##### 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 June 30, 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
  
 
 
   þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
  o þ




---



##### 



INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial
Position, June 30, 2008, (Unaudited) and December 31, 2007
    
    
    2Consolidated Statements of Operations,
Three Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    4Consolidated Statements of Operations,
Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows,
Six Months Ended June 30, 2008 and 2007 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis
of Financial Condition and Results
of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II. Other InformationItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.

    FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
(In thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsInvestments:Fixed maturities available-for-sale, at fair value
(cost: $498,651 and
$502,635 in 2008 and
2007, respectively)
    
    $
    491,278
    
    
    
    500,426Equity securities available-for-sale, at fair value
(cost: $59,494 and
$36,696 in 2008 and 2007,
respectively)
    
    
    53,988
    
    
    
    35,669Mortgage loans on real estate
    
    
    388
    
    
    
    291Policy loans
    
    
    26,539
    
    
    
    25,490Real estate held for investment
(less $258 and $249
accumulated depreciation
in 2008 and 2007,
respectively)
    
    
    5,123
    
    
    
    5,152Other long-term investments
    
    
    681
    
    
    
    618Short-term investments
    
    
    
    
    
    
    17,650Total investments
    
    
    577,997
    
    
    
    585,296Cash and cash equivalents
    
    
    39,528
    
    
    
    21,123Accrued investment income
    
    
    7,064
    
    
    
    7,115Reinsurance recoverable
    
    
    12,361
    
    
    
    13,492Deferred policy acquisition costs
    
    
    104,151
    
    
    
    100,655Cost of customer relationships acquired
    
    
    30,171
    
    
    
    31,636Goodwill
    
    
    11,386
    
    
    
    11,386Other intangible assets
    
    
    1,052
    
    
    
    1,066Federal income tax receivable
    
    
    726
    
    
    
    715Property and equipment, net
    
    
    6,479
    
    
    
    6,795Due premiums, net
(less $1,910 and $1,780 allowance for doubtful accounts
in 2008 and 2007, respectively)
    
    
    7,771
    
    
    
    7,656Prepaid expenses
    
    
    1,427
    
    
    
    Other assets
    
    
    842
    
    
    
    974Total assets
    
    $
    800,955
    
    
    
    787,909
  2




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    522,282
    
    
    
    508,209Annuities
    
    
    23,912
    
    
    
    22,792Accident and health
    
    
    7,612
    
    
    
    8,293Premiums paid in advance
    
    
    18,808
    
    
    
    16,140Policy claims payable
    
    
    8,842
    
    
    
    6,908Dividend accumulations
    
    
    4,783
    
    
    
    4,825Other policyholders funds
    
    
    4,355
    
    
    
    4,357Total policy liabilities
    
    
    590,594
    
    
    
    571,524Commissions payable
    
    
    2,127
    
    
    
    2,385Deferred Federal income tax
    
    
    3,482
    
    
    
    4,810Payable for securities in process of settlement
    
    
    3,000
    
    
    
    7,000Warrants outstanding
    
    
    1,194
    
    
    
    1,003Other liabilities
    
    
    10,722
    
    
    
    10,810Total liabilities
    
    
    611,119
    
    
    
    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)
    
    
    14,888
    
    
    
    14,220Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized,
46,259,296 shares
issued in 2008 and
46,205,830 shares
issued in 2007,
including shares in
treasury of 3,135,738
in 2008 and 2007
    
    
    225,144
    
    
    
    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
    
    
    (33,998
    )
    
    
    (39,725
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (8,371
    )
    
    
    (2,103
    )185,959
    
    
    
    187,168Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    174,948
    
    
    
    176,157Total liabilities and stockholders equity
    
    $
    800,955
    
    
    
    787,909
   3




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
Three Months Ended June 30
(In thousands, except per share amounts)
(Unaudited)
 2008
    
    
    2007Revenues:Premiums:Life insurance
    
    $
    33,491
    
    
    
    31,538Accident and health insurance
    
    
    410
    
    
    
    381Property insurance
    
    
    1,303
    
    
    
    1,183Net investment income
    
    
    7,480
    
    
    
    7,064Realized losses, net
    
    
    
    
    
    
    (119
    )Decrease in fair value of warrants
    
    
    312
    
    
    
    231Other income
    
    
    285
    
    
    
