##### 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 September 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.
 (Exact name of registrant as specified in its charter)
 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)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report.)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ




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##### 



INDEX
 PageNumberPart I. Financial InformationItem 1. Financial StatementsConsolidated Statements of Financial Position, September 30,
2008, (Unaudited) and December 31, 2007
    
    
    2Consolidated Statements of Operations, Three Months
Ended September 30, 2008 and 2007 (Unaudited)
    
    
    4Consolidated Statements of Operations, Nine Months
Ended September 30, 2008 and 2007 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows, Nine Months
Ended September 30, 2008 and 2007 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis
of Financial Condition and Results
of Operations
    
    
    19Item 3. Quantitative and Qualitative
Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31Part II. Other InformationItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    33Item 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
   1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
 (In thousands)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)AssetsInvestments:Fixed maturities available-for-sale, at fair value

(cost: $508,337 and $502,635 in 2008 and 2007, respectively)
    
    $
    489,114
    
    
    
    500,426Equity securities available-for-sale, at fair value

(cost: $60,680 and $36,696 in 2008 and 2007, respectively)
    
    
    47,154
    
    
    
    35,669Mortgage loans on real estate
    
    
    379
    
    
    
    291Policy loans
    
    
    27,434
    
    
    
    25,490Real estate held for investment

(less $277 and $249 accumulated depreciation
in 2008 and 2007,
respectively)
    
    
    5,186
    
    
    
    5,152Other long-term investments
    
    
    681
    
    
    
    618Short-term investments
    
    
    7,965
    
    
    
    17,650Total investments
    
    
    577,913
    
    
    
    585,296Cash and cash equivalents
    
    
    45,670
    
    
    
    21,123Accrued investment income
    
    
    6,228
    
    
    
    7,115Reinsurance recoverable
    
    
    13,036
    
    
    
    13,492Deferred policy acquisition costs
    
    
    106,002
    
    
    
    100,655Cost of customer relationships acquired
    
    
    29,502
    
    
    
    31,636Goodwill
    
    
    11,386
    
    
    
    11,386Other intangible assets
    
    
    1,045
    
    
    
    1,066Federal income tax receivable
    
    
    3,272
    
    
    
    715Deferred Federal income tax asset
    
    
    2,958
    
    
    
    Property and equipment, net
    
    
    6,574
    
    
    
    6,795Due premiums, net

(less $1,774 and $1,780 allowance for doubtful accounts
in 2008 and 2007, respectively)
    
    
    7,190
    
    
    
    7,656Prepaid expenses
    
    
    1,356
    
    
    
    Other assets
    
    
    764
    
    
    
    974Total assets
    
    $
    812,896
    
    
    
    787,909
    2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Financial Position, Continued
(In thousands, except share amounts)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    529,565
    
    
    
    505,517Annuities
    
    
    24,394
    
    
    
    22,792Accident and health
    
    
    7,485
    
    
    
    8,293Premiums paid in advance
    
    
    18,931
    
    
    
    16,140Policy claims payable
    
    
    9,171
    
    
    
    6,908Dividend accumulations
    
    
    4,773
    
    
    
    4,825Other policyholders funds
    
    
    7,266
    
    
    
    7,049Total policy liabilities
    
    
    601,585
    
    
    
    571,524Commissions payable
    
    
    1,901
    
    
    
    2,385Deferred Federal income tax
    
    
    
    
    
    
    4,810Payable for securities in process of settlement
    
    
    18,058
    
    
    
    7,000Warrants outstanding
    
    
    2,677
    
    
    
    1,003Other liabilities
    
    
    11,389
    
    
    
    10,810Total liabilities
    
    
    635,610
    
    
    
    597,532Commitments and contingencies (Note 7)Cumulative convertible preferred stock  Series A
(Series A-1 - $500 stated value per share, 18,750 and 25,000 shares authorized, issued and
outstanding in 2008 and 2007, respectively; Series A-2 - $935 stated value per share, 5,000
shares authorized, 4,014 issued and outstanding in 2008 and 2007)
    
    
    12,382
    
    
    
    14,220Stockholders Equity:Common stock:Class A, no par value, 100,000,000 shares
authorized, 46,959,855 shares issued
in 2008 and 46,205,830 shares issued
in 2007, including shares in treasury
of 3,135,738 in 2008 and 2007
    
    
    228,830
    
    
    
    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
    
    
    (34,812
    )
    
