
 ITEM 2 . MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
 Certain statements contained in this Quarterly Report onForm 10-Qare 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 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, 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 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 potential customers;
    
    Fluctuations in experience regarding current mortality, morbidity, persistency and
interest rates relative to expected amounts used in pricing the Companys products;
    
    Changes in assumptions related to deferred acquisition costs and the value of business
acquired;
    
    Regulatory, accounting or tax changes that may affect the cost of, or the demand for,
the Companys products or services; and
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##### Table of Contents




    
    A concentration of business from persons residing in Latin America and the Pacific
Rim; and, the success of the Company at managing the risks involved in the foregoing.
 Such forward-looking statements speak only as of the date on which such statements are made,
and the Company undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made to reflect the
occurrence of unanticipated events.We make available, free of charge, through our Internet website (http://www.citizensinc.com),
our Annual Report onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K,
Section 16 reports filed by officers and directors, news releases, and, if applicable,
amendments to those reports filed or furnished pursuant toSection 13(a)or15(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 onForm 10-Q.OverviewWe are an insurance holding company serving the life insurance needs of individuals in the
United States and in more than 35 countries around the world. We pursue a strategy of
offering ordinary whole life insurance with a focus on cash accumulation and final expense
insurance products in niche markets where we believe we are able to achieve competitive
advantages. Our core operations include issuing and servicing:
 
    
    U.S. Dollar-denominated ordinary whole life insurance policies predominantly to high
net worth, high income foreign residents, principally in Latin America and the Pacific
Rim, through approximately 2,600 independent marketing consultants;
    
    ordinary whole life insurance policies to middle income households in the Midwest and
the southern United States through approximately 600 independent marketing
consultants; and
    
    final expense and limited liability property policies to middle to lower income
households in Louisiana through approximately 350 employee agents in our home service
distribution channel.
 We primarily operate through two segments as follows:Life Insurance.For more than 30 years, CICA and its predecessors have participated in the
foreign marketplace through the issuance of U.S. Dollar-denominated ordinary whole life
insurance to foreign nationals. Traditionally, this market has focused on the top 3-5% of the
population of a country in terms of income and net worth. In recent years, however, there has
been a shift to encompass a broader spectrum of the population, as upper middle classes
develop in Latin America and the Pacific Rim. We make our insurance products available using
third-party marketing organizations and independent marketing consultants. The number of our
producing independent consultants has expanded over the years in this segment to approximately
2,600, and we presently receive applications from more than 35 countries outside of the U.S.
Historically, the majority of our international business has come from Latin America.
However, in 2004 the Pacific Rim began to represent a meaningful and growing source of new
business, and in 2008 continued to be one of the leading sources of new premium income.In the first three months of 2008, our Life Insurance segment generated revenue of $26.7
million, which accounted for 66.8% of our total revenue, compared to revenue of $25.6 million,
or 66.5% of total revenue for the same period in 2007. Our strategy in operating our Life
Insurance segment is to increase new business written through our existing marketers as well
as recruit new marketers and expand the number of countries from which we receive policy
applications.In 2008, CICA plans introduction of a new set of international life insurance products. We
anticipate these new products will be well received in the international market.
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Through the domestic market of our Life Insurance segment, we provide ordinary whole life,
credit life insurance, and final expense policies to middle income families or individuals in
certain markets in the Midwest and southern U.S. The majority of our revenues in this market
are the result of acquisitions of domestic life insurance companies since 1987.We also realize revenues from our investment portfolio. Life insurance companies earn profits
on the investment float, which reflects the investment income earned on the premiums paid to
the insurer between the time of receipt and the time benefits are paid out under policies.
Changes in interest rates, changes in economic conditions and volatility in the capital
markets can all impact the amount of earnings that we realize from our investment portfolio.Home Service Insurance.Through a subsidiary, SPLIC, we provide final expense ordinary life
insurance to middle to lower income individuals in Louisiana and Mississippi. Our policies in
this segment are sold and serviced through the home service marketing distribution system
utilizing employee-agents who work on a route system to collect premiums and service
policyholders.During the first quarter of 2008, revenue from this segment was $13.2 million, which accounted
for 33.1% of our total revenue, compared to revenue from this segment of $13.0 million, or
33.8% of total revenue, during the same period in 2007. Our business strategy in this segment
is to continue to serve existing customers in Louisiana as well as expand the business through
the acquisition of similar operations.Marketplace Conditions and TrendsDescribed below are some of the significant recent events and trends affecting the life
insurance industry and the possible effects they may have on our future operations.
 