    433Total revenues
    
    
    43,281
    
    
    
    40,711Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    14,730
    
    
    
    12,024Increase in future policy benefit reserves
    
    
    7,733
    
    
    
    8,389Policyholdersdividends
    
    
    1,577
    
    
    
    1,422Total insurance benefits paid or provided
    
    
    24,040
    
    
    
    21,835Commissions
    
    
    9,376
    
    
    
    8,997Other underwriting, acquisition and insurance expenses
    
    
    7,020
    
    
    
    7,324Capitalization of deferred policy acquisition costs
    
    
    (6,309
    )
    
    
    (6,782
    )Amortization of deferred policy acquisition costs
    
    
    4,106
    
    
    
    3,329Amortization of cost of customer relationships
acquired and other intangibles
    
    
    715
    
    
    
    826Total benefits and expenses
    
    
    38,948
    
    
    
    35,529Income before Federal income tax
    
    
    4,333
    
    
    
    5,182Federal income tax expense
    
    
    1,341
    
    
    
    1,655Net income
    
    $
    2,992
    
    
    
    3,527Net income available to common stockholders
    
    $
    2,493
    
    
    
    3,016Per Share Amounts:Basic and diluted earnings per share of Class A common stock
    
    $
    0.06
    
    
    
    0.07Basic and diluted earnings per share of Class B common stock
    
    $
    0.03
    
    
    
    0.04
   4




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
Six Months Ended June 30
(In thousands, except per share amounts)
(Unaudited)
 2008
    
    
    2007Revenues:Premiums:Life insurance
    
    $
    64,341
    
    
    
    61,378Accident and health insurance
    
    
    794
    
    
    
    803Property insurance
    
    
    2,739
    
    
    
    2,362Net investment income
    
    
    14,944
    
    
    
    14,131Realized gains (losses), net
    
    
    16
    
    
    
    (132
    )Increase in fair value of warrants
    
    
    (191
    )
    
    
    (196
    )Other income
    
    
    564
    
    
    
    785Total revenues
    
    
    83,207
    
    
    
    79,131Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    27,808
    
    
    
    25,204Increase in future policy benefit reserves
    
    
    14,730
    
    
    
    15,324Policyholdersdividends
    
    
    2,954
    
    
    
    2,652Total insurance benefits paid or provided
    
    
    45,492
    
    
    
    43,180Commissions
    
    
    17,087
    
    
    
    17,386Other underwriting, acquisition and insurance expenses
    
    
    13,931
    
    
    
    14,224Capitalization of deferred policy acquisition costs
    
    
    (11,164
    )
    
    
    (12,906
    )Amortization of deferred policy acquisition costs
    
    
    7,668
    
    
    
    6,480Amortization of cost of customer relationships
acquired and other intangibles
    
    
    1,479
    
    
    
    1,667Total benefits and expenses
    
    
    74,493
    
    
    
    70,031Income before Federal income tax
    
    
    8,714
    
    
    
    9,100Federal income tax expense
    
    
    2,987
    
    
    
    3,134Net income
    
    $
    5,727
    
    
    
    5,966Net income available to common stockholders
    
    $
    4,716
    
    
    
    4,952Per Share Amounts:Basic and diluted earnings per share of Class A common stock
    
    $
    0.11
    
    
    
    0.12Basic and diluted earnings per share of Class B common stock
    
    $
    0.05
    
    
    
    0.06
   5




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
Six Months Ended June 30
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    5,727
    
    
    
    5,966Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses (gains) on sale of investments
and other assets
    
    
    (16
    )
    
    
    132Net deferred policy acquisition costs
    
    
    (3,496
    )
    
    
    (6,426
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    1,479
    
    
    
    1,667Increase in fair value of warrants
    
    
    191
    
    
    
    196Depreciation
    
    
    534
    
    
    
    455Amortization of premiums and discounts on
fixed maturities and short-term investments
    
    
    48
    
    
    
    737Deferred Federal income tax expense (benefit)
    
    
    2,047
    
    
    
    (531
    )Change in:Accrued investment income
    
    
    51
    
    
    
    (158
    )Reinsurance recoverable
    
    
    1,131
    
    
    
    1,861Due premiums and other receivables
    
    
    10
    
    
    
    473Future policy benefit reserves
    
    
    13,923
    
    
    
