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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 Commission file number 000-16509
 CITIZENS, INC.
 (Exact name of registrant as specified in its charter)
 Colorado
    
    84-0755371(State of incorporation)
    
    (I.R.S. Employer Identification No.)
 400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 (512) 837-7100  (Registrants telephone number, including area code
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredClass A Common Stock
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:
 None  (Title of class)
 o Yes þ No
 o Yes þ No
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o
 o þ
   Class A:
    
    
    45,646,015Class B:
    
    
    1,001,714
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    9Item 1B. Unresolved Staff Comments
    
    
    20Item 2. Properties
    
    
    20Item 3. Legal Proceedings
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities
    
    
    21Item 6. Selected Financial Data
    
    
    22Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    23Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 8. Financial Statements and Supplementary Data
    
    
    35Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    35Item 9A. Controls and Procedures
    
    
    35Item 9B. Other Information
    
    
    37PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    37Item 11. Executive Compensation
    
    
    37Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    37Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    37Item 14. Principal Accounting Fees and Services
    
    
    37PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    37Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




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FORWARD-LOOKING STATEMENTS
 Certain statements contained in this Annual Report on Form 10-K are not statements of historical
fact and constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act (the Act), including, without limitation, statements specifically
identified as forward-looking statements within this document. Many of these statements contain
risk factors as well. In addition, certain statements in future filings by the Company with the
Securities and Exchange Commission, in press releases, and in oral and written statements made by
us or with the approval of the Company, which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of forward-looking statements,
include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per
share, the payment or non-payment of dividends, capital structure, and other financial items, (ii)
statements of our plans and objectives by our management or Board of Directors including those
relating to products or services, (iii) statements of future economic performance and (iv)
statements of assumptions underlying such statements. Words such as believes, anticipates,
expects, intends, targeted, may, will and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
 Forward-looking statements are subject to known and unknown risks, uncertainties and other factors
that may cause actual results to differ materially from those contemplated by the forward-looking
statements. Factors that could cause the Companys future results to differ materially from
expected results include, but are not limited to:
 
    
    Changes in foreign and U.S. general economic conditions, including the performance of
financial markets and interest rates;
    
    Changes in consumer behavior, which may affect the Companys ability to sell its
products and retain business;
    
    The timely development of and acceptance of new products of the Company and perceived
overall value of these products and services by existing potential customers;
    
    Fluctuations in experience regarding current mortality, morbidity, persistency and
interest rates relative to expected amounts used in pricing the Companys products;
    
    Changes in assumptions related to deferred acquisition costs and the value of business
acquired;
    
    Regulatory, accounting or tax changes that may affect the cost of, or the demand for,
the Companys products or services; and
    
    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
the Company undertakes no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made to reflect the occurrence of
unanticipated events.
 We make available, free of charge, through our Internet website (http://www.citizensinc.com), our
Annual Report on Form 10-K , Quarterly Reports on Form 10-Q , Current Reports on Form 8-K , Section 16
reports filed by officers and directors, news releases, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as soon as reasonably practicable after we electronically file such reports with, or furnish
such reports to, the Securities and Exchange Commission. We are not including any of the
information contained on our website as part of, or incorporating it by reference into, this Annual
Report on Form 10-K .
  2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 PART I
 
 Item 1. Business
 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 2,200 independent marketing consultants;
 
    
    ordinary whole life insurance policies to middle income households in the midwest and
the southern United States through approximately 300 independent marketing consultants; and
 
    
    final expense and limited liability property policies to middle to lower income
households in Louisiana and Arkansas through approximately 540 employee and independent
agents in our home service distribution channel.
    Our Operating Segments
  
    
    Life Insurance;
 
    
    Home Service Insurance; and
 
    
    Other Non-insurance Enterprises.
  Life Insurance
   3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 International
  
    
    policies are typically larger face amounts than in our U.S. operations, resulting in
lower underwriting and administrative costs per policy;
 
    
    premiums are paid annually rather than monthly or quarterly, which saves us
administrative expenses, accelerates cash flow and results in lower policy lapse rates than
premiums with more frequently scheduled payments;
 
    
    persistency is generally higher than U.S. policies;
 
    
    our mortality rates are as good or better than those in the United States, because our
foreign insureds are high net worth individuals in the top income brackets in their
respective countries, who have lifestyles less prone to early death than the general
population; and
 
    
    we do not advance commissions, so we have limited financial exposure in the event monies
are advanced and insurance revenues do not cover the advances.
     4




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Years ended December 31,Country
    
    2008
    
    
    2007
    
    
    2006(In thousands)Colombia
    
    $
    19,473
    
    
    
    20.6
    %
    
    $
    24,352
    
    
    
    26.2
    %
    
    $
    22,879
    
    
    
    28.0
    %Taiwan
    
    
    13,793
    
    
    
    14.6
    
    
    
    12,567
    
    
    
    13.5
    
    
    
    10,077
    
    
    
    12.3Venezuela
    
    
    12,594
    
    
    
    13.4
    
    
    
    11,631
    
    
    
    12.5
    
    
    
    8,907
    
    
    
    10.9Ecuador
    
    
    10,889
    
    
    
    11.5
    
    
    
    9,641
    
    
    
    10.4
    
    
    
    7,410
    
    
    
    9.1Argentina
    
    
    9,580
    
    
    
    10.2
    
    
    
    9,099
    
    
    
    9.8
    
    
    
    8,975
    
    
    
    11.0Other Non-U.S.
    
    
    27,988
    
    
    
    29.7
    
    
    
    25,525
    
    
    
    27.6
    
    
    
    23,500
    
    
    
    28.7Total
    
    $
    94,317
    
    
    
    100.0
    %
    
    $
    92,815
    
    
    
    100.0
    %
    
    $
    81,748
    
    
    
    100.0
    %
  International Products
  
    
    U.S. Dollar-denominated cash values that accumulate, beginning in the first policy year,
to a policyholder during his or her lifetime;
 
    
    premium rates that are competitive with or better than most foreign local companies;
 
    
    a hedge against local currency inflation;
 
    
    protection against devaluation of foreign currency;
 
    
    capital investment in a more secure economic environment (i.e., the United States); and
 
    
    lifetime income guarantees for an insured or for surviving beneficiaries.
  International Competition
    5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
   Domestic
      Years ended December 31,State
    
    2008
    
    
    2007
    
    
    2006(In thousands)Texas
    
    $
    7,306
    
    
    
    41.6
    %
    
    $
    7,481
    
    
    
    39.8
    %
    
    $
    7,962
    
    
    
    39.6
    %Missouri
    
    
    2,073
    
    
    
    11.8
    
    
    
    2,309
    
    
    
    12.3
    
    
    
    2,519
    
    
    
    12.5Oklahoma
    
    
    1,920
    
    
    
    10.9
    
    
    
    2,136
    
    
    
    11.4
    
    
    
    2,363
    
    
    
    11.8Kentucky
    
    
    1,838
    
    
    
    10.5
    
    
    
    2,224
    
    
    
    11.8
    
    
    
    2,436
    
    
    
    12.1Other States
    
    
    4,415
    
    
    
    25.2
    
    
    
    4,635
    
    
    
    24.7
    
    
    
    4,829
    
    
    
    24.0Total
    
    $
    17,552
    
    
    
    100.0
    %
    
    $
    18,785
    
    
    
    100.0
    %
    
    $
    20,109
    
    
    
    100.0
    %
   6




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Domestic Products
  
    
    cash accumulation/living benefits;
 
    
    tax-deferred interest earnings;
 
    
    guaranteed lifetime income options;
 
    
    monthly income for surviving family members;
 
    
    accidental death benefit coverage options; and
 
    
    an option to waive premium payments in the event of disability.
  Domestic Competition
   Home Service Insurance
    Home Service Products
   7




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Home Service Competition
  Other Non-Insurance Enterprises
  Operations and Technology
   Regulation
     8




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
      
 Item 1A. Risk Factors
  Risks Relating to the Business of Citizens
 A substantial amount of our revenue comes from foreign residents and is subject to risks associated
with the possible application of foreign insurance and securities laws and regulations to our
business, as well as risks from political and economic instability and currency or asset transfer
restrictions.
    9




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
     The United States and global financial markets have been experiencing extreme and unprecedented
volatility and disruption. As a consequence, we are exposed to significant financial and capital
markets risk, including changes in equity prices, which may have a material adverse effect on our
results of operations, financial condition and liquidity.
   10




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Unrealized losses may be realized
  Our actual claims losses may exceed our reserves for claims and we may be required to establish
additional reserves, which in turn may adversely impact our results of operations and financial
condition.
  We may be required to accelerate the amortization of deferred acquisition costs and the costs of
customer relationships acquired, which would increase our expenses and adversely affect our results
of operations and financial condition.
     11




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  We may be required to recognize an impairment in the value of our goodwill, which would increase
our expenses and materially adversely affect our results of operations and financial condition.
  We are a defendant in lawsuits, which may adversely affect our financial condition and detract from
the time our management is able to devote to our business, and we are subject to risks related to
litigation and regulatory matters.
  Reinsurers with which we do business could increase their premium rates and may not honor their
obligations, leaving us liable for the reinsured coverage.
      12




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  We may not be able to continue our past strategy of acquiring other U.S. life insurance companies,
and we may not realize improvements to our financial results as a result of our past or any future
acquisitions.
    Our international and domestic operations face significant competition.
  
    
    Foreign operated companies with U.S. Dollar policies. We face direct competition from
companies that operate in the same manner as we operate in our international markets. These
competitors include National Western Life Insurance Company, Best Meridian Insurance Company
and, to a lesser extent, Pan American Life Insurance Company and American International Group.
 
    
    Companies foreign to the countries in which policies are sold but that issue local currency
policies. Another group of our competitors in the international marketplace consists of
companies that are foreign to the countries in which the policies are sold but issue life
insurance policies denominated in the local currencies of those countries. Local currency
policies provide the benefit of assets located in the country of foreign residents, but entail
risks of uncertainty due to local currency fluctuations, as well as the perceived instability
and weakness of local currencies.
 
    
    Locally operated companies with local currency policies. We compete with companies formed
and operated in the country in which our foreign insureds reside. Generally, these companies
are subject to risks of currency fluctuations, and they primarily use mortality tables based
on experience of the local population as a whole. These mortality tables are typically based
on significantly shorter life spans than those we use. As a result, the cost of insurance
from these companies tends to be higher than ours. Although these companies typically market
their policies to a broader section of the population than do our independent marketing firms
and consultants, there can be no assurance that these companies will not endeavor to place a
greater emphasis on our target market and compete more directly with us.
  13




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
    Sales of our products may be reduced if we are unable to (i) establish and maintain commercial
relationships with independent marketing firms and consultants (ii) attract and retain employee
agents or (iii) develop and maintain our distribution sources.
  Loss of the services of our senior management team would likely hinder development of our operating
and marketing programs and our strategy for expanding our business.
  We are subject to extensive governmental regulation in the United States, which increases our costs
of doing business and could restrict the conduct of our business.
     14




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Changes in U.S. regulation may adversely affect our results of operations and financial condition
and limit our prospective growth.
  Our failure to maintain effective information systems could adversely affect our business.
     We have in the past identified material weaknesses in our disclosure controls and controls over
financial reporting. To the extent that we may have not remedied these weaknesses or fail to
maintain our current system of internal controls to an effective level with regard to material
weaknesses, we may not be able to report our financial results accurately. As a result, we could be
required to restate our financial statements and be exposed to increased regulatory scrutiny and
litigation from investors and others.
  Our failure to protect confidential information and privacy could result in the loss of customers,
subject us to fines and penalties and adversely affect our results of operations and financial
condition.
    15




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  The insurance industry in which we operate may be subject to periodic negative publicity, which may
negatively impact our financial results.
  General economic, financial market and political conditions may materially and adversely affect our
results of operations and financial condition.
   Our insurance subsidiaries are restricted by applicable laws and regulations in the amounts of
fees, dividends and other distributions they may make to us. The inability of our subsidiaries to
make payments to us in sufficient amounts for us to conduct our operations could adversely affect
our ability to meet our obligations or expand our business.
     16




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 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, which we do not expect to
improve in the near future, generally may materially adversely affect our business and results of
operations.
   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.
   17




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Risks Relating to Our Class A Common Stock
 The price of our Class A common stock may be volatile and may be affected by market conditions
beyond our control.
  Our Class A common shareholders will not control us for the foreseeable future, will have a limited
ability to influence our business policies and corporate actions and will not by themselves be able
to elect any directors.
  Our articles of incorporation and bylaws, as well as applicable state insurance laws, may
discourage takeovers and business combinations that our shareholders might consider to be in their
best interests.
   
    
    holders of shares of our Class B common stock elect a simple majority of our board of
directors, and all of these shares are owned by the Harold E. Riley Trust; and
 
    
    our board of directors may issue one or more series of preferred stock without the approval
of our shareholders.
  We have never paid any cash dividends on our Class A common stock and do not anticipate doing so in
the foreseeable future.
   18




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 There are a substantial number of shares of our Class A common stock eligible for future sale in
the public market. The sale of a large number of these shares could cause the market price of our
Class A common stock to fall.
    Holders of our Series A preferred stock may obtain the right to require us to redeem their Series A
preferred stock and we will be required to redeem any shares of Series A preferred stock that
remain outstanding on July 12, 2009.
    Provisions applicable to our Series A preferred stock may make it more difficult or prevent us from
raising funds or taking certain other actions.
    19




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. 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 Road Home Litigation
 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.
  20




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchase of Equity Securities
   2008
    
    
    2007Quarter Ended
    
    High
    
    
    Low
    
    
    High
    
    
    LowMarch 31
    
    $
    6.95
    
    
    
    5.14
    
    
    $
    7.71
    
    
    
    6.69June 30
    
    
    7.96
    
    
    
    6.02
    
    
    
    8.00
    
    
    
    6.10September 30
    
    
    9.15
    
    
    
    5.79
    
    
    
    8.39
    
    
    
    4.84December 31
    
    
    9.70
    
    
    
    6.99
    
    
    
    8.90
    
    
    
    5.53
   Securities Authorized for Issuance Under Equity Compensation Plans
   21




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 6. Selected Financial Data
  Years ended  December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share data)Total Revenues
    
    $
    146,673
    
    
    
    169,637
    
    
    
    154,189
    
    
    
    139,024
    
    
    
    96,697Net Income (loss)
    
    
    (15,707
    )
    
    
    16,557
    
    
    
    8,677
    
    
    
    7,302
    
    
    
    7,732Basic and Diluted Earnings (loss)
Per Class A Share
    
    
    (0.42
    )
    
    
    0.35
    
    
    
    0.16
    
    
    
    0.13
    
    
    
    0.17Total Assets at December 31
    
    
    832,276
    
    
    
    787,909
    
    
    
    711,184
    
    
    
    661,889
    
    
    
    661,212Long-term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000Total Liabilities
    
    
    653,022
    
    
    
    597,532
    
    
    
    558,690
    
    
    
    513,380
    
    
    
    520,179Total Stockholders Equity
    
    
    171,541
    
    
    
    176,157
    
    
    
    139,611
    
    
    
    136,963
    
    
    
    135,131Book Value Per Share
    
    
    3.68
    
    
    
    4.00
    
    
    
    3.38
    
    
    
    3.33
    
    
    
    3.29
   22




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation
 Overview
  
    
    U.S. Dollar-denominated ordinary whole life insurance policies predominantly to high net
worth, high income foreign residents, located principally in Latin America and the Pacific
Rim, through approximately 2,200 independent marketing consultants;
 
    
    ordinary whole life insurance policies to middle income households in the midwest and
the southern United States through approximately 300 independent marketing consultants; and
 
    
    final expense and limited liability property policies to middle to lower income
households in Louisiana and Arkansas through approximately 540 employee and independent
agents in our home service distribution segment.
  Life Insurance.
     Home Service Insurance.
  23




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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 consumers will require cash accumulation to provide expenses to meet
their lifetime needs. Our ordinary life products are designed for our policyowners to
accumulate cash values to provide for living expenses in a policy owners later years,
while continuously providing a death benefit.
 
