##### Table of Contents



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, 2007
 Commission file number 1-13004
 CITIZENS, INC.
 (Exact name of registrant as specified in its charter)
 Colorado
    
    84-0755371(State of incorporation)
    
    (IRS Employer Identification No.)400 East Anderson Lane, Austin, Texas
    
    78752(Address of principal executive offices)
    
    (Zip Code)
 
 Title of each class
    
    Name of each exchange on which registeredClass A Common Stock
    
    New York Stock Exchange
 None
 o þ No
 o þ
 þ o
 þ
  Large accelerated filer
o    
Accelerated filer
þ

Non-accelerated filer  
o(Do not check if a smaller reporting company)
  
  Smaller reporting company o
 o þ
  
 DOCUMENTS INCORPORATED BY REFERENCE




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TABLE
OF CONTENTS
 PagePART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    13Item 1B. Unresolved Staff Comments
    
    
    24Item 2. Properties
    
    
    24Item 3. Legal Proceedings
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities
    
    
    26Item 6. Selected Financial Data
    
    
    27Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operation
    
    
    27Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 8. Financial Statements and Supplementary Data
    
    
    37Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    37Item 9A. Controls and Procedures
    
    
    37Item 9B. Other Information
    
    
    39PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    39Item 11. Executive Compensation
    
    
    39Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    39Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    39Item 14. Principal Accounting Fees and Services
    
    
    39PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    39Consent of Independent Registered Public Accounting Firm - KPMG LLPConsent of Independent Registered Public Accounting Firm - Ernst & Young LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  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
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 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;
 A concentration of business from persons residing in Latin America and the Pacific Rim; and, the
success of the Company at managing the risks involved in the foregoing. Such forward-looking
statements speak only as of the date on which such statements are made, and the Company undertakes
no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which such statement is made to reflect the occurrence of unanticipated events.
 We
make available, free of charge, through our Internet website
(http://www.citizensinc.com), our
Annual Report 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 .
 
 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 2,600 independent marketing consultants;
 2




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    ordinary whole life insurance policies to middle income households in the Midwest and
the southern United States through approximately 600 independent marketing consultants;
and
    
    final expense and limited liability property policies to middle to lower income
households in Louisiana through approximately 300 employee agents in our home service
distribution channel.
     Our Operating Segments
  
    
    Life Insurance;
    
    Home Service Insurance; and
    
    Other Non-insurance Enterprises.
  Life Insurance
  International
  
    
    policies are typically larger face amounts than in our U.S. operations, resulting in
lower underwriting and administrative costs per policy;
 3




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    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, with lifestyles less prone to early death
than the general population, in the top income brackets in their respective countries; and
    
    we do not advance commissions, so we do not have 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
    
    2007
    
    
    2006
    
    
    2005(In thousands)Colombia
    
    $
    24,352
    
    
    
    26.2
    %
    
    $
    22,879
    
    
    
    28.0
    %
    
    $
    20,572
    
    
    
    30.1
    %Taiwan
    
    
    12,567
    
    
    
    13.5
    
    
    
    10,077
    
    
    
    12.3
    
    
    
    7,008
    
    
    
    10.2Venezuela
    
    
    11,631
    
    
    
    12.5
    
    
    
    8,907
    
    
    
    10.9
    
    
    
    7,178
    
    
    
    10.5Ecuador
    
    
    9,641
    
    
    
    10.4
    
    
    
    7,410
    
    
    
    9.1
    
    
    
    5,259
    
    
    
    7.7Argentina
    
    
    9,099
    
    
    
    9.8
    
    
    
    8,975
    
    
    
    11.0
    
    
    
    8,419
    
    
    
    12.3Other Non-U.S.
    
    
    25,525
    
    
    
    27.5
    
    
    
    23,500
    
    
    
    28.7
    
    
    
    20,008
    
    
    
    29.2Total
    
    $
    92,815
    
    
    
    100.0
    %
    
    $
    81,748
    
    
    
    100.0
    %
    
    $
    68,444
    
    
    
    100.0
    %
  Domestic
      Years ended December 31,State
    
    2007
    
    
    2006
    
    
    2005(In thousands)Texas
    
    $
    7,481
    
    
    
    39.8
    %
    
    $
    7,962
    
    
    
    39.6
    %
    
    $
    9,172
    
    
    
    38.6
    %Missouri
    
    
    2,309
    
    
    