    
    (39,725
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (21,287
    )
    
    
    (2,103
    )175,915
    
    
    
    187,168Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    164,904
    
    
    
    176,157Total liabilities and stockholders equity
    
    $
    812,896
    
    
    
    787,909
   3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
 Three Months Ended September 30

(In thousands, except per share amounts)
(Unaudited)
 2008
    
    
    2007Revenues:Premiums:Life insurance
    
    $
    32,837
    
    
    
    32,713Accident and health insurance
    
    
    384
    
    
    
    359Property insurance
    
    
    820
    
    
    
    1,188Net investment income
    
    
    7,543
    
    
    
    7,354Realized gains (losses), net
    
    
    (226
    )
    
    
    42Increase in fair value of warrants
    
    
    (1,483
    )
    
    
    (300
    )Other income
    
    
    288
    
    
    
    382Total revenues
    
    
    40,163
    
    
    
    41,738Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    13,855
    
    
    
    12,696Increase in future policy benefit reserves
    
    
    10,214
    
    
    
    8,656Policyholdersdividends
    
    
    1,636
    
    
    
    1,682Total insurance benefits paid or provided
    
    
    25,705
    
    
    
    23,034Commissions
    
    
    8,819
    
    
    
    8,906Other underwriting, acquisition and insurance expenses
    
    
    7,312
    
    
    
    6,728Capitalization of deferred policy acquisition costs
    
    
    (5,712
    )
    
    
    (6,576
    )Amortization of deferred policy acquisition costs
    
    
    3,861
    
    
    
    3,010Amortization of cost of customer relationships
acquired and other intangibles
    
    
    676
    
    
    
    810Total benefits and expenses
    
    
    40,661
    
    
    
    35,912Income (loss) before Federal income tax
    
    
    (498
    )
    
    
    5,826Federal income tax expense
    
    
    316
    
    
    
    1,169Net income (loss)
    
    $
    (814
    )
    
    
    4,657Net income (loss) available to common stockholders
    
    $
    (1,604
    )
    
    
    4,154Per Share Amounts:Basic and diluted earnings (loss) per share of Class A common stock
    
    $
    (0.04
    )
    
    
    0.10Basic and diluted earnings (loss) per share of Class B common stock
    
    $
    (0.02
    )
    
    
    0.05
   4




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
 Nine Months Ended September 30
(In thousands, except per share amounts)
(Unaudited)
 2008
    
    
    2007Revenues:Premiums:Life insurance
    
    $
    97,178
    
    
    
    94,091Accident and health insurance
    
    
    1,178
    
    
    
    1,162Property insurance
    
    
    3,559
    
    
    
    3,550Net investment income
    
    
    22,487
    
    
    
    21,485Realized losses, net
    
    
    (210
    )
    
    
    (90
    )Increase in fair value of warrants
    
    
    (1,674
    )
    
    
    (496
    )Other income
    
    
    852
    
    
    
    1,167Total revenues
    
    
    123,370
    
    
    
    120,869Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    41,663
    
    
    
    37,900Increase in future policy benefit reserves
    
    
    24,944
    
    
    
    23,980Policyholdersdividends
    
    
    4,590
    
    
    
    4,334Total insurance benefits paid or provided
    
    
    71,197
    
    
    
    66,214Commissions
    
    
    25,906
    
    
    
    26,292Other underwriting, acquisition and insurance expenses
    
    
    21,243
    
    
    
    20,952Capitalization of deferred policy acquisition costs
    
    
    (16,876
    )
    
    
    (19,482
    )Amortization of deferred policy acquisition costs
    
    
    11,529
    
    
    
    9,490Amortization of cost of customer relationships
acquired and other intangibles
    
    
    2,155
    
    
    
    2,477Total benefits and expenses
    
    
    115,154
    
    
    
    105,943Income before Federal income tax
    
    
    8,216
    
    
    
    14,926Federal income tax expense
    
    
    3,303
    
    
    
    4,303Net income
    
    $
    4,913
    
    
    
    10,623Net income available to common stockholders
    
    $
    3,112
    
    
    
    9,106Per Share Amounts:Basic and diluted earnings per share of Class A common stock
    
    $
    0.07
    
    
    
    0.22Basic and diluted earnings per share of Class B common stock
    
    $
    0.04
    
    
    
    0.11
   5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Nine Months Ended September 30
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    4,913
    
    
    