    
    We are exposed to a variety of risks, including the current financial recession as
well as the credit crisis and corresponding potential changes in the fair value of our
investments. Financial markets in the United States and elsewhere have experienced
extreme volatility and disruption, due largely to stresses affecting the global banking
system, which accelerated significantly in the second half of 2008. The global
economies have entered a severe recession that is likely to persist well into and
perhaps through and even beyond 2009, despite past and expected governmental
intervention in the worlds major economies. These circumstances have exerted
significant downward pressure on prices of equity securities and virtually all other
asset classes and have resulted in substantially increased market volatility, severely
constrained credit and capital markets, particularly for financial institutions, and an
overall loss of investor confidence. The current economic environment could also reduce
the persistency of our existing insurance policies.
 
    
    As a financial institution and life insurer with significant investment exposure, we
have been adversely affected by the volatility and disruption in the global capital
markets and face significant financial and capital markets risk in our operations.
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 majority of our investment portfolio
is held in debt instruments carrying the full faith and credit of the U.S. Government,
or in U.S. Government-sponsored enterprises. Most of the municipal bonds we own are
privately insured. We have not experienced any material impairments in the value of our
debt securities due to the current credit crisis in world financial markets. We intend
to manage our investment portfolio conservatively in the future by continuing to utilize
these types of debt instruments. During the course of 2008, the significant declines in
equity markets have negatively impacted our assets under management. We incurred
realized losses relative to limited equity positions we took during 2007 and the first
half of 2008 under the current accounting guidance for OTTI analysis. Due to current
economic forecasts, we expect continued pressure on our equity positions in 2009.
 
    
    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.
  24




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    Many of the events and trends affecting the life insurance industry have had an
impact on the life reinsurance industry. These events led to a decline in the
availability of reinsurance. While we currently cede a limited amount of our primary
insurance business to reinsurers, we may find it difficult to obtain reinsurance in the
future, forcing us to seek reinsurers who are more expensive to us. If we cannot obtain
affordable reinsurance coverage, either our net exposures will increase or we would have
to reduce our underwriting commitments.
 Recent Acquisitions
  Consolidated Results of Operations
  Years ended
    
    Net Income (loss)
    
    
    Net Income (loss)
    
    
    Increase (decrease)December 31,
    
    (In thousands)
    
    
    per Class A Share
    
    
    from Previous Year2008
    
    $
    (15,707
    )
    
    $
    (0.42
    )
    
    
    (194.9)
    %2007
    
    
    16,557
    
    
    
    0.35
    
    
    
    90.82006
    
    
    8,677
    
    
    
    0.16
    
    
    
    18.8
   Premium Income
 Net Investment Income
 Realized Gains (Losses) on Investments
  25




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Increase in Fair Value of Warrants
 Claims and Surrenders
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Death claims
    
    $
    22,529
    
    
    
    20,720
    
    
    
    21,686Surrender expenses
    
    
    15,222
    
    
    
    13,832
    
    
    
    13,335Endowments
    
    
    13,814
    
    
    
    12,835
    
    
    
    10,786Property claims
    
    
    2,657
    
    
    
    1,090
    
    
    
    5,194Other policy benefits
    
    
    1,604
    
    
    
    1,783
    
    
    
    849Accident and health benefits
    
    
    427
    
    
    
    311
    
    
    
    541Total claims and surrenders
    
    $
    56,253
    
    
    
    50,571
    
    
    
    52,391
     Reserves
 Policyholder Dividends
  26




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Commissions
 Underwriting, Acquisition and Insurance Expense
 Deferred Policy Acquisition Costs Accounting by Insurance Enterprises for Deferred Acquisition Costs
in Connection with Modifications or Exchanges of Insurance Contracts
 Cost of Customer Relationships Acquired and Other Intangibles
  Federal Income Tax
 Investments
   Valuation of Investments in Fixed Maturity and Equity Securities
   27




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
    28




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  December 31, 2008Carrying Value
    
    
    Percent of Total(In thousands)Fixed maturity securities:U.S. Government-sponsored corporations
and U.S. Government agencies (1)
    
    $
    295,481
    
    
    
    46.6
    %Mortgage-backed (2)
    
    
    51,907
    
    
    
    8.2Corporate
    
    
    75,375
    
    
    
    11.8Municipal bonds
    
    
    58,105
    
    
    
    9.2Public utilities
    
    
    4,153
    
    
    
    0.7Foreign governments
    
    
    134
    
    
    
    Total fixed maturity securities
    
    
    485,155
    
    
    
    76.5Cash and cash equivalents
    
    
    63,792
    
    
    
    10.1Short-term investments
    
    
    2,250
    
    
    
    0.4Other investments:Policy loans
    
    
    28,955
    
    
    
    4.6Equity securities
    
    
    43,000
    
    
    
    6.8Mortgage loans
    
    
    339
    
    
    
    0.1Real estate and other long-term investments
    
    
    9,553
    
    
    
    1.5Total cash, cash equivalents and investments
    
    $
    633,044
    
    
    
    100.0
    %
 (1)
    
    Includes U.S. Treasury securities of $14,419,000 and U.S. Government-sponsored corporations of $281,062,000.(2)
    
    Includes $46,371,000 of U.S. Government agencies and government-sponsored corporations.  December 31, 2008Carrying Value
    
    
    %(In thousands)AAA and U.S. Government
    
    $
    379,547
    
    
    
    78.2
    %AA
    
    
    37,263
    
    
    
    7.7A
    
    
    56,043
    
    
    
    11.6BBB
    
    
    7,217
    
    
    
    1.5BB and other
    
    
    5,085
    
    
    
    1.0Totals
    
    $
    485,155
    
    
    
    100.0
    %
 Reinsurance
   29




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
   Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Direct premiums
    
    $
    151,077
    
    
    
    146,409
    
    
    
    135,311Reinsurance assumed
    
    
    1,459
    
    
    
    1,462
    
    
    
    1,126Reinsurance ceded
    
    
    (11,239
    )
    
    
    (11,123
    )
    
    
    (11,811
    )Net premiums
    
    $
    141,297
    
    
    $
    136,748
    
    
    $
    124,626
   Years ended December 31,2008
    
    
    2007
    
    
    2006(In millions)Direct written life insurance inforce
    
    $
    4,322
    
    
    
    4,168
    
    
    
    3,971Reinsurance assumed
    
    
    647
    
    
    
    644
    
    
    
    670Reinsurance ceded
    
    
    (302
    )
    
    
    (274
    )
    
    
    (259
    )Net life insurance inforce
    
    $
    4,667
    
    
    $
    4,538
    
    
    $
    4,382
    Liquidity and Capital Resources
    30




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
          31




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Parent Company Liquidity and Capital Resources
  Critical Accounting Estimates
  Policy Liabilities
   Deferred Policy Acquisition Costs
      32




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts
 Goodwill
 Goodwill and Other Intangible Assets,
    Evaluation of Other-Than-Temporary Impairments on Available-for-Sale Securities
     33




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 General
  Market Risk Related to Interest Rates
    Decreases in Interest Rates
 (In thousands)
 December 31,
    
    100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis Points2008
    
    Interest rates cannot decrease by these levels2007
    
    $
    18,594
    
    
    
    29,582
    
    
    
    42,812
 Increases in Interest Rates
 (In thousands)
 December 31,
    
    100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis Points2008
    
    $
    (55,265
    )
    
    
    (85,159
    )
    
    
    (113,469
    )2007
    
    $
    (22,821
    )
    
    
    (51,006
    )
    
    
    (79,768
    )
   Market Risk Related to Equity Prices
   34




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 8. Financial Statements and Supplementary Data
   
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 (a) Disclosure Controls and Procedures
   (b) Management Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
  (c) Change in Internal Control over Financial Reporting
   35




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 (d) Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting
 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
         
  36




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 9B. Other Information
  
 PART III
 10, 11, 12, 13 14
 
 PART IV
 
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    (1) and (2) Filings as Part of this ReportThe financial statements and schedules listed on the following index to financial
statements and financial statement schedules are filed under Item 8 as part of this Form
10-K.(b)
    
    (3) Exhibits  See the Exhibit Index
 Index to Consolidated Financial Statements and Financial Statement Schedules
 PageReferenceReport of independent registered public accounting firm
    
    
    38Consolidated statements of financial position at December 31, 2008 and 2007
    
    
    39Consolidated statements of operations
- years ended December 31, 2008, 2007 and 2006
    
    
    41Consolidated statements of stockholders equity and comprehensive
income  years ended December 31, 2008, 2007 and 2006
    
    
    42Consolidated statements of cash flows
- years ended December 31, 2008, 2007 and 2006
    
    
    44Notes to consolidated financial statements
Schedules at December 31, 2008 and 2007:
    
    
    46Schedule II  Condensed Financial
Information of Registrant
    
    
    78Schedules for each of the years in the three-year
period ended December 31, 2008:Schedule III  Supplementary Insurance Information
    
    
    81Schedule IV  Reinsurance
    
    
    82
   37




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Report of Independent Registered Public Accounting Firm
     Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection With Modification or Exchanges
of Insurance Contracts Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements
 Internal Control-Integrated Framework
  
  38




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
 December 31

(In thousands)
 2008
    
    
    2007AssetsInvestments:Fixed maturities available-for-sale, at fair value
(cost: $494,034 and $502,635 in 2008 and 2007, respectively)
    
    $
    485,155
    
    
    
    500,426Equity securities available-for-sale, at fair value
(cost: $42,908 and $36,696 in 2008 and 2007, respectively)
    
    
    43,000
    
    
    
    35,669Mortgage loans on real estate
    
    
    339
    
    
    
    291Policy loans
    
    
    28,955
    
    
    
    25,490Real estate held for sale
    
    
    4,156
    
    
    
    671Real estate held for investment (less $283 and $223 accumulated
depreciation in 2008 and 2007, respectively)
    
    
    4,717
    
    
    
    4,481Other long-term investments
    
    
    680
    
    
    
    618Short-term investments
    
    
    2,250
    
    
    
    17,650Total investments
    
    
    569,252
    
    
    
    585,296Cash and cash equivalents
    
    
    63,792
    
    
    
    21,123Accrued investment income
    
    
    7,423
    
    
    
    7,115Reinsurance recoverable
    
    
    13,241
    
    
    
    13,492Deferred policy acquisition costs
    
    
    109,114
    
    
    
    100,655Cost of customer relationships acquired
    
    
    33,805
    
    
    
    31,636Goodwill
    
    
    15,687
    
    
    
    11,386Other intangible assets
    
    
    1,073
    
    
    
    1,066Federal income tax receivable
    
    
    2,090
    
    
    
    715Property and equipment, net
    
    
    6,466
    
    
    
    6,795Due premiums, net (less $2,217 and $1,780 allowance for doubtful accounts
in 2008 and 2007, respectively)
    
    
    8,958
    
    
    
    7,656Other assets
    
    
    1,375
    
    
    
    974Total assets
    
    $
    832,276
    
    
    
    787,909
    39




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##### Table of Contents



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

(In thousands, except share amounts)
 2008
    
    
    2007Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    547,621
    
    
    
    505,517Annuities
    
    
    34,025
    
    
    
    22,792Accident and health
    
    
    7,442
    
    
    
    8,293Dividend accumulations
    
    
    4,795
    
    
    
    4,825Premiums paid in advance
    
    
    18,566
    
    
    
    16,140Policy claims payable
    
    
    9,318
    
    
    
    6,908Other policyholders funds
    
    
    7,929
    
    
    
    7,049Total policy liabilities
    
    
    629,696
    
    
    
    571,524Commissions payable
    
    
    2,350
    
    
    
    2,385Deferred federal and state income taxes
    
    
    3,951
    
    
    
    4,810Payable for securities in process of settlement
    
    
    
    
    
    
    7,000Warrants outstanding
    
    
    4,973
    
    
    
    1,003Other liabilities
    
    
    12,052
    
    
    
    10,810Total liabilities
    
    
    653,022
    
    
    
    597,532Commitments and contingencies (Notes 6 and 9)Cumulative convertible preferred stock  Series A (Series A-1 - $1,000 stated value per share, 6,250 shares issued, authorized and outstanding in 2008, and $500 stated value per share, 25,000 shares issued, authorized and outstanding
in 2007; Series A-2  $935 stated value per share, 5,000 shares authorized, 4,014 shares issued and outstanding in 2008 and 2007)
    
    
    7,713
    
    
    
    14,220Stockholders equity:Common stock:Class A, no par value, 100,000,000 shares authorized,
48,781,753 shares issued in 2008 and 46,205,830 shares issued in 2007, including shares in treasury of 3,135,738 in 2008 and 2007
    
    
    240,511
    
    
    
    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
    
    
    (55,432
    )
    
    
    (39,725
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (5,711
    )
    
    
    (2,103
    )182,552
    
    
    
    187,168Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    171,541
    
    
    
    176,157Total liabilities and stockholders equity
    
    $
    832,276
    
    
    