    13,705Other policy liabilities
    
    
    4,558
    
    
    
    73Federal income tax receivable
    
    
    (11
    )
    
    
    (2,089
    )Commissions payable and other liabilities
    
    
    (346
    )
    
    
    42Other, net
    
    
    (1,419
    )
    
    
    (1,217
    )Net cash provided by operating activities
    
    
    24,411
    
    
    
    14,886Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    
    
    
    
    3,344Maturity and calls of fixed maturities, available-for-sale
    
    
    108,685
    
    
    
    42,265Purchase of fixed maturities, available-for-sale
    
    
    (109,097
    )
    
    
    (60,600
    )Sale of equity securities, available-for-sale
    
    
    
    
    
    
    74Purchase of equity securities, available-for-sale
    
    
    (22,798
    )
    
    
    (10,111
    )Principal payments on mortgage loans
    
    
    18
    
    
    
    94Mortgage loans funded
    
    
    (115
    )
    
    
    Sale of other long-term investments and property
and equipment
    
    
    179
    
    
    
    340Increase in policy loans
    
    
    (1,049
    )
    
    
    (1,479
    )Purchase of other long-term investments and property and
equipment
    
    
    (418
    )
    
    
    (3,445
    )Maturity of short-term investments
    
    
    18,000
    
    
    
    Net cash used in investing activities
    
    $
    (6,595
    )
    
    
    (29,518
    )
  6




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from financing activities:Annuity deposits
    
    $
    1,350
    
    
    
    1,114Annuity withdrawals
    
    
    (761
    )
    
    
    (971
    )Net cash provided by financing activities
    
    
    589
    
    
    
    143Net increase (decrease) in cash and cash equivalents
    
    
    18,405
    
    
    
    (14,489
    )Cash and cash equivalents at beginning of period
    
    
    21,123
    
    
    
    24,521Cash and cash equivalents at end of period
    
    $
    39,528
    
    
    
    10,032Supplemental disclosures of operating activities:Cash paid during the period for income taxes
    
    $
    951
    
    
    
    5,754
 Supplemental Disclosures of Non-Cash Financing Activities:
    7




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2008
 (Unaudited)
 (1)
    
    Financial Statements
        8




---



##### Table of Contents



Reclassifications
  (2)
    
    Accounting Pronouncements
 Business Combinations
 Determining the Useful Life of
Intangible Assets
 Fair Value Measurements
 The Fair Value Option
for Financial Assets and Financial Liabilities
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly In Conformity with Generally Accepted
Accounting Principles
  9




---



##### Table of Contents



Accounting for Financial Guarantee Insurance
Contracts  an interpretation of FASB Statement No. 60 Accounting and Reporting by Insurance
Enterprises
 (3)
    
    Segment Information
     10




---



##### Table of Contents



Three Months Ended June 30,2008
    
    
    2007(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    3,140
    
    
    
    2,698Home Service Insurance
    
    
    734
    
    
    
    2,865Other Non-Insurance Enterprises
    
    
    459
    
    
    
    (381
    )Total consolidated pretax income
    
    $
    4,333
    
    
    
    5,182Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    29,632
    
    
    
    27,226Home Service Insurance
    
    
    12,909
    
    
    
    12,966Other Non-Insurance Enterprises
    
    
    740
    
    
    
    519Total consolidated revenue
    
    $
    43,281
    
    
    
    40,711Premiums:Life Insurance
    
    $
    25,399
    
    
    
    23,239Home Service Insurance
    
    
    9,805
    
    
    
    9,863Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    35,204
    
    
    
    33,102Net investment income:Life Insurance
    
    $
    4,148
    
    
    
    3,791Home Service Insurance
    
    
    3,099
    
    
    
    3,185Other Non-Insurance Enterprises
    
    
    233
    
    
    
    88Total consolidated net investment income
    
    $
    7,480
    
    
    
    7,064Amortization expense:Life Insurance
    
    $
    3,373
    
    
    
    3,236Home Service Insurance
    
    
    1,448
    
    
    
    919Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    4,821
    
    
    
    4,155Realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    3
    
    
    
    (36
    )Home Service Insurance
    
    
    (3
    )
    
    
    (83
    )Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated realized gains (losses)
    
    $
    
    
    
    
    (119
    )
  11




---



##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    6,232
    
    
    