    10,623Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses on sale of investments
and other assets
    
    
    210
    
    
    
    90Net deferred policy acquisition costs
    
    
    (5,347
    )
    
    
    (9,992
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    2,155
    
    
    
    2,477Increase in fair value of warrants
    
    
    1,674
    
    
    
    496Depreciation
    
    
    827
    
    
    
    752Amortization of premiums and discounts on
fixed maturities and short-term investments
    
    
    216
    
    
    
    995Deferred Federal income tax expense (benefit)
    
    
    2,562
    
    
    
    (530
    )Change in:Accrued investment income
    
    
    887
    
    
    
    510Reinsurance recoverable
    
    
    456
    
    
    
    2,183Due premiums and other receivables
    
    
    591
    
    
    
    169Future policy benefit reserves
    
    
    21,372
    
    
    
    22,099Other policy liabilities
    
    
    7,911
    
    
    
    (241
    )Federal income tax receivable
    
    
    (2,557
    )
    
    
    (2,977
    )Commissions payable and other liabilities
    
    
    95
    
    
    
    (3,823
    )Other, net
    
    
    (1,270
    )
    
    
    (761
    )Net cash provided by operating activities
    
    
    34,695
    
    
    
    22,070Cash flows from investing activities:Sale of fixed maturities, available-for-sale
    
    
    237
    
    
    
    3,344Maturity and calls of fixed maturities, available-for-sale
    
    
    130,800
    
    
    
    49,256Purchase of fixed maturities, available-for-sale
    
    
    (126,514
    )
    
    
    (63,648
    )Sale of equity securities, available-for-sale
    
    
    
    
    
    
    20Purchase of equity securities, available-for-sale
    
    
    (23,984
    )
    
    
    (17,097
    )Principal payments on mortgage loans
    
    
    27
    
    
    
    156Mortgage loans funded
    
    
    (115
    )
    
    
    Sale of other long-term investments and property
and equipment
    
    
    178
    
    
    
    342Purchase of other long-term investments and property and
equipment
    
    
    (868
    )
    
    
    (4,009
    )Increase in policy loans
    
    
    (1,944
    )
    
    
    (1,930
    )Maturity of short-term investments
    
    
    18,000
    
    
    
    Purchase of short-term investments
    
    
    (7,923
    )
    
    
    Net cash used in investing activities
    
    $
    (12,106
    )
    
    
    (33,566
    )
    6




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Consolidated Statements of Cash Flows, Continued
Nine Months Ended September 30
(In thousands)
(Unaudited)
 2008
    
    
    2007Cash flows from financing activities:Annuity deposits
    
    $
    1,862
    
    
    
    1,640Annuity withdrawals
    
    
    (1,084
    )
    
    
    (1,492
    )Series A-1 Preferred Stock capital contribution
    
    
    1,125
    
    
    
    Warrant exercise
    
    
    55
    
    
    
    Net cash provided by financing activities
    
    
    1,958
    
    
    
    148Net increase (decrease) in cash and cash equivalents
    
    
    24,547
    
    
    
    (11,348
    )Cash and cash equivalents at beginning of period
    
    
    21,123
    
    
    
    24,521Cash and cash equivalents at end of period
    
    $
    45,670
    
    
    
    13,173Supplemental disclosures of operating activities:Cash paid during the period for income taxes
    
    $
    3,298
    
    
    
    7,810
 Supplemental Disclosures of Non-Cash Financing Activities:
    7




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




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(2)
    
    Accounting Pronouncements
 Business Combinations Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements
 Determining the Useful Life of
Intangible Assets (FSP 142-3).
 Fair Value Measurements
 The Fair Value Option
for Financial Assets and Financial Liabilities
  9




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##### Table of Contents



(3)
    
    Segment Information
     10




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##### Table of Contents



Three Months Ended September 30,2008
    
    
    2007(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    2,687
    
    
    
    2,862Home Service Insurance
    
    
    (2,317
    )
    
    
    3,507Other Non-Insurance Enterprises
    
    
    (868
    )
    
    
    (543
    )Total consolidated pretax income (loss)
    
    $
    (498
    )
    
    
    5,826Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    28,810
    
    
    
    28,640Home Service Insurance
    
    
    12,476
    
    
    
    13,212Other Non-Insurance Enterprises
    
    
    (1,123
    )
    
    
    (114
    )Total consolidated revenue
    
    $
    40,163
    
    
    