    12.3
    
    
    
    2,519
    
    
    
    12.5
    
    
    
    2,648
    
    
    
    11.1Kentucky
    
    
    2,224
    
    
    
    11.8
    
    
    
    2,436
    
    
    
    12.1
    
    
    
    2,936
    
    
    
    12.3Oklahoma
    
    
    2,136
    
    
    
    11.4
    
    
    
    2,363
    
    
    
    11.8
    
    
    
    3,481
    
    
    
    14.6Other States
    
    
    4,635
    
    
    
    24.7
    
    
    
    4,829
    
    
    
    24.0
    
    
    
    5,555
    
    
    
    23.4Total
    
    $
    18,785
    
    
    
    100.0
    %
    
    $
    20,109
    
    
    
    100.0
    %
    
    $
    23,792
    
    
    
    100.0
    %
  5




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Home Service Insurance
     Other Non-Insurance Enterprises
  Our Products
 Life Insurance
 International.
 
    
    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.
 6




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Domestic.
 
    
    cash accumulation/living benefits;
    
    tax-deferred interest earnings;
    
    guaranteed lifetime income at age 65;
    
    monthly income for surviving family members;
    
    accidental death benefit coverage options; and
    
    an option to waive premium payments in the event of disability.
  Home Service Insurance
  Operations and Technology
   7




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Competition
       Investments
  8




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Valuation of Investments in Fixed Maturity and Equity Securities
    9




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  December 31, 2007Carrying Value
    
    
    Percent of Total(In thousands)Fixed maturity securities:U.S.
Government-sponsored corporations and U.S. Government agencies (1)

    $
    292,951
    
    
    
    48.3
    %Mortgage-backed (2)
    
    
    54,718
    
    
    
    9.0Corporate
    
    
    84,051
    
    
    
    13.9Municipal bonds
    
    
    64,639
    
    
    
    10.7Public utilities
    
    
    3,942
    
    
    
    0.6Foreign governments
    
    
    125
    
    
    
    Total fixed maturity securities
    
    
    500,426
    
    
    
    82.5Cash and cash equivalents
    
    
    21,123
    
    
    
    3.5Short-term investments
    
    
    17,650
    
    
    
    2.9Other investments:Policy loans
    
    
    25,490
    
    
    
    4.2Equity securities
    
    
    35,669
    
    
    
    5.9Mortgage loans
    
    
    291
    
    
    
    Real estate and other long-term investments
    
    
    5,770
    
    
    
    1.0Total cash, cash equivalents and investments
    
    $
    606,419
    
    
    
    100.0
    %
 
 (1)
    
    Includes U.S. Treasury securities of $12,991 and U.S. Government-sponsored corporations
of 279,960.(2)
    
    Includes $48,634 of U.S. Government agencies and government-sponsored corporations. December 31, 2007Carrying Value
    
    
    %AAA and U.S. Government
    
    $
    416,647
    
    
    
    83.2
    %AA
    
    
    24,948
    
    
    
    5.0A
    
    
    52,410
    
    
    
    10.5BBB
    
    
    3,625
    
    
    
    0.7BB and other
    
    
    2,796
    
    
    
    0.6Totals
    
    $
    500,426
    
    
    
    100.0
    %
 Reinsurance
  10




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
   Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Direct premiums
    
    $
    150,566
    
    
    
    139,181
    
    
    
    129,570Reinsurance assumed
    
    
    1,462
    
    
    
    1,126
    
    
    
    571Reinsurance ceded
    
    
    (11,123
    )
    
    
    (11,811
    )
    
    
    (13,867
    )Net premiums
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274
   At December 31,2007
    
    
    2006
    
    
    2005(In millions)Direct written life insurance inforce
    
    $
    4,168
    
    
    
    3,971
    
    
    
    3,687Reinsurance assumed
    
    
    644
    
    
    
    670
    
    
    
    593Reinsurance ceded
    
    
    (274
    )
    
    
    (259
    )
    
    
    (222
    )Net life insurance inforce
    
    $
    4,538
    
    
    
    4,382
    
    
    
    4,058
 11




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
    Regulation
     12




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
      
 Item 1A.
    