    4,506Home Service Insurance
    
    
    2,207
    
    
    
    5,033Other Non-Insurance Enterprises
    
    
    275
    
    
    
    (439
    )Total consolidated pretax income
    
    $
    8,714
    
    
    
    9,100Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    56,319
    
    
    
    52,777Home Service Insurance
    
    
    26,113
    
    
    
    25,970Other Non-Insurance Enterprises
    
    
    775
    
    
    
    384Total consolidated revenue
    
    $
    83,207
    
    
    
    79,131Premiums:Life Insurance
    
    $
    47,950
    
    
    
    44,849Home Service Insurance
    
    
    19,924
    
    
    
    19,694Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    67,874
    
    
    
    64,543Net investment income:Life Insurance
    
    $
    8,210
    
    
    
    7,589Home Service Insurance
    
    
    6,183
    
    
    
    6,352Other Non-Insurance Enterprises
    
    
    551
    
    
    
    190Total consolidated net investment income
    
    $
    14,944
    
    
    
    14,131Amortization expense:Life Insurance
    
    $
    7,059
    
    
    
    6,476Home Service Insurance
    
    
    2,088
    
    
    
    1,671Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    9,147
    
    
    
    8,147Realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    3
    
    
    
    (43
    )Home Service Insurance
    
    
    (5
    )
    
    
    (77
    )Other Non-Insurance Enterprises
    
    
    18
    
    
    
    (12
    )Total consolidated realized gains (losses)
    
    $
    16
    
    
    
    (132
    )
 June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Assets:Life Insurance
    
    $
    463,126
    
    
    
    449,719Home Service Insurance
    
    
    305,352
    
    
    
    305,997Other Non-Insurance Enterprises
    
    
    32,477
    
    
    
    32,193Total consolidated assets
    
    $
    800,955
    
    
    
    787,909
  12




---



##### Table of Contents



(4)
    
    Total Comprehensive Income (Loss)
 Three Months Ended June 30,2008
    
    
    2007(In thousands)Net income
    
    $
    2,992
    
    
    
    3,527Other comprehensive loss, net of tax:Unrealized net losses on investments
in fixed maturities available for sale and
equity securities
    
    
    (3,999
    )
    
    
    (4,987
    )Total comprehensive loss
    
    $
    (1,007
    )
    
    
    (1,460
    )
 Six Months Ended June 30,2008
    
    
    2007(In thousands)Net income
    
    $
    5,727
    
    
    
    5,966Other comprehensive loss, net of tax:Unrealized net losses on investments
in fixed maturities available for sale and
equity securities
    
    
    (6,268
    )
    
    
    (3,280
    )Total comprehensive income (loss)
    
    $
    (541
    )
    
    
    2,686
  13




---



##### Table of Contents



(5)
    
    Earnings per Share
  Three Months Ended June 30,2008
    
    
    2007(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    2,992
    
    
    
    3,527Less: Preferred stock dividends
    
    
    (165
    )
    
    
    (177
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (334
    )
    
    
    (334
    )Net income available to common stockholders
    
    $
    2,493
    
    
    
    3,016Net income allocated to Class A common stock
    
    $
    2,465
    
    
    
    2,979Net income allocated to Class B common stock
    
    
    28
    
    
    
    37Net income available to common stockholders
    
    $
    2,493
    
    
    
    3,016Denominator:Weighted average shares of Class A outstanding -
basic and diluted
    
    
    43,096
    
    
    
    40,313Weighted average shares of Class B outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding - basic and diluted
    
    
    44,098
    
    
    
    41,315Basic and diluted earnings per share of
Class A common stock
    
    $
    0.06
    
    
    
    0.07Basic and diluted earnings per share of
Class B common stock
    
    $
    0.03
    
    
    
    0.04
  14




---



##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    5,727
    
    
    
    5,966Less: Preferred stock dividends
    
    
    (343
    )
    
    
    (345
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (668
    )
    
    
    (669
    )Net income available to common stockholders
    
    $
    4,716
    
    
    
    4,952Net income allocated to Class A common stock
    
    $
    4,662
    
    
    
    4,891Net income allocated to Class B common stock
    
    
    54
    
    
    
    61Net income available to common stockholders
    
    $
    4,716
    
    
    