    41,738Premiums:Life Insurance
    
    $
    24,634
    
    
    
    24,429Home Service Insurance
    
    
    9,407
    
    
    
    9,831Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    34,041
    
    
    
    34,260Net investment income:Life Insurance
    
    $
    4,309
    
    
    
    3,952Home Service Insurance
    
    
    3,072
    
    
    
    3,384Other Non-Insurance Enterprises
    
    
    162
    
    
    
    18Total consolidated net investment income
    
    $
    7,543
    
    
    
    7,354Amortization expense:Life Insurance
    
    $
    3,709
    
    
    
    2,716Home Service Insurance
    
    
    828
    
    
    
    1,104Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    4,537
    
    
    
    3,820Net realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    (223
    )
    
    
    49Home Service Insurance
    
    
    (3
    )
    
    
    (7
    )Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated net realized gains (losses)
    
    $
    (226
    )
    
    
    42
  11




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Nine Months Ended September 30,2008
    
    
    2007(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    8,919
    
    
    
    7,368Home Service Insurance
    
    
    (110
    )
    
    
    8,540Other Non-Insurance Enterprises
    
    
    (593
    )
    
    
    (982
    )Total consolidated pretax income
    
    $
    8,216
    
    
    
    14,926Selected Components of Profit (Loss) MeasurementRevenue:Life Insurance
    
    $
    85,129
    
    
    
    81,417Home Service Insurance
    
    
    38,589
    
    
    
    39,182Other Non-Insurance Enterprises
    
    
    (348
    )
    
    
    270Total consolidated revenue
    
    $
    123,370
    
    
    
    120,869Premiums:Life Insurance
    
    $
    72,584
    
    
    
    69,278Home Service Insurance
    
    
    29,331
    
    
    
    29,525Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated premiums
    
    $
    101,915
    
    
    
    98,803Net investment income:Life Insurance
    
    $
    12,519
    
    
    
    11,541Home Service Insurance
    
    
    9,255
    
    
    
    9,736Other Non-Insurance Enterprises
    
    
    713
    
    
    
    208Total consolidated net investment income
    
    $
    22,487
    
    
    
    21,485Amortization expense:Life Insurance
    
    $
    10,768
    
    
    
    9,192Home Service Insurance
    
    
    2,916
    
    
    
    2,775Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    13,684
    
    
    
    11,967Net realized gains (losses) on sale of
investments and other assets:Life Insurance
    
    $
    (220
    )
    
    
    6Home Service Insurance
    
    
    (8
    )
    
    
    (84
    )Other Non-Insurance Enterprises
    
    
    18
    
    
    
    (12
    )Total consolidated net realized losses
    
    $
    (210
    )
    
    
    (90
    )
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Assets:Life Insurance
    
    $
    476,311
    
    
    
    449,719Home Service Insurance
    
    
    300,564
    
    
    
    305,997Other Non-Insurance Enterprises
    
    
    36,021
    
    
    
    32,193Total consolidated assets
    
    $
    812,896
    
    
    
    787,909
  12




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(4)
    
    Total Comprehensive Income (Loss)
 Three Months Ended September 30,2008
    
    
    2007(In thousands)Net income (loss)
    
    $
    (814
    )
    
    
    4,657Other comprehensive income (loss), net of tax:Unrealized net gains (losses) on investments
in fixed maturities available for sale and
equity securities available for sale
    
    
    (12,916
    )
    
    
    4,919Total comprehensive income (loss)
    
    $
    (13,730
    )
    
    
    9,576
 Nine Months Ended September 30,2008
    
    
    2007(In thousands)Net income
    
    $
    4,913
    
    
    
    10,623Other comprehensive income (loss), net of tax:Unrealized net gains (losses) on investments
in fixed maturities available for sale and
equity securities available for sale
    
    
    (19,184
    )
    
    
    1,639Total comprehensive income (loss)
    
    $
    (14,271
    )
    
    
    12,262
  13




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##### Table of Contents



(5)
    
    Earnings per Share
  Three Months Ended September 30,2008
    
    
    2007(In thousands, except per share amounts)Basic and diluted earnings (loss) per share:Numerator:Net income (loss)
    
    $
    (814
    )
    
    
    4,657Less: Preferred stock dividends
    
    
    (171
    )
    
    
    (169
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (619
    )
    
    
    (334
    )Net income (loss) available to common
 stockholders
    
    $
    (1,604
    )
    