    Risk Factors
  Risks Relating to Our Business
 A substantial amount of our revenue comes from foreign residents. This involves 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 transfer
restrictions.
    13




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
      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.
  14




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 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.
   We may be required to recognize 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.
  15




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Reinsurers with which we do business could increase their premium rates and may not honor their
obligations, leaving us liable for the reinsured coverage.
      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.
   16




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  
    
    inaccurate assessment of liabilities, contingent liabilities or the adequacy of claims
reserves;
    
    difficulties in realizing projected efficiencies, synergies and cost savings;
    
    failure to achieve anticipated revenues, earnings or cash flow;
    
    an increase in indebtedness and a limitation on our ability to access additional
capital when needed; and
    
    adverse changes in the economies of geographic regions in which the businesses of our
acquisitions are concentrated, due to natural disasters, changing population demographics,
governmental actions and other causes.
  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.
  17




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
    Sales of our products may be reduced if we are unable to establish and maintain commercial
relationships with independent marketing firms and consultants attract and retain employee agents
or 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.
  
    
    licensing companies to transact business;
    
    authorizing lines of business;
    
    mandating capital and surplus requirements;
    
    imposing dividend limitations;
    
    approving changes in control;
    
    licensing agents and distributors of insurance products;
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    placing limitations on the minimum size and certain other provisions of life insurance
contracts;
    
    restricting companies ability to enter and exit markets;
    
    admitting statutory assets;
    
    mandating certain insurance benefits;
    
    restricting companies ability to terminate or cancel coverage;
    
    requiring companies to provide certain types of coverage;
    
    regulating premium rates, including the ability to increase premium rates;
    
    approving policy forms;
    
    regulating trade and claims practices;
    
    imposing privacy requirements;
    
    establishing reserve requirements and solvency standards;
    
    restricting certain transactions between affiliates;
    
    mandating assessments or other surcharges for guaranty funds;
    
    regulating market conduct and sales practices of insurers and their marketing agents;
and
    
    restricting contact with consumers, such as the recently created national do not call
list, and imposing consumer protection measures.
   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.
   
    
    inadequate information on which to base pricing, underwriting and reserve decisions;
 19




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    the loss of existing customers;
    
    difficulty in attracting new customers;
    
    disputes with customers and our independent marketing firms, consultants and employee
agents;
    
    regulatory problems, such as failure to meet prompt payment obligations;
    
    litigation exposure; and
    
    increases in administrative expenses.
  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 identify, 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.
  
    
    monitoring our record retention plans and policies and any changes in state or federal
privacy and compliance requirements;
    
    maintaining secure storage facilities for tangible records; and
    
    limiting access to electronic information in order to safeguard certain current
information.
   The insurance industry in which we operate may be subject to periodic negative publicity, which may
negatively impact our financial results.
  20




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  General economic, financial market and political conditions may materially and adversely affect our
results of operations and financial condition.
  
    
    insurance industry cycles;
    
    levels of employment;
    
    levels of consumer spending;
    
    levels of inflation;
    
    movements of the financial markets,
    
    fluctuations in interest rates, monetary policy, demographics; and
    
    legislative and competitive changes.
  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.
    21




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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.
  
    
    quarterly variations in actual or anticipated results of our operations;
    
    interest rate fluctuations;
    
    changes in financial estimates by securities analysts;
    
    valuations of similarly situated companies in our industry;
    
    our failure to meet the expectations of securities analysts and investors;
    
    actions or announcements by our competitors;
    
    competition and other factors affecting the life insurance business generally; and
    
    conditions in the U.S. and world economies.
 Our class A common stockholders 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 stockholders 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 stockholders.
  22




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  We have never paid any cash dividends on our class A common stock and do not anticipate doing so in
the foreseeable future.
  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.
   
    
    the average closing price of the stock is in excess of $3.50 per share for a period of
ten consecutive trading days prior to (but not including) the date that is three trading
days prior to the date of redemption;
    
    the stock is listed on NYSE or other eligible market; and
    
    the stock to be issued is registered under a registration statement effective with the
SEC.
   23




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Provisions applicable to our series A preferred stock may make it more difficult or prevent us from
raising funds or taking certain other actions.
   
 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
  24




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Connie
Abadie, et al v. Aegis Security Insurance Co., et al., Connie Abadie Connie Abadie In Re: Katrina Canal Breaches Consolidated Litigation
  The State of Louisiana v. AAA Insurance
 Cheneau
 Cheneau
  25




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
   
    
    disputes over insurance coverage or claims adjudication;
    
    regulatory compliance with insurance and securities laws in the United States and in
foreign countries;
    
    disputes with our marketing firms, consultants and employee agents over compensation
and termination of contracts and related claims;
    
    disputes regarding our tax liabilities;
    
    disputes relative to reinsurance and coinsurance agreements; and
    
    disputes relating to businesses acquired and operated by us.
  