    4,952Denominator:Weighted average shares of Class A outstanding -
basic and diluted
    
    
    43,083
    
    
    
    40,301Weighted average shares of Class B outstanding -
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding - basic and diluted
    
    
    44,085
    
    
    
    41,303Basic and diluted earnings per share of
Class A common stock
    
    $
    0.11
    
    
    
    0.12Basic and diluted earnings per share of
Class B common stock
    
    $
    0.05
    
    
    
    0.06
  (6)
    
    Fair Value Measurements
   
    
    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.
  15




---



##### Table of Contents



June 30, 2008(In thousands)Financial Assets:
    
    Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Fixed Maturities Available-for-Sale
    
    $
    491,278
    
    
    
    12,801
    
    
    
    477,804
    
    
    
    673Equity Securities Available-for-Sale
    
    
    53,988
    
    
    
    53,988
    
    
    
    
    
    
    
    Total Financial Assets
    
    $
    545,266
    
    
    
    66,789
    
    
    
    477,804
    
    
    
    673
  June 30, 2008(In thousands)Beginning balance at December 31, 2007
    
    $
    700Total realized and unrealized gains (losses):Included in net income
    
    
    Included in other comprehensive income
    
    
    (3
    )Principal paydowns
    
    
    (24
    )Transfer in and (out) of Level 3
    
    
    Ending balance at June 30, 2008
    
    $
    673
  (7)
    
    Legal Proceedings
 Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach Respondent
  16




---



##### Table of Contents



In re Katrina Canal Breaches Consolidated Litigation
 The State of Louisiana v. AAA Insurance Road Home
Litigation
 Cheneau
 Road Home Litigation Cheneau
 Lilac Todd vs. Security
Plan Life Insurance Company
  17




---



##### 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.
  (8)
    
    Convertible Preferred Stock
      18




---



##### Table of Contents



19




---



##### Table of Contents



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
us with the Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with our approval, 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 our 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 our ability to sell our 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 our products;
    
    Changes in assumptions related to deferred acquisition costs and the value of
business acquired;
  20




---



##### Table of Contents




    
    Regulatory, accounting or tax changes that may affect the cost of, or the demand
for, our products or services; and
    
    A concentration of business from persons residing in Latin America and the Pacific
Rim; and, our success 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 we undertake no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to reflect the occurrence of
unanticipated events.
 We make available, free of charge, through our Internet website (http://www.citizensinc.com),
our Annual Report on Form 10-K , Quarterly Reports on Form 10-Q , Current Reports on Form 8-K ,
Section 16 reports filed by officers and directors, news releases, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically
file such reports with, or furnish such reports to, the Securities and Exchange Commission.
We are not including any of the information contained on our website as part of, or
incorporating it by reference into, this Quarterly Report on Form 10-Q .
 Overview
  
    
    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 2,870 independent marketing consultants;
    
    ordinary whole life insurance policies to middle income households in the Midwest and
the southern United States through approximately 550 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.
  Life Insurance.
    21




---



##### Table of Contents



Home Service Insurance.
    Marketplace Conditions and Trends
  
    
    As an increasing percentage of the world population reaches retirement age, we believe
we will benefit from increased demand for living products rather than death products, as
aging baby boomers will require cash accumulation to provide expenses to meet their
lifetime needs. Our ordinary life products are designed 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.
  22




---



##### Table of Contents




    
    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 9.3% of total invested assets as of June 30, 2008 and 6.1% 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 in U.S. Government-sponsored enterprises. Most of the municipal bonds
we own are privately insured. We intend to manage our investment portfolio in the future
using these types of debt instruments. At June 30, 2008, 67.7% of our fixed maturity
securities were invested in U.S. Government-sponsored enterprises, including Fannie Mae
and Freddie Mac. The recent stock price performance of these companies has not affected
our bond holdings in these entities. The Company continues to monitor these investments,
and has not seen any material decrease in the prices of these bonds.
    
    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.
    