    
    4,154Net income (loss) allocated to Class A
common stock
    
    $
    (1,585
    )
    
    
    4,103Net income (loss) allocated to Class B
common stock
    
    
    (19
    )
    
    
    51Net income (loss) available to common
stockholders
    
    $
    (1,604
    )
    
    
    4,154Denominator:Weighted average shares of Class A
outstanding 
basic and diluted
    
    
    43,198
    
    
    
    40,338Weighted average shares of Class B
outstanding 
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares
outstanding  basic and diluted
    
    
    44,200
    
    
    
    41,340Basic and diluted earnings (loss) per share of
Class A common stock
    
    $
    (0.04
    )
    
    
    0.10Basic and diluted earnings (loss) per share of
Class B common stock
    
    $
    (0.02
    )
    
    
    0.05
  14




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##### Table of Contents



Nine Months Ended September 30,2008
    
    
    2007(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    4,913
    
    
    
    10,623Less: Preferred stock dividends
    
    
    (514
    )
    
    
    (514
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (1,287
    )
    
    
    (1,003
    )Net income available to common stockholders
    
    $
    3,112
    
    
    
    9,106Net income allocated to Class A common stock
    
    $
    3,076
    
    
    
    8,994Net income allocated to Class B common stock
    
    
    36
    
    
    
    112Net income available to common stockholders
    
    $
    3,112
    
    
    
    9,106Denominator:Weighted average shares of Class A outstanding 
basic and diluted
    
    
    43,121
    
    
    
    40,313Weighted average shares of Class B outstanding 
basic and diluted
    
    
    1,002
    
    
    
    1,002Total weighted average shares outstanding 
basic and diluted
    
    
    44,123
    
    
    
    41,315Basic and diluted earnings per share of  
Class A common stock
    
    $
    0.07
    
    
    
    0.22Basic and diluted earnings per share of 

Class B common stock
    
    $
    0.04
    
    
    
    0.11
  (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




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##### Table of Contents



September 30, 2008(In thousands)Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Financial Assets:Fixed Maturities Available-for-Sale
    
    $
    489,114
    
    
    
    12,947
    
    
    
    475,494
    
    
    
    673Equity Securities Available-for-Sale
    
    
    47,154
    
    
    
    47,154
    
    
    
    
    
    
    
    Total Financial Assets
    
    $
    536,268
    
    
    
    60,101
    
    
    
    475,494
    
    
    
    673
  September 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 September 30, 2008
    
    $
    673
   16




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##### Table of Contents



(7)
    
    Legal Proceedings
 Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach Respondent
 The State of Louisiana v. AAA Insurance Road Home
Litigation
 Cheneau
 Road Home Litigation Cheneau
 Lilac Todd vs. Security
Plan Life Insurance Company
   17




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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.
  (8)
    
    Convertible Preferred Stock
      (9)
    
    Subsequent Events
   18




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##### 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;
    
    Regulatory, accounting or tax changes that may affect the cost of, or the demand for,
our products or services; and
    
    Our 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 .
  19




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##### Table of Contents



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 2,350 independent marketing consultants;
    
    ordinary whole life insurance policies to middle income households in the Midwest and
the southern United States through approximately 400 independent marketing consultants;
and
    
    final expense and limited liability property policies to middle and lower income
households in Louisiana through approximately 320 employee agents in our home service
distribution channel.
  Life Insurance.
   Home Service Insurance.
   20




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##### Table of Contents



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 significant impairment in
the value of our securities due to the current credit crisis in world financial markets.
An immaterial impairment was recorded in the third quarter of 2008 as noted below. 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 8.2% of total invested assets as of September 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. The Company recorded a
loss of $223,000 during the quarter ended September 30, 2008, resulting from the
other-than-temporary impairment of one Lehman Brothers bond holding. No bond
other-than-temporary impairments were taken during 2007. 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 September 30, 2008, 71.5% of our fixed maturity securities were
invested in U.S. Government-sponsored enterprises, including Fannie Mae and Freddie
Mac. The recent stock market turmoil related to 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.
  21




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##### Table of Contents



Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007
 All comparisons below state the 2008 third fiscal quarter first and the 2007 third fiscal
quarter second.
 Consolidated Results of Operations
    Premium Income
 Net Investment Income
 Increase in Fair Value of Warrants
  22