    
    As an increasing percentage of the world population reaches retirement age, we believe
we will benefit from increased demand for living products rather than death products, as
aging baby boomers will require cash accumulation to provide expenses to meet their
lifetime needs. Our ordinary life products are designed to accumulate cash values to
provide for living expenses in a policy owners later years, while continuously providing
a death benefit.
    
    We are exposed to a variety of risks, including the current market conditions as well
as the credit crisis and corresponding potential changes in the fair value of our
investments. In the normal course of business, we employ established policies and
procedures to manage our exposure to fluctuations in the current market and changes in
the fair value of our investments. We have not experienced any impairment in the value
of our securities due to the current credit crisis in world financial markets. We have
no subprime or collateralized debt investments.
    
    The volatility in the equity markets over the past few years has posed a number of
problems for some companies in the life insurance industry. Our equity holdings have
been limited to 8% of total invested assets as of March 31, 2008 and 6% at December 31,
2007.
    
    Corporate bond defaults and credit downgrades, which have resulted in
other-than-temporary impairments in the value of some securities, have had a material
impact on life insurers in the past few years. We have not incurred significant losses
from bond defaults for many years. The majority of our investment portfolio is held in
debt instruments carrying the full faith and credit of the U.S. Government, or in U.S.
Government-sponsored enterprises. Most of the municipal bonds we own are privately
insured. We intend to manage our investment portfolio conservatively in the future using
these types of debt instruments.
    
    Because of the trends described above coupled with increasing costs of regulatory
compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards
consolidation of domestic life insurance companies. We believe this should be a benefit
to our acquisition strategy because there should be more complementary acquisition
candidates available for us to consider.
 
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
    
    Many of the events and trends affecting the life insurance industry have had an impact
on the life reinsurance industry. These events led to a decline in the availability of
reinsurance. While we currently cede a limited amount of our primary insurance business
to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us
to seek reinsurers who are more expensive to us. If we cannot obtain affordable
reinsurance coverage, either our net exposures will increase or we will have to reduce
our underwriting commitments.
 All comparisons below state the 2008 first fiscal quarter first and the 2007 first fiscal
quarter second.Consolidated Results of OperationsThe following table sets forth our net income for the periods indicated:
 Three Months Ended
    
    Net Income
    
    Net Income per
    
    Increase (decrease)March 31,
    
    (In thousands)
    
    Class A Share
    
    from Previous Year2008
    
    $
    2,735
    
    
    $
    0.05
    
    
    
    12.1
    %2007
    
    
    2,439
    
    
    
    0.05
    
    
    
    138.9
 As further discussed below, increases in premium income, fueled by increased renewal life
insurance premiums and property insurance rate increases, as well as an increase in investment
income contributed to a 12.1% increase in earnings during the first quarter of 2008.Total revenues for the first quarter of 2008 were $39.9 million, a 3.9% increase over the same
period in 2007 when revenues were $38.4 million. Total revenues from Home Service were $13.2
million during the first quarter of 2008 and $13.0 million during the same period in 2007.
Total revenues from our Life Insurance segment amounted to $26.7 million during the first
quarter of 2008, compared to $25.6 million for the same period in 2007, reflecting increased
renewal premium on the international business. New business in the Life Insurance segment was
down approximately 25% in 2008 compared to 2007, as marketing associates delayed sales of new
business in anticipation of new international life products, which were introduced in April
2008.Premium Income. Premium income during the first quarter of 2008 increased to $32.7
million from $31.4 million during the same period in 2007, or 3.9%. The 2008 increase was
attributable to persistency on the international business written in the Life Insurance
segment, which had $22.6 million of premium income during the quarter. First year premiums in
the Life Insurance segment during the first quarter of 2008 were down from comparable levels
in 2007. We expect our new international products to reverse this decrease. Additionally,
rate increases on property insurance products added an additional $257,000 to premium income
in 2008 over 2007.Net Investment Income. Net investment income increased 5.6% during the first quarter
of 2008 to $7.5 million, compared to $7.1 million during the same period in 2007, due
primarily to the growth in our bond portfolio during 2007. Additionally, during 2007 and the
first quarter of 2008, we invested $49.8 million in equity mutual funds. We expect to
increase this number to 10% of invested assets during 2008. We continue to invest primarily
in bonds of U.S. Government-sponsored enterprises, such as FNMA and FHLMC.Policyholder Dividends. Policyholder dividends increased 12.0% during the first
quarter of 2008 to $1.4 million from $1.2 million during the same quarter in 2007, due to the
continued sale and persistency of participating ordinary whole life products in the
international market. All of our international policies are participating, and the growth of
this block of business has contributed to the growth in dividends. The dividends are factored
into the premiums and have no impact on profitability.Claims and Surrenders. As noted in the table below, claims and surrenders decreased
slightly to $13.1 million in the first quarter of 2008 from $13.2 million during the same
period in 2007.
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Three Months Ended March 31,2008
    