 Item 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
 
   Securities Authorized for Issuance Under Equity Compensation Plans
  26




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Item 6. Selected Financial Data
  Years ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands, except per share data)Total Revenues
    
    $
    173,794
    
    
    
    158,059
    
    
    
    142,113
    
    
    
    99,859
    
    
    
    92,060Net Income
    
    
    16,557
    
    
    
    8,677
    
    
    
    7,302
    
    
    
    7,732
    
    
    
    3,126Basic and Diluted Earnings
Per
Class A Share
    
    
    0.35
    
    
    
    0.16
    
    
    
    0.13
    
    
    
    0.17
    
    
    
    0.08Total Assets at December 31
    
    
    787,909
    
    
    
    711,184
    
    
    
    661,889
    
    
    
    661,212
    
    
    
    390,093Long-term Debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    Total Liabilities
    
    
    597,532
    
    
    
    558,690
    
    
    
    513,380
    
    
    
    520,179
    
    
    
    263,066Total Stockholders Equity
    
    
    176,157
    
    
    
    139,611
    
    
    
    136,963
    
    
    
    135,131
    
    
    
    127,027Book Value Per Share
    
    
    4.00
    
    
    
    3.38
    
    
    
    3.33
    
    
    
    3.29
    
    
    
    3.10
  
 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 2,600 independent marketing consultants;
    
    ordinary whole life insurance policies to middle income households in the Midwest and
the southern United States through approximately 600 independent marketing consultants;
and
    
    final expense and limited liability property policies to middle to lower income
households in Louisiana through approximately 300 employee agents in our home service
distribution channel.
  Life Insurance.
 27




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
       Home Service Insurance.
    28




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Marketplace Conditions and Trends
  
    
    As an increasing percentage of the world population reaches retirement age, we
believe we will benefit from increased demand for living products rather than death
products, as aging baby boomers will require cash accumulation to provide expenses to
meet their lifetime needs. Our ordinary life products are designed 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 market conditions as
well as the credit crisis and corresponding potential changes in the fair value of our
investments. In the normal course of business, we employ established policies and
procedures to manage our exposure to fluctuations in the current market and changes in
the fair value of our investments. We have not experienced any impairments in the
value of our securities due to the current credit crisis in world financial markets.
We have no subprime or collateralized debt investments.
    
    The volatility in the equity markets over the past few years has posed a number of
problems for some companies in the life insurance industry. We historically have had
minimal equity holdings, constituting less than 7% of total invested assets as of
December 31, 2007 and less than 1% at December 31, 2006.
    
    Corporate bond defaults and credit downgrades, which have resulted in
other-than-temporary impairments in the value of some securities, have had a material
impact on life insurers in the past few years. We have not incurred significant
losses from bond defaults for many years. The majority of our investment portfolio is
held in debt instruments carrying the full faith and credit of the U.S. Government, or
in U.S. Government-sponsored enterprises. Most of the municipal bonds we own are
privately insured. We intend to manage our investment portfolio conservatively in the
future in these type of debt instruments.
    
    Because of the trends described above coupled with increasing costs of regulatory
compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards
consolidation of domestic life insurance companies. We believe this should be a
benefit to our acquisition strategy because there should be more complementary
acquisition candidates available for us to consider.
    
    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.
 Significant Transactions
  29




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated Results of Operations
  Years ended
    
    Net Income
    
    Net Income per
    
    Increase (decrease)December 31,
    
    (In thousands)
    
    Class A Share
    
    from Previous Year2007
    
    $
    16,557
    
    
    $
    0.35
    
    
    
    90.8
    %2006
    
    
    8,677
    
    
    
    0.16
    
    
    
    18.82005
    
    
    7,302
    
    
    
    0.13
    
    
    
    (5.6
    )
   Premium Income
 Net Investment Income
 Reserves
 Policyholder Dividends
 Claims and Surrenders
 30




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Death claims
    
    $
    20,720
    
    
    
    21,686
    
    
    
    22,404Surrender expenses
    
    
    17,989
    
    
    