    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.
 Quarter Ended June 30, 2008 Compared to Quarter Ended June 30, 2007
 All comparisons below state the 2008 second fiscal quarter first and the 2007 second fiscal
quarter second.
 Consolidated Results of Operations
     23




---



##### Table of Contents



Premium Income
 Net Investment Income
 Claims and Surrenders
 Three Months Ended June 30,2008
    
    
    2007(In thousands)Death claims
    
    $
    6,118
    
    
    
    4,931Surrender benefits
    
    
    3,735
    
    
    
    3,281Endowments
    
    
    3,664
    
    
    
    3,128Property claims
    
    
    677
    
    
    
    302Other policy benefits
    
    
    446
    
    
    
    318Accident and health benefits
    
    
    90
    
    
    
    64Total claims and surrenders
    
    $
    14,730
    
    
    
    12,024
    Policyholder Dividends
 Change in Reserves.
 Commissions
  24




---



##### Table of Contents



Other Underwriting, Acquisition and Insurance Expenses
 Deferred Policy Acquisition Costs
 Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 All comparisons below state the 2008 six months first and the 2007 six months second.
 Consolidated Results of Operations
   Premium Income
 Net Investment Income
  25




---



##### Table of Contents



Claims and Surrenders
 Six Months Ended June 30,2008
    
    
    2007(In thousands)Death claims
    
    $
    11,902
    
    
    
    10,937Surrender benefits
    
    
    7,177
    
    
    
    6,474Endowments
    
    
    6,794
    
    
    
    6,031Property claims
    
    
    1,048
    
    
    
    825Other policy benefits
    
    
    727
    
    
    
    766Accident and health benefits
    
    
    160
    
    
    
    171Total claims and surrenders
    
    $
    27,808
    
    
    
    25,204
     Policyholder Dividends
 Change in Reserves
 Commissions
 Other Underwriting, Acquisition and Insurance Expenses
 Deferred Policy Acquisition Costs
  26




---



##### Table of Contents



Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    Years(In thousands)Operating leases
    
    $
    884
    
    
    
    385
    
    
    
    448
    
    
    
    46
    
    
    
    5Other
    
    
    44
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    Total operating and other leases
    
    
    928
    
    
    
    429
    
    
    
    448
    
    
    
    46
    
    
    
    5Future policy benefit reserves:Life insurance
    
    
    522,282
    
    
    
    194
    
    
    
    1,090
    
    
    
    10,227
    
    
    
    510,771Annuities
    
    
    23,912
    
    
    
    12,509
    
    
    
    5,606
    
    
    
    2,417
    
    
    
    3,380Accident and health
    
    
    7,612
    
    
    
    7,612
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit reserves
    
    
    553,806
    
    
    
    20,315
    
    
    
    6,696
    
    
    
    12,644
    
    
    
    514,151Policy claims payable:Life insurance
    
    
    7,230
    
    
    
    7,230
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    982
    
    
    
    982
    
    
    
    
    
    
    
    
    
    
    
    Property and casualty
    
    
    630
    
    
    
    630
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    8,842
    
    
    
    8,842
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    16,251
    
    
    
    
    
    
    
    16,251
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    579,827
    
    
    
    29,586
    
    
    
    23,395
    
    
    
    12,690
    
    
    
    514,156
 Liquidity and Capital Resources
      27




---



##### Table of Contents



Parent Company Liquidity and Capital Resources
   28




---



##### Table of Contents



Critical Accounting Policies
  Policy Liabilities
    Deferred Policy Acquisition Costs
     29




---



##### 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
    30




---



##### Table of Contents



ITEM 3.

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 General
  Market Risk Related to Interest Rates
      Market Risk Related to Equity Prices
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   31




---



##### Table of Contents



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
 In
re Katrina Canal Breaches Consolidated Litigation
 The State of Louisiana v. AAA Insurance Road Home
Litigation
  32




---



##### Table of Contents



Cheneau
 Road Home Litigation Cheneau
 Lilac Todd vs. Security
Plan Life Insurance Company
   
    
    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.
   33




---



##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  Lack of market acceptance of our new insurance policies for our non-U.S. residents could
negatively impact our financial results.
  Success of our business depends in part on effective information technology systems and on
continuing development and implementation of improvements.
   We are experiencing a delay in the completion of the conversion of Security Plans Home
Service administration system to our policy administration system.
    34




---



##### Table of Contents



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
  
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 ExhibitNumber
    
    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)
  35




---



##### Table of Contents



ExhibitNumber
    
    The following exhibits are filed herewith: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)10.6
    
    
    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.  36




---



##### Table of Contents



(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.  37




---



##### 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   38




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    
    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.  39