    787,909
   40




---



##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
 Years ended December 31
 (In thousands, except per share amounts)
 2008
    
    
    2007
    
    
    2006Revenues:Premiums:Life insurance
    
    $
    134,953
    
    
    
    130,265
    
    
    
    119,388Accident and health insurance
    
    
    1,580
    
    
    
    1,558
    
    
    
    1,461Property insurance
    
    
    4,764
    
    
    
    4,925
    
    
    
    3,777Net investment income
    
    
    30,478
    
    
    
    30,743
    
    
    
    26,975Realized gains (losses), net
    
    
    (23,812
    )
    
    
    (94
    )
    
    
    1,286Decrease (increase) in fair value of warrants
    
    
    (2,662
    )
    
    
    828
    
    
    
    (244
    )Other income
    
    
    1,372
    
    
    
    1,412
    
    
    
    1,546Total revenues
    
    
    146,673
    
    
    
    169,637
    
    
    
    154,189Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    56,253
    
    
    
    50,571
    
    
    
    52,391Increase in future policy benefit reserves
    
    
    37,117
    
    
    
    36,420
    
    
    
    30,719Policyholders dividends
    
    
    6,865
    
    
    
    6,401
    
    
    
    5,384Total insurance benefits paid or provided
    
    
    100,235
    
    
    
    93,392
    
    
    
    88,494Commissions
    
    
    35,984
    
    
    
    35,641
    
    
    
    35,691Other underwriting, acquisition and insurance
expenses
    
    
    28,611
    
    
    
    27,583
    
    
    
    27,607Capitalization of deferred policy acquisition costs
    
    
    (24,109
    )
    
    
    (26,210
    )
    
    
    (26,986
    )Amortization of deferred policy acquisition costs
    
    
    15,650
    
    
    
    12,530
    
    
    
    11,391Amortization of cost of customer relationships
acquired and other intangibles
    
    
    2,897
    
    
    
    3,203
    
    
    
    4,650Total benefits and expenses
    
    
    159,268
    
    
    
    146,139
    
    
    
    140,847Income (loss) before income tax expense
    
    
    (12,595
    )
    
    
    23,498
    
    
    
    13,342Income tax expense
    
    
    3,112
    
    
    
    6,941
    
    
    
    4,665Net income (loss)
    
    
    (15,707
    )
    
    
    16,557
    
    
    
    8,677Net income (loss) applicable to common stockholders
    
    $
    (18,263
    )
    
    
    14,555
    
    
    
    6,654Per Share AmountsBasic and diluted earnings (loss) per share of
Class A common stock
    
    $
    (0.42
    )
    
    
    0.35
    
    
    
    0.16Basic and diluted earnings (loss) per share of
Class B common stock
    
    $
    (0.21
    )
    
    
    0.18
    
    
    
    0.08
   41




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Stockholders Equity and Comprehensive Income
 Years ended December 31, 2008, 2007 and 2006
 (In thousands)
 Accumulatedother
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    StockholdersClass A
    
    
    Class B
    
    
    deficit
    
    
    loss
    
    
    stock
    
    
    equityBalance at December 31, 2005
    
    $
    211,403
    
    
    
    3,184
    
    
    
    (61,812
    )
    
    
    (4,801
    )
    
    
    (11,011
    )
    
    
    136,963Cummulative effect of adopting SEC Staff Accounting Bulletin No. 108
    
    
    
    
    
    
    
    
    
    
    (3,147
    )
    
    
    
    
    
    
    
    
    
    
    (3,147
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    8,677
    
    
    
    
    
    
    
    
    
    
    
    8,677Unrealized investment losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,545
    )
    
    
    
    
    
    
    (1,545
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    8,677
    
    
    
    (1,545
    )
    
    
    
    
    
    
    7,132Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (1,337
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337
    )Balance at December 31, 2006
    
    
    210,066
    
    
    
    3,184
    
    
    
    (56,282
    )
    
    
    (6,346
    )
    
    
    (11,011
    )
    
    
    139,611Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    16,557
    
    
    
    
    
    
    
    
    
    
    
    16,557Unrealized investment gains, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,243
    
    
    
    
    
    
    
    4,243Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    16,557
    
    
    
    4,243
    
    
    
    
    
    
    
    20,800Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (1,337
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,337
    )Sale of Class A common stock
    
    
    17,083
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,083Balance at December 31, 2007
    
    
    225,812
    
    
    
    3,184
    
    
    
    (39,725
    )
    
    
    (2,103
    )
    
    
    (11,011
    )
    
    
    176,157Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    (15,707
    )
    
    
    
    
    
    
    
    
    
    
    (15,707
    )Unrealized investment losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,608
    )
    
    
    
    
    
    
    (3,608
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (15,707
    )
    
    
    (3,608
    )
    
    
    
    
    
    
    (19,315
    )Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (1,905
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,905
    )Beneficial conversion feature and warrant
discounts on preferred stock capital
contribution
    
    
    854
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    854Preferred stock conversions
    
    
    15,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,625Warrants exercised
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Balance at December 31, 2008
    
    $
    240,511
    
    
    
    3,184
    
    
    
    (55,432
    )
    
    
    (5,711
    )
    
    
    (11,011
    )
    
    
    171,541
   42




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Stockholders Equity and Comprehensive Income, Continued
Years ended December 31, 2008, 2007 and 2006
(In thousands)
  Common Stock
    
    
    TreasuryClass A
    
    
    Class B
    
    
    StockBalance at December 31, 2005
    
    
    43,301
    
    
    
    1,002
    
    
    
    (3,136
    )Stock dividends
    
    
    125
    
    
    
    
    
    
    
    Balance at December 31, 2006
    
    
    43,426
    
    
    
    1,002
    
    
    
    (3,136
    )Stock dividends
    
    
    97
    
    
    
    
    
    
    
    Stock sale
    
    
    2,683
    
    
    
    
    
    
    
    Total stock issued
    
    
    2,780
    
    
    
    
    
    
    
    Balance at December 31, 2007
    
    
    46,206
    
    
    
    1,002
    
    
    
    (3,136
    )Stock dividends
    
    
    90
    
    
    
    
    
    
    
    Warrant exercised
    
    
    18
    
    
    
    
    
    
    
    Preferred stock conversions
    
    
    2,468
    
    
    
    
    
    
    
    Total stock issued
    
    
    2,576
    
    
    
    
    
    
    
    Balance at December 31, 2008
    
    
    48,782
    
    
    
    1,002
    
    
    
    (3,136
    )
  43




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
 Years ended December 31
 (In thousands)
 2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (15,707
    )
    
    
    16,557
    
    
    
    8,677Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Net realized losses (gains) on sale of investments and other assets
assets and other-than-temporary impairment
charges
    
    
    23,812
    
    
    
    94
    
    
    
    (1,286
    )Net deferred policy acquisition costs
    
    
    (8,459
    )
    
    
    (13,680
    )
    
    
    (16,565
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    2,897
    
    
    
    3,203
    
    
    
    4,650Increase (decrease) in fair value of warrants
    
    
    2,662
    
    
    
    (828
    )
    
    
    244Depreciation
    
    
    1,116
    
    
    
    1,076
    
    
    
    1,297Amortization of premiums and discounts on
fixed maturities
    
    
    354
    
    
    
    1,243
    
    
    
    1,467Deferred federal income tax expense
    
    
    496
    
    
    
    1,202
    
    
    
    829Change in:Accrued investment income
    
    
    (127
    )
    
    
    (8
    )
    
    
    (644
    )Reinsurance recoverable
    
    
    275
    
    
    
    2,552
    
    
    
    3,452Due premiums and other receivables
    
    
    (1,227
    )
    
    
    (1,702
    )
    
    
    (1,089
    )Future policy benefit reserves
    
    
    36,100
    
    
    
    34,132
    
    
    
    31,741Other policy liabilities
    
    
    5,412
    
    
    
    275
    
    
    
    (46
    )Federal income tax
    
    
    (1,474
    )
    
    
    (2,746
    )
    
    
    1,330Commissions payable and other liabilities
    
    
    637
    
    
    
    (3,367
    )
    
    
    4,854Other, net
    
    
    (335
    )
    
    
    (86
    )
    
    
    166Net cash provided by operating activities
    
    
    46,432
    
    
    
    37,917
    
    
    
    39,077Cash flows from investing activities:Sale of fixed maturities, held-to-maturity
    
    
    
    
    
    
    
    
    
    
    2,472Sale of fixed maturities, available-for-sale
    
    
    237
    
    
    
    3,844
    
    
    
    14,006Maturity of fixed maturities, available-for-sale
    
    
    162,337
    
    
    
    75,939
    
    
    
    57,473Purchase of fixed maturities, available-for-sale
    
    
    (156,055
    )
    
    
    (78,845
    )
    
    
    (107,080
    )Sale of equity securities, available-for-sale
    
    
    
    
    
    
    248
    
    
    
    334Purchase of equity securities available-for-sale
    
    
    (24,439
    )
    
    
    (36,666
    )
    
    
    Principal payments on mortgage loans
    
    
    97
    
    
    
    165
    
    
    
    201Mortgage loans funded
    
    
    (115
    )
    
    
    
    
    
    
    Sale of other long-term investments and property
and equipment
    
    
    185
    
    
    
    430
    
    
    
    739
   44




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Statements of Cash Flows, Continued
Years ended December 31
(In thousands)
 2008
    
    
    2007
    
    
    2006Purchase of other long-term investments and property
and equipment
    
    $
    (1,110
    )
    
    
    (4,357
    )
    
    
    (1,277
    )Increase in policy loans, net
    
    
    (3,062
    )
    
    
    (1,948
    )
    
    
    (428
    )Maturity of short-term investments
    
    
    26,000
    
    
    
    
    
    
    
    Purchase of short-term investments
    
    
    (10,173
    )
    
    
    (17,650
    )
    
    
    Cash paid for acquisition, net
    
    
    (8,242
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (14,340
    )
    
    
    (58,840
    )
    
    
    (33,560
    )Cash flows from financing activities:Series A-1 preferred stock capital contributions
    
    
    9,375
    
    
    
    
    
    
    
    Proceeds from sale of Class A common stock
    
    
    
    
    
    
    17,083
    
    
    
    Warrants exercised
    
    
    125
    
    
    
    
    
    
    
    Annuity and universal life deposits
    
    
    2,848
    
    
    
    2,279
    
    
    
    2,520Annuity and universal life withdrawals
    
    
    (1,771
    )
    
    
    (1,837
    )
    
    
    (1,827
    )Net cash provided by financing activities
    
    
    10,577
    
    
    
    17,525
    
    
    
    693Net increase (decrease) in cash and cash equivalents
    
    
    42,669
    
    
    
    (3,398
    )
    
    
    6,210Cash, and cash equivalents at beginning of year
    
    
    21,123
    
    
    
    24,521
    
    
    
    18,311Cash, and cash equivalents at end of year
    
    $
    63,792
    
    
    
    21,123
    
    
    
    24,521Supplemental Disclosure of Operating ActivitiesCash paid during the year for:Income taxes
    
    $
    4,090
    
    
    
    8,476
    
    
    
    2,506
 Supplemental disclosures of non-cash investing and financing activities:
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 December 31, 2008, 2007 and 2006
 (1)
    
    Summary of Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts and operations of Citizens,
Inc. (Citizens), a Colorado company, and its wholly-owned subsidiaries, CICA Life
Insurance Company of America (CICA), Computing Technology, Inc. (CTI), Funeral Homes of
America, Inc. (FHA), Insurance Investors, Inc. (III), Citizens National Life Insurance
Company (CNLIC), Security Plan Life Insurance Company (SPLIC), Security Plan Fire
Insurance Company (SPFIC) and Ozark National Life Insurance Company (ONLIC). ONLIC was
acquired for $8.0 million in cash on October 27, 2008 and the results of its operations
are included for the period subsequent to acquisition. All significant inter-company
accounts and transactions have been eliminated. Citizens and its wholly owned
consolidated subsidiaries are collectively referred to as the Company, we, or our.We provide life and health insurance policies through four of our subsidiaries  CICA,
SPLIC, CNLIC and ONLIC. CICA issues ordinary whole-life policies internationally and
domestically, and burial insurance, pre-need policies, and accident and health related
policies, throughout the midwestern and southern United States. SPLIC offers home
service life insurance in Louisiana and Mississippi, and SPFIC, a wholly owned subsidiary
of SPLIC, writes a limited amount of property insurance in Louisiana. ONLIC offers final
expense and home service ordinary whole life insurance in Arkansas.CTI provides data processing systems and services as well as furniture and equipment to
the Company. III provides aviation transportation to the Company. FHA is a funeral home
operator.(b)
    
    Basis of PresentationThe accompanying consolidated financial statements of the Company and its wholly owned
subsidiaries have been prepared in conformity with U.S. Generally Accepted Accounting
Principles (U.S. GAAP).(c)
    
    InvestmentsFixed maturities consist primarily of bonds. The Company does not classify any fixed
maturities as held-to-maturity or trading. Fixed maturities that may be sold prior to
maturity to support our investment strategies are considered held as available-for-sale
and carried at fair value. Equity securities (including non-redeemable preferred stock)
are considered available-for-sale and are reported at fair value.Unrealized appreciation (depreciation) of equity securities and fixed maturities held as
available-for-sale is shown as a separate component of stockholders equity, net of tax,
and is a separate component of comprehensive income.A decline in the fair value of any available-for-sale security below cost that is deemed
other than temporary is charged to earnings as realized losses. Any impairment results
in the establishment of a new cost basis for the security.Mortgage loans on real estate and policy loans are reported at unpaid principal balances.Real estate and other long-term investments consist primarily of land and buildings that
are recorded at the lower of fair value, minus estimated costs to sell, or depreciated
cost. If the fair value of the real estate is less than the carrying value, an
impairment loss is recognized and charged to earnings.Premiums and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the effective interest method. Dividend and interest income
is recognized when earned. Realized gains and losses are included in earnings and are
derived using the specific identification method for determining the cost of securities
sold.The Company had cash equivalents and fixed maturities with an aggregate fair value of
$10,653,000 and $9,607,000 at December 31, 2008 and 2007, respectively, on deposit with
various state regulatory authorities to fulfill statutory requirements.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 Short-term investments at December 31, 2008 are certificates of deposit.
Short-term investments at December 31, 2007 are discounted commercial paper with
maturities greater than three months, when purchased, and less than one year. They are
carried on the balance sheet at amortized cost(d)
    