    
    2007(In thousands)Death claims
    
    $
    5,784
    
    
    
    6,006Surrender benefits
    
    
    3,442
    
    
    
    3,193Endowments
    
    
    3,130
    
    
    
    2,903Property claims
    
    
    371
    
    
    
    523Other policy benefits
    
    
    281
    
    
    
    448Accident and health benefits
    
    
    70
    
    
    
    107Total claims and surrenders
    
    $
    13,078
    
    
    
    13,180
 Commissions
 Other Underwriting, Acquisition and Insurance Expenses
 Deferred Policy Acquisition Costs
 Federal Income Tax
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Commitments and Contingencies
 Contractual Obligation
    
    Total
    
    
    Less than 1 Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    More than 5 Years(In Thousands)Operating leases
    
    $
    1,012
    
    
    
    355
    
    
    
    551
    
    
    
    106
    
    
    
    Other
    
    
    44
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    Total operating and other leases
    
    
    1,056
    
    
    
    399
    
    
    
    551
    
    
    
    106
    
    
    
    Future policy benefit reserves:Life insurance
    
    
    514,775
    
    
    
    191
    
    
    
    1,074
    
    
    
    10,080
    
    
    
    503,430Annuities
    
    
    23,132
    
    
    
    12,101
    
    
    
    5,424
    
    
    
    2,338
    
    
    
    3,269Accident and health
    
    
    7,920
    
    
    
    7,920
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit
reserves
    
    
    545,827
    
    
    
    20,212
    
    
    
    6,498
    
    
    
    12,418
    
    
    
    506,699Policy claims payable:Life insurance
    
    
    6,135
    
    
    
    6,135
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    673
    
    
    
    673
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    8,166
    
    
    
    8,166
    
    
    
    
    
    
    
    
    
    
    
    Convertible Preferred Stock
    
    
    16,251
    
    
    
    
    
    
    
    16,251
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    571,300
    
    
    
    28,777
    
    
    
    23,300
    
    
    
    12,524
    
    
    
    506,699
 Liquidity and Capital Resources
     21




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##### Table of Contents



Parent Company Liquidity and Capital Resources
  22




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##### Table of Contents



Critical Accounting Policies
  Policy Liabilities
    Deferred Policy Acquisition Costs
     23




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##### Table of Contents



Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contracts
 Valuation of Investments in Fixed Maturity and Equity Securities
   Premium Revenue and Related Expenses
   24




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK
 General
  Market Risk Related to Interest Rates
    Decreases in Interest Rates(In thousands)100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis PointsMarch 31, 2008
    
    $
    15,205
    
    
    
    28,799
    
    
    
    44,070December 31, 2007
    
    $
    18,594
    
    
    
    29,582
    
    
    
    42,812
 Increases in Interest Rates(In thousands)100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis PointsMarch 31, 2008
    
    $
    (11,504
    )
    
    
    (47,803
    )
    
    
    (76,560
    )December 31, 2007
    
    $
    (22,821
    )
    
    
    (51,006
    )
    
    
    (79,768
    )
   25




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##### Table of Contents



Market Risk Related to Equity Prices
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach Respondent
 The Master Class Action Insurance Complaint
 26




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##### Table of Contents



Master Class Action Insurance Complaint
 Master Class Action Insurance Complaint
 The State of Louisiana v. AAA Insurance Road
Home Litigation
 Cheneau
 Master Class Action Insurance Complaint Road Home Litigation Cheneau
 Lilac Todd vs. Security
Plan Life Insurance Company
  27




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##### Table of Contents




    
    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 1.A Risk Factors
  Lack of market acceptance of our new insurance policies for our non-U.S. residents could
negatively impact our financial results.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  28




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##### Table of Contents



Item 5. Other Information
  
 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)
 29




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith: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)10.6
    
    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)11
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    Subsidiaries of Registrant (k)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on 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 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. I, 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.(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 March 30, 2007 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2006 as Exhibit 21, and incorporated herein by reference. 30




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##### Table of Contents



SIGNATURES
  CITIZENS, INC.By:
    /s/ Harold E. RileyHarold E. RileyChairman and Chief Executive OfficerBy:
    /s/ Thomas F. KopeticThomas F. KopeticVice President, Chief Financial Officer
and Treasurer  31




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##### Table of Contents



Exhibit Index
 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)




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith: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)10.6
    
    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)11
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    Subsidiaries of Registrant (k)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on 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 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. I, 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.(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 March 30, 2007 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2006 as Exhibit 21, and incorporated herein by reference.