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##### Table of Contents



Claims and Surrenders
 Three Months Ended September 30,2008
    
    
    2007(In thousands)Death claims
    
    $
    5,156
    
    
    
    5,215Surrender benefits
    
    
    3,591
    
    
    
    3,680Endowments
    
    
    3,415
    
    
    
    3,152Property claims
    
    
    1,178
    
    
    
    (176
    )Other policy benefits
    
    
    419
    
    
    
    732Accident and health benefits
    
    
    96
    
    
    
    93Total claims and surrenders
    
    $
    13,855
    
    
    
    12,696
   Change in Reserves.
 Other Underwriting, Acquisition and Insurance Expenses
 Deferred Policy Acquisition Costs
 Federal Income Tax
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 All comparisons below state the 2008 nine months first and the 2007 nine months second.
 Consolidated Results of Operations
   23




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##### Table of Contents



Premium Income
 Net Investment Income
 Increase in Fair Value of Warrants
 Claims and Surrenders
 Nine Months Ended September 30,2008
    
    
    2007(In thousands)Death claims
    
    $
    17,058
    
    
    
    16,152Surrender benefits
    
    
    10,768
    
    
    
    10,154Endowments
    
    
    10,209
    
    
    
    9,183Property claims
    
    
    2,226
    
    
    
    649Other policy benefits
    
    
    1,146
    
    
    
    1,498Accident and health benefits
    
    
    256
    
    
    
    264Total claims and surrenders
    
    $
    41,663
    
    
    
    37,900
     24




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##### Table of Contents



Policyholder Dividends
 Change in Reserves
 Commissions
 Other Underwriting, Acquisition and Insurance Expenses
 Deferred Policy Acquisition Costs
 Federal Income Tax.
  25




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##### 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
    
    $
    834
    
    
    
    383
    
    
    
    409
    
    
    
    42
    
    
    
    Future policy benefit reserves:Life insurance
    
    
    529,565
    
    
    
    197
    
    
    
    1,105
    
    
    
    10,370
    
    
    
    517,893Annuities
    
    
    24,394
    
    
    
    12,761
    
    
    
    5,719
    
    
    
    2,466
    
    
    
    3,448Accident and health
    
    
    7,485
    
    
    
    7,485
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit reserves
    
    
    561,444
    
    
    
    20,443
    
    
    
    6,824
    
    
    
    12,836
    
    
    
    521,341Policy claims payable:Life insurance
    
    
    6,042
    
    
    
    6,042
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    949
    
    
    
    949
    
    
    
    
    
    
    
    
    
    
    
    Property and casualty
    
    
    2,180
    
    
    
    2,180
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    9,171
    
    
    
    9,171
    
    
    
    
    
    
    
    
    
    
    
    Convertible preferred stock
    
    
    13,126
    
    
    
    
    
    
    
    13,126
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    584,575
    
    
    $
    29,997
    
    
    $
    20,359
    
    
    $
    12,878
    
    
    $
    521,341
 Liquidity and Capital Resources
      26




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27




---



##### Table of Contents



Parent Company Liquidity and Capital Resources
  Critical Accounting Policies
  Policy Liabilities
    Deferred Policy Acquisition Costs
    28




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##### Table of Contents



Valuation of Investments in Fixed Maturity and Equity Securities
   Premium Revenue and Related Expenses
    29




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##### 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
   30




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##### Table of Contents



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 State of Louisiana v. AAA Insurance Road Home
Litigation
  31




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##### 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.
   32




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##### 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.
    33




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##### Table of Contents



Gross Unrealized Losses May be Realized or Result in Future Impairments.
  Adverse capital and credit market conditions may significantly affect our access to debt and
equity capital and our cost of capital in seeking to expand our business.
   Difficult conditions in the global capital markets and the world economy generally may
materially adversely affect our business and results of operations and we do not expect these
conditions to improve in the near future
    34




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##### Table of Contents



There can be no assurance that actions of the U.S. Government ,the Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
  
 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)
  35




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith:10.4
    
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company
and Wells Fargo Bank, N.A. (g)10.5
    (a)
    
    Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5
    (b)
    
    Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5
    (c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.5
    (d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.5
    (e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.5
    (f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.5
    (g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.5
    (h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.5
    (i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.5
    (j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.5
    (k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July
12, 2004 (h)10.6
    
    
    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.  36




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##### Table of Contents



(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.  37




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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   38




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act32.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act