    Premium Revenue and Related ExpensesBeginning in the first quarter of 2006, the Company began accruing premium revenue based
on the gross amount due rather than just a portion of that amount, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 60, Accounting and Reporting by
Insurance Enterprises.The initial implementation of this accounting treatment, in the
amount of $955,000 of income, was recorded in the SAB 108 adjustment.Premiums on life policies are recognized as earned when due. Due premium on the balance
sheet are net of allowances of $2,217,000 in 2008 and $1,780,000 in 2007. Accident and
Health policies are recognized as revenue over the contract period on a pro rata basis.
Benefits and expenses are associated with earned premiums so as to result in the
recognition of profits over the estimated lives of the contracts. This matching is
accomplished by means of a provision for future policy benefits and the capitalization
and amortization of deferred policy acquisition costs.Annuity policies, primarily flexible premium fixed annuity products, are accounted for in
a manner consistent with accounting for interest bearing financial instruments. Premium
receipts are not reported as revenue, rather as deposit liabilities to annuity contracts.
The annuity products issued do not include fees or other such charges.(e)
    
    Deferred Policy Acquisition Costs and Cost of Customer Relationships AcquiredAcquisition costs, consisting of commissions and policy issuance, underwriting and agency
expenses that relate to and vary with the production of new business, are deferred.
These deferred policy acquisition costs (DAC) are amortized primarily over the
estimated premium paying period of the related policies in proportion to the ratio of the
annual premium recognized to the total premium revenue anticipated using the same
assumptions as were used in computing liabilities for future policy benefits.The key assumptions used for amortization of DAC and cost of customer relationships
acquired (CCRA) are mortality, persistency and interest earned on investments. In
recent years, the Company has experienced better mortality and persistency than the
previous assumptions presumed. Specifically, there was an increase of business in the
Asian market and a shifting of business within the Latin American markets. Our
historical experience reflects that Latin America and Asia behave differently as it
relates to persistency. Our historical experience also reflects a difference in behavior
among Latin American countries as it relates to persistency. The assumption for interest
earned on investments did not materially change between 2008, 2007 and 2006. The CCRA
assumptions did not change in 2008 because assumptions are locked in at purchase unless a
premium deficiency exists.The significant majority of life insurance written by the Company is traditional whole
life business. As such, we operate under the guidance of SFAS 60. In accordance with
SFAS 60, capitalized acquisition costs are charged to expense using methods that include
the same assumptions used in estimating the liability for future policy benefits.
Liability assumptions are required under SFAS 60 to provide for adverse deviations in
experience. Also, original liability assumptions continue to be used in subsequent
accounting periods unless a premium deficiency exists. Accordingly, our DAC and CCRA
assumptions also include a provision for adverse deviation, are set at the time of policy
issue or acquisition, and are locked in for the life of the policy unless management
concludes that DAC or CCRA is not recoverable. In such circumstances, DAC or CCRA is
reduced to the amount that is recoverable based on best estimate assumptions and there is
a corresponding expense recorded in consolidated results of operations. In selecting the
provision for adverse deviation, we use reasonably likely deviations from our best
estimate assumptions; thus, in general, a reasonably likely change in the Companys
mortality, persistency or interest earned on investments would have minimal effect on DAC
or CCRA amortization.The Company utilizes the factor method to determine the amount of costs to be capitalized
and the ending asset balance. The factor method ensures that policies that lapsed or
surrendered during the reporting period are no longer included in the DAC or the CCRA
calculation. The factor method limits the amount of deferred costs to its estimated
realizable
value, provided actual experience is comparable to that contemplated in the factors. A
recoverability test that considers among other things, actual experience and projected
future experience, is performed at least annually.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 DAC on universal life contracts are capitalized and amortized over the life of the
contract at a constant rate based on the present value of the estimated gross profit
amounts expected to be earned over the life of the universal life contracts.The value of CCRA in our various acquisitions, which is included in cost of customer
relationships acquired in the accompanying consolidated financial statements, was
determined based on the present value of future profits discounted at rates ranging from
5% to 8.5%.(f)
    
    Policy Liabilities and AccrualsFuture policy benefit reserves for life insurance have been computed by the net level
premium method with assumptions as to investment yields, dividends on participating
business, mortality and withdrawals based upon our and industry experience, which provide
for possible unfavorable deviation.Annuity benefits are carried at accumulated contract values based on consideration paid
by participants and annuity rates of return ranging from 3.0% to 6.5%.Accident and health reserves are carried based on case-basis estimates for reported
claims.The Companys property business by its nature requires contingencies for loss reserves
and claim costs resulting from specific uncertainties that are not considered to be
recurring or normal due to their significance or nature. In 2005, Hurricane Katrina
caused significant damage to the Gulf Coast. We suffered losses of $3.7 million in
excess of our reinsurance coverage related to this storm. At the end of 2006, the
Company was still receiving claims related to Hurricane Katrina. As a result, loss
reserves were increased by $500,000 in anticipation of newly reported or adjusted claims.
In 2007, we began to experience a significant slowdown in hurricane related claims, and
in the third quarter released approximately $425,000 of liabilities related to Hurricane
Katrina, as management determined that no additional losses were payable on policies in
effect when Hurricane Katrina occurred due to the expiration of the August 29, 2007
filing deadline for claims.In 2008, SPFIC was negatively impacted by Hurricanes Gustav and Ike. Incurred losses
were $500,000 for Hurricane Gustav and $285,000 for Hurricane Ike. The Company also
incurred $478,000 in second and third event renewal premiums.Anticipated investment income is not considered in determining whether a premium
deficiency exists with respect to short-duration contracts.Premium deposits accrue interest at rates ranging from 4.0% to 8.25% per annum. The cost
of insurance is included in premium when collected and interest is credited annually to
deposit accounts.Policy and contract claims are based on case-basis estimates for reported claims, and on
estimates, based on experience, for incurred but unreported claims and loss expenses.At December 31, 2007, the Security Plan premium paying in force policies were converted
to the Companys mainframe policy administration system and Security Plans original
computer system was discontinued, except for providing access to certain historical
information. The initial conversion was successful and all in force amounts were
reconciled between systems. Certain records within the paid-up block were not converted
until the third quarter of 2008. The conversion of these paid-up records resulted in an
increase in future policy benefit reserves of approximately $700,000 over the reserves
that were being carried prior to conversion. This resulted in a decrease to net income
of approximately $455,000.During the first quarter of 2008, the Company discovered a $796,000 overstatement of life
reserves, due to the use of an incorrect reserve factor going back several years. The
error was corrected during the first quarter, resulting in an increase to net income of
$517,000.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (g)
    
    Goodwill and Other Intangible AssetsGoodwill is the difference between the purchase price in a business combination and the
fair value of assets and liabilities acquired, and is not amortized. Other intangible
assets include various state insurance licenses, which have been determined to have
indefinite useful lives. Therefore, these amounts are not amortized. Instead, such assets
are subjected to annual impairment analyses, while intangibles with definitive lives are
amortized over the life of the respective asset. The Company performed assessments of
whether there was an indication that goodwill and intangible assets were impaired on
December 31, 2006 and wrote off $1.0 million of goodwill in 2006. No impairments were
identified in 2007 or 2008. The acquisition of ONLIC in 2008 resulted in additional
goodwill of $4.3 million. See Note 4 for details.(h)
    
    Participating PoliciesAt December 31, 2008 and 2007, participating business approximated 50.5% and 57.6%,
respectively, of direct life insurance in force.Future policy benefits on participating policies are estimated based on net level premium
reserves for death and endowment policy benefits ranging from 3% to 8%, and the cash
surrender values described in such contracts. The average annual rate of investment
yields used in the determination of expected gross margin was 6.0% in 2008, 2007 and
2006. Earnings and dividends on participating policies are allocated based on policies
in force.Policyholder dividends are determined based on the discretion of the Board of Directors
of the policy issuing subsidiary. Policyholder dividends are accrued over the premium
paying periods of the insurance contract.(i)
    
    Earnings Per ShareBasic earnings per share are computed by dividing income available to common stockholders
by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share are computed under the if-converted method for convertible
securities and the treasury stock method for warrants, giving effect to all potential
dilutive common stock, including options, warrants and convertible/redeemable preferred
stock. The basic and diluted earnings per share of Class B common stock are one half the
earnings per share of the Class A common stock.In 2008, we issued 2,468,000 shares of our Class A common stock for the redemption of
part of our outstanding Series A Preferred Stock. Additionally, 18,000 shares of Class A
common stock were issued upon the exercise of warrants.On December 4, 2007, the Company sold approximately 2.7 million shares of our Class A
common stock in a registered direct public offering. These shares had a very minor
effect on weighted average shares, since they were outstanding for such a short period
during 2007. The sale resulted in gross proceeds of $18.8 million and net proceeds of
$17.1 million, after broker commissions and offering related expenses.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income (loss)
    
    $
    (15,707
    )
    
    
    16,557
    
    
    
    8,677Less: Preferred stock dividends
    
    
    (651
    )
    
    
    (665
    )
    
    
    (686
    )Accretion of deferred issuance costs
and discounts on preferred stock
    
    
    (1,905
    )
    
    
    (1,337
    )
    
    
    (1,337
    )Net income (loss) available to common stockholders
    
    $
    (18,263
    )
    
    
    14,555
    
    
    
    6,654Net income (loss) allocated to Class A common stock
    
    $
    (18,054
    )
    
    
    14,377
    
    
    
    6,572Net income (loss) allocated to Class B common stock
    
    
    (209
    )
    
    
    178
    
    
    
    82Net income (loss) available to common stockholders
    
    $
    (18,263
    )
    
    
    14,555
    
    
    
    6,654Denominator:Weighted average shares of Class A
outstanding  basic
    
    
    43,365
    
    
    
    40,519
    
    
    
    40,216Weighted average shares of Class B
outstanding  basic and diluted
    
    
    1,002
    
    
    
    1,002
    
    
    
    1,002Total weighted average shares
outstanding  basic and diluted
    
    
    44,367
    
    
    
    41,521
    
    
    
    41,218Basic and diluted earnings (loss) per share of
Class A common stock
    
    $
    (0.42
    )
    
    
    0.35
    
    
    
    0.16Basic and diluted earnings (loss) per share of
Class B common stock
    
    $
    (0.21
    )
    
    
    0.18
    
    
    
    0.08
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (j)
    
    Income TaxesDeferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered. Valuation allowances are
recorded as needed to reduce deferred tax assets to the amounts we expect to realize.(k)
    
    Property and EquipmentProperty and equipment, including leasehold improvements, are carried at cost less
accumulated depreciation. Depreciation of property and equipment is computed using the
straight-line method over the useful lives of the assets, ranging from three to thirty
years. We amortize leasehold improvements over the shorter of the related lease term or
the estimated life of the improvements. The Company has no capital leases.Following is a summary of property and equipment:
 At December 31,2008
    
    
    2007(In thousands)Property and equipment:Home office land and buildings
    
    $
    6,535
    
    
    
    6,475Furniture and equipment
    
    
    2,255
    
    
    
    1,719Electronic data processing equipment
    
    
    4,039
    
    
    
    3,732Automobiles and marine assets
    
    
    412
    
    
    
    445Airplane
    
    
    3,274
    
    
    
    3,282Total property and equipment
    
    
    16,515
    
    
    
    15,653Accumulated depreciation
    
    
    (10,049
    )
    
    
    (8,858
    )Net property and equipment
    
    $
    6,466
    
    
    
    6,795
 (l)
    
    Reinsurance RecoverableReinsurance recoverable includes expected reimbursements for policyholder claim amounts
in excess of the Companys retention, as well as profit sharing and experience refund
accruals. Reinsurance recoverable is reduced for estimated uncollectible amounts, if
any.Reinsurance premiums, losses and adjustment expenses are accounted for on a basis
consistent with those used in accounting for the original policies issued and the terms
of the reinsurance contracts. The cost of reinsurance related to long duration contracts
is accounted for over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies. The cost of
reinsurance related to short duration contracts is accounted for over the coverage
period. Profit-sharing and similar adjustable provisions are accrued based on the
experience of the underlying policies.(m)
    
    Cash EquivalentsThe Company considers as cash equivalents all securities whose duration does not exceed
90 days at the date of acquisition.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (n)
    
    DepreciationDepreciation on most property and equipment is calculated on a straight-line basis using
estimated useful lives ranging from three to ten years. Building improvements are
depreciated over the estimated lives of thirty years.(o)
    
    Use of EstimatesThe preparation of financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.(p)
    
    ReclassificationCertain principal amounts have been reclassified to conform to the current year
presentation, as follows:
    (q)
    
    Accounting PronouncementsIn December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 141 (Revised 2007), Business Combinations(SFAS
141R) and SFAS No. 160, Accounting and Reporting of Non-controlling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51 (SFAS 160). These two
standards must be adopted in conjunction with each other on a prospective basis. SFAS
141R will significantly change the accounting for business combinations in a number of
areas including the treatment of contingent consideration, contingencies, acquisition
costs, research and development assets and restructuring costs. In addition, under SFAS
141R, changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact income
taxes. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The
Company completed the acquisition of Integrity Capital Corporation in February 2009 and
will use the provisions of SFAS 141R to account for this acquisition; however, the impact
of this acquisition and the adoption of SFAS 141R has not yet been determined.In April 2008, the FASB issued Staff Position (FSP) No. 142-3, Determining the Useful
Life of Intangible Assets(FSP 142-3). FSP 142-3 amends the factors to be considered in
determining the useful life of intangible assets. Its intent is to improve the
consistency between the useful life of an intangible asset and the period of expected
cash flows used to measure such assets fair value. FSP 142-3 is effective for fiscal
years beginning after December 15, 2008. The
Companys assessment of FSP 142-3 does not indicate a material effect on the Companys
financial condition or results of operation.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 Fair Value
Measurements
 The Fair Value
Option for Financial Assets and Financial Liabilities
 Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
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(2)
    
    InvestmentsThe cost, gross unrealized gains and losses and fair value of investments in fixed maturities
and equity securities, as of December 31, 2008 and 2007, are as follows:
 December 31, 2008Gross
    
    
    Grossunrealized
    
    
    unrealizedBook Value
    
    
    gains
    
    
    (losses)
    
    
    Fair value(In thousands)Fixed Maturities Available-for-Sale:U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
    
    $
    11,306
    
    
    
    3,113
    
    
    
    
    
    
    
    14,419U.S. Government-sponsored enterprises
    
    
    280,434
    
    
    
    1,128
    
    
    
    (500
    )
    
    
    281,062States of the United States and political
subdivisions of the states
    
    
    64,152
    
    
    
    156
    
    
    
    (6,203
    )
    
    
    58,105Foreign governments
    
    
    105
    
    
    
    29
    
    
    
    
    
    
    
    134Public utilities
    
    
    4,231
    
    
    
    22
    
    
    
    (100
    )
    
    
    4,153Corporate
    
    
    83,089
    
    
    
    1,112
    
    
    
    (8,826
    )
    
    
    75,375Securities not due at a single maturity date
    
    
    50,717
    
    
    
    1,564
    
    
    
    (374
    )
    
    
    51,907Total fixed maturities available-for-sale
    
    $
    494,034
    
    
    
    7,124
    
    
    
    (16,003
    )
    
    
    485,155Total Equity Securities
    
    $
    42,908
    
    
    
    92
    
    
    
    
    
    
    
    43,000
 December 31, 2007Gross
    
    
    Grossunrealized
    
    
    unrealizedBook Value
    
    
    gains
    
    
    (losses)
    
    
    Fair value(In thousands)Fixed Maturities Available-for-Sale:U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
    
    $
    11,678
    
    
    
    1,313
    
    
    
    
    
    
    
    12,991U.S. Government-sponsored enterprises
    
    
    279,937
    
    
    
    476
    
    
    
    (453
    )
    
    
    279,960States of the United States and political
subdivisions of the states
    
    
    64,807
    
    
    
    290
    
    
    
    (458
    )
    
    
    64,639Foreign governments
    
    
    106
    
    
    
    19
    
    
    
    
    
    
    
    125Public utilities
    
    
    4,067
    
    
    
    
    
    
    
    (125
    )
    
    
    3,942Corporate
    
    
    86,996
    
    
    
    71
    
    
    
    (3,016
    )
    
    
    84,051Securities not due at a single maturity date
    
    
    55,044
    
    
    
    316
    
    
    
    (642
    )
    
    
    54,718Total fixed maturities available-for-sale
    
    $
    502,635
    
    
    
    2,485
    
    
    
    (4,694
    )
    
    
    500,426Total Equity Securities
    
    $
    36,696
    
    
    
    146
    
    
    
    (1,173
    )
    
    
    35,669
  55




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  December 31, 2008Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) moreBook Value
    
    
    than 12 months
    
    
    than 12 months
    
    
    Fair value(In thousands)Fixed maturities available-for-sale:U.S. Government-sponsored enterprises
    
    $
    18,945
    
    
    
    (265
    )
    
    
    
    
    
    
    18,680U.S. Government-sponsored enterprises
    
    
    11,491
    
    
    
    
    
    
    
    (235
    )
    
    
    11,256States of the United States and political
subdivisions of the states
    
    
    35,216
    
    
    
    (2,827
    )
    
    
    
    
    
    
    32,389States of the United States and political
subdivisions of the states
    
    
    24,868
    
    
    
    
    
    
    
    (3,376
    )
    
    
    21,492Public utilities
    
    
    2,015
    
    
    
    
    
    
    
    (100
    )
    
    
    1,915Corporate
    
    
    22,679
    
    
    
    (2,170
    )
    
    
    
    
    
    
    20,509Corporate
    
    
    39,620
    
    
    
    
    
    
    
    (6,655
    )
    
    
    32,965Securities not due at a single maturity date
    
    
    127
    
    
    
    (9
    )
    
    
    
    
    
    
    118Securities not due at a single maturity date
    
    
    11,995
    
    
    
    
    
    
    
    (366
    )
    
    
    11,629Total fixed maturities available-for-sale
    
    $
    166,956
    
    
    
    (5,271
    )
    
    
    (10,732
    )
    
    
    150,953
      56




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  December 31, 2007Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) moreBook Value
    
    
    than 12 months
    
    
    than 12 months
    
    
    Fair value(In thousands)Fixed maturities available-for-sale:U.S. Government-sponsored enterprises
    
    $
    650
    
    
    
    (2
    )
    
    
    
    
    
    
    648U.S. Government-sponsored enterprises
    
    
    46,135
    
    
    
    
    
    
    
    (451
    )
    
    
    45,684States of the United States and political
subdivisions of the states
    
    
    21,488
    
    
    
    (193
    )
    
    
    
    
    
    
    21,295States of the United States and political
subdivisions of the states
    
    
    18,214
    
    
    
    
    
    
    
    (264
    )
    
    
    17,950Public Utilities
    
    
    4,067
    
    
    
    
    
    
    
    (125
    )
    
    
    3,942Corporate
    
    
    15,879
    
    
    
    (648
    )
    
    
    
    
    
    
    15,231Corporate
    
    
    61,867
    
    
    
    
    
    
    
    (2,368
    )
    
    
    59,499Securities not due at a single maturity date
    
    
    8,517
    
    
    
    (36
    )
    
    
    
    
    
    
    8,481Securities not due at a single maturity date
    
    
    22,412
    
    
    
    
    
    
    
    (607
    )
    
    
    21,805Total fixed maturities available-for-sale
    
    $
    199,229
    
    
    
    (879
    )
    
    
    (3,815
    )
    
    
    194,535Equity securities available-for-sale:Equity Securities
    
    $
    20,534
    
    
    
    (1,168
    )
    
    
    
    
    
    
    19,366Equity Securities
    
    
    29
    
    
    
    
    
    
    
    (5
    )
    
    
    24Total equity securities available-for-sale
    
    $
    20,563
    
    
    
    (1,168
    )
    
    
    (5
    )
    
    
    19,390
  Fixed maturities available-for-sale  (In thousands)
 Book Value
    
    
    Fair ValueDue in one year or less
    
    $
    12,490
    
    
    
    12,138Due after one year through five years
    
    
    21,748
    
    
    
    19,987Due after five years through ten years
    
    
    46,721
    
    
    
    46,558Due after ten years
    
    
    362,358
    
    
    
    354,565443,317
    
    
    
    433,248Securities not due at a single maturity date
    
    
    50,717
    
    
    
    51,907Totals
    
    $
    494,034
    
    
    
    485,155
    57




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Investment income on:Fixed maturities
    
    $
    27,536
    
    
    
    26,925
    
    
    
    25,386Equity securities
    
    
    1,027
    
    
    
    2,171
    
    
    
    6Mortgage loans on real estate
    
    
    28
    
    
    
    33
    
    
    
    46Policy loans
    
    
    2,105
    
    
    
    1,919
    
    
    
    1,219Long-term investments
    
    
    39
    
    
    
    (47
    )
    
    
    479Other
    
    
    357
    
    
    
    191
    
    
    
    25531,092
    
    
    
    31,192
    
    
    
    27,391Investment expenses
    
    
    (614
    )
    
    
    (449
    )
    
    
    (416
    )Net investment income
    
    $
    30,478
    
    
    
    30,743
    
    
    
    26,975
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Proceeds
    
    $
    237
    
    
    
    3,844
    
    
    
    14,006Gross realized gains
    
    $
    5
    
    
    
    18
    
    
    
    1,090Gross realized losses
    
    $
    
    
    
    
    (141
    )
    
    
    (122
    )
   Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Proceeds
    
    $
    
    
    
    
    248
    
    
    
    334Gross realized gains
    
    $
    
    
    
    
    30
    
    
    
    183Gross realized losses
    
    $
    
    
    
    
    (32
    )
    
    
    
  58




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Realized gains (losses):Fixed maturities
    
    $
    (290
    )
    
    
    (123
    )
    
    
    1,251Equity securities
    
    
    (23,536
    )
    
    
    (2
    )
    
    
    183Property and equipment
    
    
    (4
    )
    
    
    
    
    
    
    Other long-term investments
    
    
    18
    
    
    
    31
    
    
    
    (148
    )Net realized gains (losses)*
    
    $
    (23,812
    )
    
    
    (94
    )
    
    
    1,286
 *
    
    Other-than-temporary impairment losses of $23.5 million related to equity securities and $0.3
million related to fixed maturity securities were recognized during
2008. All other realized gains (losses) were from sales and
maturities. The Company performs
other-than-temporary impairments analyses, as previously discussed. (3) 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.
     59




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  December 31, 2008(In thousands)Total
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Financial Assets:Fixed Maturities Available-for-Sale
    
    $
    485,155
    
    
    
    14,419
    
    
    
    470,082
    
    
    
    654Equity Securities Available-for-Sale
    
    
    43,000
    
    
    
    43,000
    
    
    
    
    
    
    
    Total Financial Assets
    
    $
    528,155
    
    
    
    57,419
    
    
    
    470,082
    
    
    
    654
  December 31, 2008(In thousands)Beginning balance at January 1, 2008
    
    $
    700Total realized and unrealized gains (losses):Included in net income
    
    
    Included in other comprehensive income
    
    
    (3
    )Principal paydowns
    
    
    (43
    )Transfer in and (out) of Level 3
    
    
    Ending balance at December 31, 2008
    
    $
    654
 We review the fair value hierarchy classifications each reporting period. Changes in the
observability of the valuation attributes may result in a reclassification of certain financial
assets. Such reclassifications, if any, are reported as transfers in and out of Level 3 at the
beginning fair value for the reporting period in which the changes occur.(4)
    
    Cost of Customer Relationships Acquired and GoodwillCost of customer relationships acquired (CCRA) is summarized as follows:
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Balance at beginning of period
    
    $
    31,636
    
    
    
    34,812
    
    
    
    39,259SAB 108 adjustment
    
    
    
    
    
    
    
    
    
    
    (863
    )Adjusted balance at beginning of period
    
    
    31,636
    
    
    
    34,812
    
    
    
    38,396Acquisition of ONLIC
    
    
    5,038
    
    
    
    
    
    
    
    Amortization
    
    
    (2,869
    )
    
    
    (3,176
    )
    
    
    (3,584
    )Balance at end of period
    
    $
    33,805
    
    
    
    31,636
    
    
    
    34,812
   60




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(In thousands)
 Year
    
    Amount2009
    
    $
    2,5822010
    
    
    2,3772011
    
    
    2,2142012
    
    
    2,0522013
    
    
    1,902Thereafter
    
    
    22,678
  AccumulatedGross
    
    
    amortization
    
    
    Net(In thousands)Balance at January 1, 2006
    
    $
    17,470
    
    
    
    (5,068
    )
    
    
    12,402Impairment of Goodwill
    
    
    (1,016
    )
    
    
    
    
    
    
    (1,016
    )Balance at December 31, 2007
    
    
    16,454
    
    
    
    (5,068
    )
    
    
    11,386Acquisition of ONLIC
    
    
    4,301
    
    
    
    
    
    
    
    4,301Balance at December 31, 2008
    
    $
    20,755
    
    
    
    (5,068
    )
    
    
    15,687
 In the fourth quarter of 2008, the Company added $4.3 million of goodwill related to the
acquisition of ONLIC. The purchase price was allocated to identifiable assets of $21.4
million (net of goodwill) and liabilities of $16.9 million based on managements estimate,
resulting in goodwill of $4.3 million. The purchase price we paid for the acquisition was
$58.06 per share, for a total of $8.0 million, plus acquisition
related expenses of $900,000.
Goodwill of $11.4 million is in the Life Insurance segment and goodwill acquired of $4.3
million is in the Home Service segment, with the acquisition of ONLIC, and is tested for
impairment at December 31 of each year. The analysis of goodwill of CNLIC, a reporting unit
within the Life Insurance segment, indicated that it was impaired at December 31, 2006. Due
to significant declines in new business issued by CNLIC, the fair value of this reporting unit
was below its carrying value. As a result, an impairment loss of $1.0 million was recognized
in the fourth quarter of 2006. The fair value of that reporting unit was estimated using the
present value of estimated future cash flows. There was no impairment of goodwill in 2007 or
2008.(5)

    Policy LiabilitiesVarious assumptions used to determine the future policy benefit reserves of life insurance
include the following: a) valuation interest rates from 4% to 9% per year; b) mortality
assumptions are from the 1955 to 1960, 1965 to 1970, 1975 to 1980 and 2001 Select and Ultimate
mortality tables; and c) withdrawals are based primarily on actual historical termination
rates.
  61




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Policy claims payable at January 1
    
    $
    6,908
    
    
    
    9,448
    
    
    
    11,227Less: reinsurance recoverable
    
    
    1,918
    
    
    
    2,039
    
    
    
    4,337Net balance at January 1
    
    
    4,990
    
    
    
    7,409
    
    
    
    6,890SAB 108 adjustment
    
    
    
    
    
    
    
    
    
    
    292Adjusted balance at January 1
    
    
    4,990
    
    
    
    7,409
    
    
    
    7,182Acquisition of ONLIC, gross and net
    
    
    140
    
    
    
    
    
    
    
    Add claims incurred, related to:Current year
    
    
    25,308
    
    
    
    22,985
    
    
    
    24,790Prior years
    
    
    305
    
    
    
    (883
    )
    
    
    2,83825,613
    
    
    
    22,102
    
    
    
    27,628Deduct claims paid, related to:Current year
    
    
    19,735
    
    
    
    18,736
    
    
    
    18,731Prior years
    
    
    4,396
    
    
    
    5,785
    
    
    
    8,67024,131
    
    
    
    24,521
    
    
    
    27,401Net balance December 31
    
    
    6,612
    
    
    
    4,990
    
    
    
    7,409Plus: reinsurance recoverable
    
    
    2,706
    
    
    
    1,918
    
    
    
    2,039Policy claims payable, December 31
    
    $
    9,318
    
    
    
    6,908
    
    
    
    9,448
 SPLIC had higher death claims in 2008 than in prior years, which caused the adverse
development. The unfavorable claims development of $305,000 in 2008 was primarily the result
of SPLIC receiving prior year claims in excess of liabilities established. The favorable
development in 2007 was the result of the expiration of the extended due date for filing of
hurricane claims. We released approximately $425,000 of accrued liabilities in 2007, as we
determined that no amounts were payable on these policies. The adverse development in 2006
occurred because SPFIC continued to receive new claims in excess of those estimated in 2005.
Through December 31, 2006, losses in excess of reinsurance on Hurricane Katrina amounted to
more than $3.7 million, resulting in SPLIC infusing $4.0 million of additional capital into
SPFIC in 2006.(6)

    ReinsuranceIn the normal course of business, the Company reinsures portions of certain policies that we
underwrite to limit disproportionate risks. During 2008 and 2007, we retained varying amounts
of individual insurance up to a maximum retention of $100,000 on any life. The Company also
reinsures 100% of our accidental death benefit rider coverage. Catastrophe reinsurance is in
place for our property policies. In 2008 and 2007, this reinsurance provided $10,000,000 of
coverage above a $500,000 deductible. Our health insurance policies are substantially all
reinsured on a 100% coinsurance basis. We remain contingently liable to the extent that the
reinsuring companies cannot meet their obligations under these reinsurance treaties.Our amounts recoverable from reinsurers represent receivables from and reserves ceded to
reinsurers. We obtain reinsurance from multiple reinsurers, and we monitor concentration as
well as financial strength ratings of our principal reinsurers. The ratings by A.M. Best
Company range from B+ (Good) to A+ (Superior). To protect our position, we have established
and funded a trust to cover the contingent liabilities related to accident and health
reinsurance ceded to Texas International Life Insurance Company, which represents $7.5 million
of the $13.2 million of reinsurance recoverable at December 31, 2008.
  62




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At December 31,2008
    
    
    2007(In thousands)Aggregate assumed life insurance in force
    
    $
    647,041
    
    
    
    644,242Aggregate ceded life insurance in force
    
    $
    (302,253
    )
    
    
    (273,553
    )Net life insurance in force
    
    $
    4,666,848
    
    
    
    4,538,202
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Premiums from short-duration contracts:Direct
    
    $
    6,856
    
    
    
    6,803
    
    
    
    5,747Assumed
    
    
    
    
    
    
    
    
    
    
    Ceded
    
    
    (1,202
    )
    
    
    (843
    )
    
    
    (1,025
    )Net premiums earned
    
    
    5,654
    
    
    
    5,960
    
    
    
    4,722Premiums from long-duration contracts:Direct
    
    
    144,221
    
    
    
    139,606
    
    
    
    129,564Assumed
    
    
    1,459
    
    
    
    1,462
    
    
    
    1,126Ceded
    
    
    (10,037
    )
    
    
    (10,280
    )
    
    
    (10,786
    )Net premiums earned
    
    
    135,643
    
    
    
    130,788
    
    
    
    119,904Total premiums earned
    
    $
    141,297
    
    
    
    136,748
    
    
    
    124,626Claims and surrenders assumed
    
    $
    1,429
    
    
    $
    1,422
    
    
    
    1,056Claims and surrenders ceded
    
    $
    (9,982
    )
    
    
    (9,338
    )
    
    
    (10,448
    )
 For calendar years 2007 and 2006, SPFIC elected to increase the amount of first event
catastrophe reinsurance to $10 million from $7.1 million and increase the retention to
$500,000 from $250,000 by paying an annual premium of $840,000 and $799,000 in 2007 and 2006,
respectively. This same coverage was in place in 2008 with an annual premium of $750,000.
Also in 2008, SPFIC paid $478,000 in second and third event coverage because of the occurrence
of Hurricanes Gustav and Ike.(7)
    Stockholders Equity and RestrictionsThe two classes of our common stock are equal in all respects, except (a) each Class A share
receives twice the cash dividends paid on a per share basis to the Class B common stock; and
(b) the Class B common stock elects a simple majority of the Board of Directors of Citizens
and the Class A common stock elects the remaining directors.
  63




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  At December 31,2008
    
    
    2007(In thousands)(Unaudited)Combined Statutory Stockholders EquityLife insurance operations
    
    $
    83,906
    
    
    
    110,340Property insurance operations
    
    
    3,156
    
    
    
    4,570Total statutory capital and surplus
    
    $
    87,062
    
    
    
    114,910
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)(Unaudited)Combined Statutory Net Income (Loss)Life insurance operations
    
    $
    (11,839
    )
    
    
    14,644
    
    
    
    9,104Property insurance operations
    
    
    (1,436
    )
    
    
    1,184
    
    
    
    (3,783
    )Total statutory net income (loss)
    
    $
    (13,275
    )
    
    
    15,828
    
    
    
    5,321
 Generally, the net assets of the insurance subsidiaries available for transfer to their
immediate parent are limited to the lesser of the subsidiary net gain from operations during
the preceding year or 10% of the subsidiary net statutory surplus as of the end of the
preceding year as determined in accordance with accounting practices prescribed or permitted
by insurance regulatory authorities. Under these practices, total surplus at December 31,
2008 was $35.1 million and net gain from operations was $10.5 million for CICA. Based upon
statutory net gain from operations and surplus of CICA as of and for the year ended December
31, 2008, a dividend of approximately $10.5 million could be paid to the Company without prior
regulatory approval in 2009. Payments of dividends in excess of such amounts would generally
require approval by regulatory authorities.CICA, CNLIC, SPLIC, SPFIC and ONLIC have calculated their risk based capital (RBC) in
accordance with the National Association of Insurance Commissioners Model Rule and the RBC
rules as adopted by their respective states of domicile. The RBC as calculated for CICA,
CNLIC and SPLIC as of December 31, 2008 exceeded levels requiring company or regulatory
action. SPFIC is at the Company Action Level and ONLIC is at a Regulatory Action Level. The
Company plans to contribute $1.0 million to both ONLIC and SPFIC to eliminate the RBC level of
action. This plan is pending insurance department approvals.(8)

    Convertible Preferred StockIn July 2004, the Company completed a private placement of $12.5 million of Series A-1
Convertible Preferred Stock (Series A-1 Preferred) to four unaffiliated institutional
investors. We also issued to the investors warrants to purchase 544,000 shares of our Class A
common stock, at an exercise price of $6.95 per share, and unit warrants to purchase Series
A-2 Convertible Preferred Stock (Series A-2 Preferred). The conversion, exercise and
redemption prices set forth in this Note 8, along with the numbers of shares and warrants
(except for the 25,000 Series A-1 Preferred shares referenced below), have been adjusted for
the respective stock dividends paid December 31, 2004 and December 30, 2005.
  64




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
           65




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The initial July 2004 recognition of the beneficial conversion feature and discounts on fair
values of options and warrants resulted in $3,073,000 of additional paid-in capital for the
Class A common stock and $2,944,000 of liabilities for options and warrants. Changes in the
fair value of options and warrants are recognized in the statement of operations with a
corresponding change in the liabilities for options and warrants. One investor who
contributed an additional $3.125 million in stated value for Series A-1 Preferred stock in
2008 and did not convert its Series A-1 Preferred stock into Class A common stock, created a
beneficial conversion feature of $1.7 million. The $9.375 million capital contribution
created a discount for warrants of $1.3 million, as an
additional right to purchase 407,844
shares of Class A common stock.(9)
    Commitments and ContingenciesWe have committed to the following contractual obligations as of December 31, 2008 with the
payments due by the period indicated below:
 Less than
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligation
    
    Total
    
    
    1 Year
    
    
    1 to 3 Years
    
    
    3 to 5 Years
    
    
    Years(In thousands)Operating leases
    
    $
    861
    
    
    
    391
    
    
    
    428
    
    
    
    42
    
    
    
    Future policy benefit reserves:Life insurance
    
    
    547,621
    
    
    
    204
    
    
    
    1,143
    
    
    
    10,723
    
    
    
    535,551Annuities
    
    
    34,025
    
    
    
    17,800
    
    
    
    7,977
    
    
    
    3,439
    
    
    
    4,809Accident and health
    
    
    7,442
    
    
    
    7,442
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit reserves
    
    
    589,088
    
    
    
    25,446
    
    
    
    9,120
    
    
    
    14,162
    
    
    
    540,360Policy claims payable:Life insurance
    
    
    6,934
    
    
    
    6,934
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    1,130
    
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    1,254
    
    
    
    1,254
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    9,318
    
    
    
    9,318
    
    
    
    
    
    
    
    
    
    
    
    Convertible Preferred Stock
    
    
    10,001
    
    
    
    10,001
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    609,268
    
    
    
    45,156
    
    
    
    9,548
    
    
    
    14,204
    
    
    
    540,360
  Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach Respondent
  66




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 The State of
Louisiana v. AAA Insurance Road Home Litigation Road Home Litigation
 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.
 In the absence of countervailing considerations, we would expect to defend any such claims
vigorously. However, in doing so, we could incur significant defense costs, including not
only attorneys fees and other direct litigation costs, but also the expenditure of
substantial amounts of management time that otherwise would be devoted to our business. If we
suffer an adverse judgment as a result of any claim, it could have a material adverse effect
on our business, results of operations and financial condition. We have not established any
material reserve account on our consolidated financial statements for the adverse financial
impact of any of our litigation matters.(10)
    
    Segment and Other Operating InformationOperating Segment InformationThe Company has three reportable segments: Life Insurance, Home Service Insurance, and Other
Non-Insurance Enterprises. The accounting policies of the segments are in accordance with
U.S. GAAP and are the same as those described in the summary of significant accounting
policies. We evaluate profit and loss performance based on U.S. GAAP net income before
federal income taxes for its three reportable segments.The allocation of expenses within the Citizens, Inc. management services agreement was
changed in the first quarter of 2008 to reflect the conversion of Security Plans policies
to our policy administration system at year end 2007. Approximately $4.0
million in expenses were reallocated from the Life Insurance segment to the Home Service
segment, which is reflected in the lower profits for the Home Service segment compared to
comparable periods in 2007.The measurement of segment profit and loss and segment assets do not include material
transactions between segments. The Company has no reportable differences between segments and
consolidated operations.
  67




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
 For the Year Ended December 31, 2008OtherLife
    
    
    Home
    
    
    Non-InsuranceInsurance
    
    
    Service
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    102,030
    
    
    
    39,267
    
    
    
    
    
    
    
    141,297Net investment income
    
    
    17,015
    
    
    
    12,654
    
    
    
    809
    
    
    
    30,478Realized gains (losses), net
    
    
    (13,882
    )
    
    
    (9,948
    )
    
    
    18
    
    
    
    (23,812
    )Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    (2,662
    )
    
    
    (2,662
    )Other income
    
    
    330
    
    
    
    273
    
    
    
    769
    
    
    
    1,372Total revenue
    
    
    105,493
    
    
    
    42,246
    
    
    
    (1,066
    )
    
    
    146,673Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    36,241
    
    
    
    20,012
    
    
    
    
    
    
    
    56,253Increase in future policy benefit reserves
    
    
    34,246
    
    
    
    2,871
    
    
    
    
    
    
    
    37,117Policyholders dividends
    
    
    6,714
    
    
    
    151
    
    
    
    
    
    
    
    6,865Total insurance benefits paid or provided
    
    
    77,201
    
    
    
    23,034
    
    
    
    
    
    
    
    100,235Commissions
    
    
    21,589
    
    
    
    14,395
    
    
    
    
    
    
    
    35,984Other underwriting, acquisition and insurance
expenses
    
    
    10,866
    
    
    
    14,459
    
    
    
    3,286
    
    
    
    28,611Capitalization of deferred policy acquisition costs
    
    
    (19,177
    )
    
    
    (4,932
    )
    
    
    
    
    
    
    (24,109
    )Amortization of deferred policy acquisition costs
    
    
    13,331
    
    
    
    2,319
    
    
    
    
    
    
    
    15,650Amortization of cost of customer relationships
acquired and other intangibles
    
    
    971
    
    
    
    1,926
    
    
    
    
    
    
    
    2,897Total benefits and expenses
    
    
    104,781
    
    
    
    51,201
    
    
    
    3,286
    
    
    
    159,268Income (loss) before income tax expense
    
    $
    712
    
    
    
    (8,955
    )
    
    
    (4,352
    )
    
    
    (12,595
    )
  68




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
 For the Year Ended December 31, 2007OtherLife
    
    
    Home
    
    
    Non-InsuranceInsurance
    
    
    Service
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    97,292
    
    
    
    39,456
    
    
    
    
    
    
    
    136,748Net investment income
    
    
    16,891
    
    
    
    13,502
    
    
    
    350
    
    
    
    30,743Realized gains (losses), net
    
    
    3
    
    
    
    (85
    )
    
    
    (12
    )
    
    
    (94
    )Decrease in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828Other income
    
    
    660
    
    
    
    6
    
    
    
    746
    
    
    
    1,412Total revenue
    
    
    114,846
    
    
    
    52,879
    
    
    
    1,912
    
    
    
    169,637Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    34,305
    
    
    
    16,266
    
    
    
    
    
    
    
    50,571Increase in future policy benefit reserves
    
    
    34,160
    
    
    
    2,260
    
    
    
    
    
    
    
    36,420Policyholders dividends
    
    
    6,401
    
    
    
    
    
    
    
    
    
    
    
    6,401Total insurance benefits paid or provided
    
    
    74,866
    
    
    
    18,526
    
    
    
    
    
    
    
    93,392Commissions
    
    
    22,144
    
    
    
    13,497
    
    
    
    
    
    
    
    35,641Other underwriting, acquisition and insurance
expenses
    
    
    13,294
    
    
    
    10,001
    
    
    
    4,288
    
    
    
    27,583Capitalization of deferred policy acquisition costs
    
    
    (20,653
    )
    
    
    (5,557
    )
    
    
    
    
    
    
    (26,210
    )Amortization of deferred policy acquisition costs
    
    
    10,874
    
    
    
    1,656
    
    
    
    
    
    
    
    12,530Amortization of cost of customer relationships
acquired and other intangibles
    
    
    1,176
    
    
    
    2,027
    
    
    
    
    
    
    
    3,203Total benefits and expenses
    
    
    101,701
    
    
    
    40,150
    
    
    
    4,288
    
    
    
    146,139Income (loss) before income tax expense
    
    $
    13,145
    
    
    
    12,729
    
    
    
    (2,376
    )
    
    
    23,498
  69




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
 For the Year Ended December 31, 2006OtherLife
    
    
    Home
    
    
    Non-InsuranceInsurance
    
    
    Service
    
    
    Enterprises
    
    
    Consolidated(In thousands)Revenues:Premiums
    
    $
    86,609
    
    
    
    38,017
    
    
    
    
    
    
    
    124,626Net investment income
    
    
    14,243
    
    
    
    12,232
    
    
    
    500
    
    
    
    26,975Realized gains (losses), net
    
    
    321
    
    
    
    983
    
    
    
    (18
    )
    
    
    1,286Increase in fair value of warrants
    
    
    
    
    
    
    
    
    
    
    (244
    )
    
    
    (244
    )Other income
    
    
    705
    
    
    
    2
    
    
    
    839
    
    
    
    1,546Total revenue
    
    
    101,878
    
    
    
    51,234
    
    
    
    1,077
    
    
    
    154,189Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    30,287
    
    
    
    22,104
    
    
    
    
    
    
    
    52,391Increase in future policy benefit reserves
    
    
    27,398
    
    
    
    3,321
    
    
    
    
    
    
    
    30,719Policyholders dividends
    
    
    5,384
    
    
    
    
    
    
    
    
    
    
    
    5,384Total insurance benefits paid or provided
    
    
    63,069
    
    
    
    25,425
    
    
    
    
    
    
    
    88,494Commissions
    
    
    21,942
    
    
    
    13,749
    
    
    
    
    
    
    
    35,691Other underwriting, acquisition and insurance
expenses
    
    
    13,707
    
    
    
    9,026
    
    
    
    4,874
    
    
    
    27,607Capitalization of deferred policy acquisition costs
    
    
    (21,284
    )
    
    
    (5,702
    )
    
    
    
    
    
    
    (26,986
    )Amortization of deferred policy acquisition costs
    
    
    9,786
    
    
    
    1,605
    
    
    
    
    
    
    
    11,391Amortization of cost of customer relationships
acquired and other intangibles
    
    
    2,316
    
    
    
    2,334
    
    
    
    
    
    
    
    4,650Total benefits and expenses
    
    
    89,536
    
    
    
    46,437
    
    
    
    4,874
    
    
    
    140,847Income (loss) before income tax expense
    
    $
    12,342
    
    
    
    4,797
    
    
    
    (3,797
    )
    
    
    13,342
  70




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  At December 31,2008
    
    
    2007(In thousands)Assets:Life Insurance
    
    $
    481,606
    
    
    
    449,719Home Service Insurance
    
    
    316,184
    
    
    
    305,997Other Non-Insurance Enterprises
    
    
    34,486
    
    
    
    32,193Total
    
    $
    832,276
    
    
    
    787,909
  Years Ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Year Ended December 31:Premium income:Ordinary life
    
    $
    133,775
    
    
    
    129,100
    
    
    
    118,407Group life
    
    
    1,178
    
    
    
    1,165
    
    
    
    981Accident and health
    
    
    1,580
    
    
    
    1,558
    
    
    
    1,461Property
    
    
    4,764
    
    
    
    4,925
    
    
    
    3,777Total premium income
    
    $
    141,297
    
    
    
    136,748
    
    
    
    124,626
 Geographic Information
  Years Ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)AreaUnited States
    
    $
    51,616
    
    
    
    53,290
    
    
    
    52,847Colombia
    
    
    19,509
    
    
    
    24,427
    
    
    
    23,088Taiwan
    
    
    13,818
    
    
    
    12,607
    
    
    
    10,173Venezuela
    
    
    12,617
    
    
    
    11,652
    
    
    
    8,995Ecuador
    
    
    10,909
    
    
    
    9,673
    
    
    
    7,482Argentina
    
    
    9,598
    
    
    
    9,133
    
    
    
    9,060Other foreign countries
    
    
    33,010
    
    
    
    25,627
    
    
    
    23,666Reinsurance
    
    
    (9,780
    )
    
    
    (9,661
    )
    
    
    (10,685
    )Total
    
    $
    141,297
    
    
    
    136,748
    
    
    
    124,626
  71




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (11)
    
    Income TaxesOur federal income tax expense was $3.1 million, $6.9 million and $4.7 million in 2008, 2007
and 2006, respectively. This represents effective tax rates of 24.7%, 29.5% and 35%,
respectively. In 2008, a valuation allowance of $6.9 million was established for the OTTI
recorded in 2008 related to the Companys stock mutual funds. In 2007, a valuation allowance
was released in the amount of $1.1 million, as the CNLIC sale agreement was terminated and we
planned to consolidate CNLIC in our life-nonlife tax return beginning in 2008. The 2006 tax
rate was higher due to a write-off of $1.0 million of goodwill for financial reporting purposes, which had no tax effect.A reconciliation of federal income tax expense computed by applying the federal income tax
rate of 35% in 2008 and 2007 and 34% in 2006 to income (loss) before federal income tax
expense is as follows:
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Expected tax expense (benefit)
    
    $
    (4,408
    )
    
    
    8,224
    
    
    
    4,536Change in valuation allowance
    
    
    6,900
    
    
    
    (1,177
    )
    
    
    41Tax-exempt interest
    
    
    (234
    )
    
    
    (241
    )
    
    
    (281
    )Goodwill impairment loss
    
    
    
    
    
    
    
    
    
    
    345Change in fair value of options and
warrants
    
    
    932
    
    
    
    (290
    )
    
    
    83Adjustment of prior year taxes
    
    
    23
    
    
    
    294
    
    
    
    (33
    )Taxable portion of intercompany dividend
    
    
    
    
    
    
    175
    
    
    
    State income tax credits
    
    
    4
    
    
    
    (149
    )
    
    
    Change in expected tax rate related to
deferred taxes
    
    
    
    
    
    
    48
    
    
    
    Effect of graduated rates
    
    
    (62
    )
    
    
    
    
    
    
    Other
    
    
    (49
    )
    
    
    48
    
    
    
    (26
    )Federal income tax expense
    
    
    3,106
    
    
    
    6,932
    
    
    
    4,665State income tax expense
    
    
    6
    
    
    
    9
    
    
    
    Total income tax expense
    
    $
    3,112
    
    
    
    6,941
    
    
    
    4,665
  Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Current
    
    $
    2,616
    
    
    
    5,739
    
    
    
    3,836Deferred
    
    
    496
    
    
    
    1,202
    
    
    
    829Total income tax expense
    
    $
    3,112
    
    
    
    6,941
    
    
    
    4,665
  72




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
  At December 31,2008
    
    
    2007(In thousands)Deferred tax assets:Future policy benefit reserves
    
    $
    23,699
    
    
    
    22,918Net operating and capital loss carryforwards
    
    
    4,833
    
    
    
    6,741Due and accrued dividends and expenses
    
    
    1,310
    
    
    
    1,122Investments available-for-sale
    
    
    13,106
    
    
    
    1,132State income tax credits
    
    
    145
    
    
    
    149Other
    
    
    1,253
    
    
    
    712Total gross deferred tax assets
    
    
    44,346
    
    
    
    32,774Valuation allowance
    
    
    (7,704
    )
    
    
    Total gross deferred tax assets net of valuation
allowance
    
    
    36,642
    
    
    
    32,774Deferred tax liabilities:Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets
    
    
    (38,452
    )
    
    
    (35,324
    )Investments amortization
    
    
    (569
    )
    
    
    (1,751
    )Other
    
    
    (1,572
    )
    
    
    (509
    )Total gross deferred tax liabilities
    
    
    (40,593
    )
    
    
    (37,584
    )Net deferred tax liability
    
    $
    (3,951
    )
    
    
    (4,810
    )
  December 312008
    
    
    2007(In thousands)Deferred federal and state income taxes:Balance January 1
    
    $
    (4,810
    )
    
    
    (1,498
    )Deferred tax benefit (expense)
    
    
    (496
    )
    
    
    (1,202
    )Acquisition of ONLIC
    
    
    216
    
    
    
    ONLIC valuation allowance
    
    
    (804
    )
    
    
    Investment available-for-sale
    
    
    1,943
    
    
    
    (2,110
    )Balance December 31
    
    $
    (3,951
    )
    
    
    (4,810
    )
   73




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 At December 31, 2008, the Company had accumulated approximately $3,291,000 in our
policyholders surplus account. This is a special memorandum tax account into which certain
amounts not previously taxed, under prior tax laws, were accumulated. No new additions are
expected to be made to this account. Federal income taxes will become payable thereon at the
then current tax rate (a) when and if distributions to shareholders, other than stock
dividends and other limited exceptions, are made in excess of the accumulated previously taxed
income; or (b) when a company ceases to be a life insurance company as defined by the Internal
Revenue Code and such termination is not due to another life insurance company acquiring its
assets in a nontaxable transaction. We do not anticipate any transactions that would cause
any part of this amount to become taxable. However, should the balance at December 31, 2008
become taxable, the tax computed at present rates would be approximately $1,152,000.The Company implemented SAB 108 as of January 1, 2006 and increased federal income taxes
payable by $253,000, from $448,000 to $701,000, as of the date.The Company implemented FIN 48, Accounting for Uncertainty in Income Taxes  an Interpretation
of FASB No. 109,during the first quarter of 2007. One provision of FIN 48 requires accruing
interest and/or penalties on potential tax deficiencies resulting from unsustainable tax
positions. We did not accrue any interest or penalties related to uncertain tax positions
during the year ended December 31, 2008, because such positions are immaterial.The Company and our subsidiaries file income tax returns in the U.S. federal jurisdiction and
various U.S. states. Most of our subsidiaries are not subject to examination by U.S. tax
authorities for years prior to 2005. Some of our subsidiaries have open tax years going back
as far as 1994 due to net operating loss carry-forwards.(12)
    
    Fair Value of Financial InstrumentsEstimates of fair values are made at a specific point in time, based on relevant market prices
and information about the financial instrument. The estimated fair values of financial
instruments presented below are not necessarily indicative of the amounts the Company might
realize in actual market transactions. The carrying amount and fair value for the financial
assets and liabilities on the consolidated balance sheets at each year-end were as follows:
 At December 31,2008
    
    
    2007Carrying
    
    
    
    
    
    
    Carryingamount
    
    
    Fair value
    
    
    amount
    
    
    Fair value(In thousands)Financial assets:Fixed maturities
    
    $
    485,155
    
    
    
    485,155
    
    
    
    500,426
    
    
    
    500,426Equity securities
    
    
    43,000
    
    
    
    43,000
    
    
    
    35,669
    
    
    
    35,669Mortgage loans
    
    
    339
    
    
    
    370
    
    
    
    291
    
    
    
    334Policy loans
    
    
    28,955
    
    
    
    28,955
    
    
    
    25,490
    
    
    
    25,490Cash and cash equivalents
    
    
    63,792
    
    
    
    63,792
    
    
    
    21,123
    
    
    
    21,123Short-term investments
    
    
    2,250
    
    
    
    2,250
    
    
    
    17,650
    
    
    
    17,650Financial liabilities:Annuities
    
    
    34,025
    
    
    
    29,107
    
    
    
    22,792
    
    
    
    22,792
    74




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
      75




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (13)
    
    Other Comprehensive Income (Loss)The changes in the components of other comprehensive income (loss) are reported net of the
effects of income taxes of 35% in 2008 and 2007 and 34% in 2006, as indicated below:
 Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    Amount(In thousands)Year ended December 31, 2008Unrealized loss on securities:Unrealized holding loss arising
during the period
    
    $
    (29,377
    )
    
    
    10,283
    
    
    
    (19,094
    )Add reclassification adjustment for
losses included in net income
    
    
    23,826
    
    
    
    (8,340
    )
    
    
    15,486Other comprehensive loss
    
    $
    (5,551
    )
    
    
    1,943
    
    
    
    (3,608
    )Year ended December 31, 2007Unrealized gains on securities:Unrealized holding gain arising
during the period
    
    $
    6,228
    
    
    
    (2,084
    )
    
    
    4,144Add reclassification adjustment for
losses included in net income
    
    
    125
    
    
    
    (44
    )
    
    
    81Change in tax valuation allowance
    
    
    
    
    
    
    18
    
    
    
    18Other comprehensive income
    
    $
    6,353
    
    
    
    (2,110
    )
    
    
    4,243Year ended December 31, 2006Unrealized loss on securities:Unrealized holding loss arising
during the period
    
    $
    (1,613
    )
    
    
    548
    
    
    
    (1,065
    )Add reclassification adjustment for
gains included in net income
    
    
    (1,434
    )
    
    
    488
    
    
    
    (946
    )Unrealized gains on securities
transferred during the period
from held-to-maturity to
available-for-sale
    
    
    734
    
    
    
    (250
    )
    
    
    484Change in tax valuation allowance
    
    
    
    
    
    
    (18
    )
    
    
    (18
    )Other comprehensive loss
    
    $
    (2,313
    )
    
    
    768
    
    
    
    (1,545
    )
 (14)
    
    Profit-Sharing PlanThe Company sponsors a defined contribution profit-sharing plan. Employees with one year of
service can participate. Contributions are made at the discretion of the Board of Directors
and are subject to a tiered vesting schedule. Employer contributions to the plan were
$700,000, $650,000 and $750,000 in 2008, 2007 and 2006, respectively. The plan does not
permit employee contributions.
  76




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2008, 2007 and 2006
 (15)
    
    Related Party TransactionsThe Company sponsors the Citizens, Inc. Stock Investment Plan (the Plan), which is
administered by an independent third party. The Plan is a means for new and existing
investors in our Class A Common Stock to purchase and sell shares at market prices. Each
share purchased through the Plan is registered in the name of the investing shareholder. The
Company offers the Plan to our policyholders for automatic investment of policy benefits,
including policyholder dividends. We do not have possession of, or control over, any amounts
invested through the Plan.(16)
    
    Quarterly Financial Information (Unaudited)The following table contains selected unaudited financial data for each quarter.
 Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands)2008Revenues
    
    $
    23,303
    
    
    
    40,163
    
    
    
    43,281
    
    
    
    39,926Benefits and expenses
    
    
    44,114
    
    
    
    40,661
    
    
    
    38,948
    
    
    
    35,545Federal income tax expense (benefit)
    
    
    (191
    )
    
    
    316
    
    
    
    1,341
    
    
    
    1,646Net income (loss)
    
    
    (20,620
    )
    
    
    (814
    )
    
    
    2,992
    
    
    
    2,735Net income (loss) available to
common shareholders
    
    
    (21,473
    )
    
    
    (1,604
    )
    
    
    2,493
    
    
    
    2,223Basic and diluted earnings (loss) per
share of Class A common stock
    
    
    (0.49
    )
    
    
    (0.04
    )
    
    
    0.06
    
    
    
    0.05Basic and diluted earnings (loss) per
share of Class B common stock
    
    
    (0.25
    )
    
    
    (0.02
    )
    
    
    0.03
    
    
    
    0.03
 Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands)2007Revenues
    
    $
    48,768
    
    
    
    41,738
    
    
    
    40,711
    
    
    
    38,420Benefits and expenses
    
    
    40,196
    
    
    
    35,912
    
    
    
    35,529
    
    
    
    34,502Federal income tax expense
    
    
    2,638
    
    
    
    1,169
    
    
    
    1,655
    
    
    
    1,479Net income
    
    
    5,934
    
    
    
    4,657
    
    
    
    3,527
    
    
    
    2,439Net income available to
common shareholders
    
    
    5,449
    
    
    
    4,154
    
    
    
    3,016
    
    
    
    1,936Basic earnings per share of
Class A common stock
    
    
    0.13
    
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.05Basic earnings per share of
Class B common stock
    
    
    0.07
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.03Diluted earning per share of
Class A common stock
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.05Diluted earning per share of
Class B common stock
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.03
 (17)
    
    Subsequent EventsThe Company completed its acquisition of Integrity Capital Corporation in exchange for
1,292,000 shares of Citizens, Inc. Class A common stock in the first quarter of 2009.
Integrity Capital Corporation is the parent of Integrity Capital Insurance Company, an Indiana
life insurance company. The transaction was valued at $8.4 million at closing on February 27,
2009.
  77




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
 
 Schedule II
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Balance Sheet
 At December 31,2008
    
    
    2007(In thousands)AssetsInvestment in subsidiaries (1)
    
    $
    151,973
    
    
    
    161,399Fixed maturities available-for-sale, at fair value
    
    
    4,301
    
    
    
    5,989Real estate
    
    
    5,167
    
    
    
    4,913Short-term investments
    
    
    2,250
    
    
    
    17,650Cash
    
    
    16,638
    
    
    
    106Accrued investment income
    
    
    58
    
    
    
    79Accounts receivable from subsidiaries (1)
    
    
    4,560
    
    
    
    1,742Other assets
    
    
    1,310
    
    
    
    526Total assets
    
    $
    186,257
    
    
    
    192,404Liabilities and Stockholders EquityLiabilities:Accrued expense and other liabilities
    
    $
    2,030
    
    
    
    1,024Liabilities for options and warrants
    
    
    4,973
    
    
    
    1,003Total Liabilities
    
    
    7,003
    
    
    
    2,027Cumulative convertible preferred stock
    
    
    7,713
    
    
    
    14,220Stockholders equity:Common stock:Class A
    
    
    240,511
    
    
    
    225,812Class B
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (55,432
    )
    
    
    (39,725
    )Unrealized investment losses on securities held by
parent and subsidiaries, net of tax
    
    
    (5,711
    )
    
    
    (2,103
    )Treasury stock
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    171,541
    
    
    
    176,157Total liabilities and stockholders equity
    
    $
    186,257
    
    
    
    192,404
 (1)
    
    Eliminates in consolidation.   78




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
 Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Revenues:Management service fees (1)
    
    $
    29,764
    
    
    $
    27,110
    
    
    
    28,076Investment income
    
    
    808
    
    
    
    342
    
    
    
    471Decrease (increase) in fair value of warrants
    
    
    (2,662
    )
    
    
    828
    
    
    
    (244
    )Other
    
    
    11
    
    
    
    6
    
    
    
    65Realized gains (losses)
    
    
    18
    
    
    
    (12
    )
    
    
    (18
    )Total revenues
    
    
    27,939
    
    
    
    28,274
    
    
    
    28,350Expenses:General
    
    
    27,791
    
    
    
    25,547
    
    
    
    26,497Taxes
    
    
    1,186
    
    
    
    1,345
    
    
    
    1,387Total expenses
    
    
    28,977
    
    
    
    26,892
    
    
    
    27,884Income (loss) before equity in income (loss)
of consolidated subsidiaries
    
    
    (1,038
    )
    
    
    1,382
    
    
    
    466Equity in income (loss) of consolidated subsidiaries
    
    
    (14,669
    )
    
    
    15,175
    
    
    
    8,211Net income (loss)
    
    $
    (15,707
    )
    
    
    16,557
    
    
    
    8,677
 (1)
    
    Eliminates in consolidation.   79




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
 Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows
 Years ended December 31,2008
    
    
    2007
    
    
    2006(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (15,707
    )
    
    
    16,557
    
    
    
    8,677Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Realized losses (gains)
    
    
    (18
    )
    
    
    12
    
    
    
    18Equity in net income (loss) of consolidated subsidiaries
    
    
    14,669
    
    
    
    (15,175
    )
    
    
    (8,211
    )Increase (decrease) in fair value of options and
warrants
    
    
    2,662
    
    
    
    (828
    )
    
    
    244Accrued expenses and other liabilities
    
    
    1,006
    
    
    
    353
    
    
    
    (64
    )Amortization of discounts on short-term investments
    
    
    (428
    )
    
    
    
    
    
    
    Depreciation
    
    
    126
    
    
    
    94
    
    
    
    82Change in accrued investment income
    
    
    21
    
    
    
    28
    
    
    
    (15
    )Increase (decrease) in receivable from subsidiaries
    
    
    (2,457
    )
    
    
    (644
    )
    
    
    71Other
    
    
    (1,379
    )
    
    
    225
    
    
    
    463Net cash provided by (used in) operating activities
    
    
    (1,505
    )
    
    
    622
    
    
    
    1,265Cash flows from investing activities:Purchase of fixed maturities, available-for-sale
    
    
    (1,000
    )
    
    
    
    
    
    
    (2,999
    )Sale of fixed maturities, available-for-sale
    
    
    
    
    
    
    1,988
    
    
    
    Maturities of fixed maturities, available-for-sale
    
    
    2,700
    
    
    
    500
    
    
    
    2,000Sale of real estate and other long-term investments
    
    
    58
    
    
    
    104
    
    
    
    58Purchase of other long-term investments
and property and equipment
    
    
    (806
    )
    
    
    (3,901
    )
    
    
    (191
    )Maturity of short-term investments
    
    
    26,000
    
    
    
    
    
    
    
    Purchase of short-term investments
    
    
    (10,173
    )
    
    
    (17,650
    )
    
    
    Cash paid for acquisition, net
    
    
    (8,242
    )
    
    
    
    
    
    
    Net cash provided by (used by) investing activities
    
    
    8,537
    
    
    
    (18,959
    )
    
    
    (1,132
    )Cash flows from financing activities:Proceeds from sale of Class A common stock
    
    
    
    
    
    
    17,083
    
    
    
    Warrants exercised
    
    
    125
    
    
    
    
    
    
    
    Series A-1 preferred stock capital contributions
    
    
    9,375
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    9,500
    
    
    
    17,083
    
    
    
    Net increase (decrease) in cash
    
    
    16,532
    
    
    
    (1,254
    )
    
    
    133Cash at beginning of year
    
    
    106
    
    
    
    1,360
    
    
    
    1,227Cash at end of year
    
    $
    16,638
    
    
    
    106
    
    
    
    1,360
   80




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
 
 Schedule III
 Supplementary Insurance Information
 At December 31,2008
    
    
    2007(In thousands)Deferred policy acquisition cost:Life Insurance
    
    $
    96,106
    
    
    
    90,260Home Service Insurance
    
    
    13,008
    
    
    
    10,395Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated deferred policy acquisition costs:
    
    $
    109,114
    
    
    
    100,655Future policy benefit reserves and policy
claims payable:Life Insurance
    
    $
    377,039
    
    
    
    342,429Home Service Insurance
    
    
    221,367
    
    
    
    201,081Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated future policy benefit reserves
and policy claims payable
    
    $
    598,406
    
    
    
    543,510Unearned premiums:Life Insurance
    
    $
    690
    
    
    
    925Home Service Insurance
    
    
    194
    
    
    
    1,067Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated unearned premiums
    
    $
    884
    
    
    
    1,992Other policy claims and benefits payable:Life Insurance
    
    $
    25,742
    
    
    
    22,897Home Service Insurance
    
    
    4,664
    
    
    
    3,125Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated other policy claims and benefits
payable
    
    $
    30,406
    
    
    
    26,022
   81




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
  
 Schedule IV
 Reinsurance
 % ofCeded to
    
    
    Assumed
    
    
    
    
    
    
    AmountDirect
    
    
    Other
    
    
    From Other
    
    
    
    
    
    
    Assumed to(In thousands)
    
    Amount
    
    
    Companies
    
    
    Companies
    
    
    Net Amount
    
    
    NetYear ended December 31, 2008Life insurance in force
    
    $
    4,322,060
    
    
    
    302,253
    
    
    
    647,041
    
    
    
    4,666,848
    
    
    
    13.9
    %Premiums:Life insurance
    
    
    136,016
    
    
    
    2,522
    
    
    
    1,459
    
    
    
    134,953
    
    
    
    1.1Accident and health insurance
    
    
    9,095
    
    
    
    7,515
    
    
    
    
    
    
    
    1,580Property insurance
    
    
    5,966
    
    
    
    1,202
    
    
    
    
    
    
    
    4,764Total premiums
    
    $
    151,077
    
    
    
    11,239
    
    
    
    1,459
    
    
    
    141,297
    
    
    
    1.0
    %Year ended December 31, 2007Life insurance in force
    
    $
    4,167,513
    
    
    
    273,553
    
    
    
    644,242
    
    
    
    4,538,202
    
    
    
    14.2
    %Premiums:Life insurance
    
    
    130,921
    
    
    
    2,118
    
    
    
    1,462
    
    
    
    130,265
    
    
    
    1.1Accident and health insurance
    
    
    9,720
    
    
    
    8,162
    
    
    
    
    
    
    
    1,558Property insurance
    
    
    5,768
    
    
    
    843
    
    
    
    
    
    
    
    4,925Total premiums
    
    $
    146,409
    
    
    
    11,123
    
    
    
    1,462
    
    
    
    136,748
    
    
    
    1.0
    %Year ended December 31, 2006Life insurance in force
    
    $
    3,971,499
    
    
    
    258,756
    
    
    
    669,787
    
    
    
    4,382,530
    
    
    
    15.3
    %Premiums:Life insurance
    
    
    120,106
    
    
    
    1,844
    
    
    
    1,126
    
    
    
    119,388
    
    
    
    0.9Accident and health insurance
    
    
    10,403
    
    
    
    8,942
    
    
    
    
    
    
    
    1,461Property insurance
    
    
    4,802
    
    
    
    1,025
    
    
    
    
    
    
    
    3,777Total premiums
    
    $
    135,311
    
    
    
    11,811
    
    
    
    1,126
    
    
    
    124,626
    
    
    
    0.9
    %
   82




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##### Table of Contents



SIGNATURES
  CITIZENS, INC.Date: March 13, 2009
    By:
    /s/ Harold E. RileyHarold E. RileyChairman and Chief Executive OfficerBy:
    /s/ Thomas F. KopeticThomas F. KopeticVice President, Chief Financial Officer and Treasurer    /s/ Harold E. Riley
    
    
    
    /s/ Rick D. RileyHarold E. Riley, Chairman of the Board and 
Chief Executive Officer
    
    
    
    Rick D. Riley, Vice Chairman, 
Chief Corporate Officer
and President/s/ Richard C. Scott
    
    
    
    /s/ Robert B. Sloan, Jr.Dr. Richard C. Scott, Director
    
    
    
    Robert B. Sloan, Jr., Director/s/ E. Dean Gage
    
    
    
    /s/ Steven F. SheltonDr. E. Dean Gage, Director
    
    
    
    Steven F. Shelton, Director/s/ Timothy T. Timmerman
    
    
    
    /s/ Grant G. TeaffTimothy T. Timmerman, Director
    
    
    
    Grant G. Teaff, Director/s/ Dottie S. RileyDottie S. Riley, Director
  83




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##### Table of Contents



EXHIBITS
 Exhibit Number
    
    The following exhibits are filed herewith:3.1
    
    Restated and
Amended Articles of Incorporation (a)3.2
    
    Bylaws (b)4.1
    
    Amendment to State Series A-1 and A-2 Senior Convertible Preferred Stock (c)10.1
    
    Self-Administered Automatic Reinsurance Agreement  Citizens Insurance Company of America and Riunione Adriatica di Sicurta, S.p.A. (d)10.2
    
    Bulk Accidental Death Benefit Reinsurance Agreement between Connecticut General Life
Insurance Company and Citizens Insurance Company of America, as amended (e)10.3
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Citizens Insurance Company of America and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Citizens Insurance Company of America, Texas International Life Insurance Company and
Wells Fargo Bank, N.A. (f)10.4
    
    Coinsurance Reinsurance Agreement, Assumption Reinsurance Agreement, Administrative Services
Agreement dated March 9, 2004, between Combined Underwriters Life Insurance Company and Texas
International Life Insurance Company, Reinsurance Trust Agreement dated March 9, 2004, by and
among Combined Underwriters Life Insurance Company, Texas International Life Insurance Company
and Wells Fargo Bank, N.A. (g)10.5(a)
    
    Securities Purchase Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(b)
    
    Registration Rights Agreement dated July 12, 2004 among Citizens, Inc., Mainfield
Enterprises, Inc., Steelhead Investments Ltd., Portside Growth and Opportunity Fund, and
Smithfield Fiduciary LLC (h)10.5(c)
    
    Unit Warrant dated July 12, 2004, to Mainfield Enterprises, Inc. (h)10.5(d)
    
    Unit Warrant dated July 12, 2004, to Steelhead Investments Ltd. (h)10.5(e)
    
    Unit Warrant dated July 12, 2004, to Portside Growth and Opportunity Fund (h)10.5(f)
    
    Unit Warrant dated July 12, 2004, to Smithfield Fiduciary LLC (h)10.5(g)
    
    Warrant to Purchase Class A Common Stock to Mainfield Enterprises, Inc. (h)10.5(h)
    
    Warrant to Purchase Class A Common Stock to Steelhead Investments Ltd. (h)10.5(i)
    
    Warrant to Purchase Class A Common Stock to Portside Growth and Opportunity Fund (h)10.5(j)
    
    Warrant to Purchase Class A Common Stock to Smithfield Fiduciary LLC (h)10.5(k)
    
    Subordination Agreement among Regions Bank, the Purchasers and Citizens, Inc. dated July 12, 2004 (h)10.5(l)
    
    Non-Exclusive Finders Agreement dated September 29, 2003, between Citizens, Inc. and the Shemano Group, Inc. (h)
  84




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##### Table of Contents



Exhibit Number
    
    The following exhibits are filed herewith: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 the Registrant*23
    
    Consent of Independent Registered Public Accounting Firm  Ernst & Young LLP*24
    
    Power of
Attorney (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 on March 31, 1999 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 1998, as Exhibit 3.2, and incorporated herein by reference.(c)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.(d)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, on
November 14, 1996 and incorporated herein by reference.(e)
    
    Filed on April 9, 1997 as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for
the Year Ended December 31, 1996, Amendment No. 1, and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.8 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(g)
    
    Filed on March 22, 2004 as Exhibit 10.9 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(h)
    
    Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrants Current Report on Form
8-K, and incorporated herein by reference.(i)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.(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)
    
    The Power of Attorney is
incorporated in the signature page enclosed herein.  85