    17,205
    
    
    
    15,369Endowments
    
    
    12,835
    
    
    
    10,786
    
    
    
    9,021Property claims
    
    
    1,090
    
    
    
    5,194
    
    
    
    3,685Other policy benefits
    
    
    1,783
    
    
    
    849
    
    
    
    780Accident and health benefits
    
    
    311
    
    
    
    541
    
    
    
    446Total claims and surrenders
    
    $
    54,728
    
    
    
    56,261
    
    
    
    51,705
     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
 31




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
  Cost of Customer Relationships Acquired and Other Intangibles
  Federal Income Tax
 Liquidity and Capital Resources
    32




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
           33




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Parent
Company Liquidity and Capital Resources
  Critical Accounting Policies
  Policy Liabilities
    Deferred Policy Acquisition Costs
    34




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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
 Valuation of Investments in Fixed Maturity and Equity
Securities
   35




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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)100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis PointsDecember 31,2007
    
    $
    18,594
    
    
    
    29,582
    
    
    
    42,8122006
    
    $
    20,429
    
    
    
    36,129
    
    
    
    55,312
 Increases in Interest Rates(In thousands)100 Basis Points
    
    
    200 Basis Points
    
    
    300 Basis PointsDecember 31,2007
    
    $
    (22,821
    )
    
    
    (51,006
    )
    
    
    (79,768
    )2006
    
    $
    (32,305
    )
    
    
    (59,302
    )
    
    
    (92,949
    )
   Market Risk Related to Equity Prices
  36




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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
  
    
    Hired a new Vice President of Accounting, with significant statutory accounting and
U.S. GAAP experience;
 37




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
    
    Hired a new Chief Actuary with a background in U.S. GAAP financial
reporting;
    
    Ensured that all of our financial statement closing process journal entries for each

of
our subsidiaries have been recorded in their general ledgers (previously, many such
entries were in Excel only);
    
    Created the position of Vice President of Financial Reporting, committing resources
to
enable the timely review of supporting work papers for prior and current accounting
periods and to prevent and detect misapplications of U.S. GAAP;
    
    Strengthened accounting work paper review by senior members of management, including
our VP Financial Reporting and CFO, to ensure completeness and accuracy of supporting work
papers and schedules, including formalized sign-off processes;
    
    Implemented additional layers of review at greater levels of precision over our
financial statement close process; and
    
    Strengthened our preparation and review of annual accounting and year-end disclose
analysis.
  (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
       38




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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 Report
  (b)
    
    (3) Exhibits  See the Exhibit Index
 Index to Consolidated Financial Statements and Financial
Statement Schedules
 PageReferenceReports of independent registered public accounting
firms
    
    
    40Consolidated statements of financial position at
December 31, 2007 and 2006
    
    
    42Consolidated statements of operations
- years ended December 31, 2007, 2006 and 2005
    
    
    44Consolidated statements of stockholders equity
and comprehensive
income  years ended December 31, 2007, 2006 and 2005
    
    
    45Consolidated statements of cash flows
- years ended December 31, 2007, 2006 and 2005
    
    
    47Notes to consolidated financial
statements
    
    
    49Schedules at December 31, 2007 and 2006:Schedule II  Condensed
Financial
    
    
    82Information of RegistrantSchedules for each of the years in the three-year
period ended December 31, 2007:Schedule III  Supplementary Insurance
Information
    
    
    85Schedule IV  Reinsurance
    
    
    87
  39




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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
  
 40




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Report of Independent Registered Public Accounting Firm
 
     
 41




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Financial Position
December 31, 2007 and 2006
(In thousands)
 2007
    
    
    2006AssetsInvestments:Fixed maturities available-for-sale, at fair value
(cost: $502, 635 and $497,939 in 2007 and 2006, respectively)
    
    $
    500,426
    
    
    
    488,318Equity securities available-for-sale, at fair value
(cost: $36,696 and $279 in 2007 and 2006, respectively)
    
    
    35,669
    
    
    
    312Mortgage loans on real estate
    
    
    291
    
    
    
    456Policy loans
    
    
    25,490
    
    
    
    23,542Real estate held for investment (less $249 and $206 accumulated
depreciation in 2007 and 2006, respectively
    
    
    5,152
    
    
    
    1,341Other long-term investments
    
    
    618
    
    
    
    1,086Short-term investments
    
    
    17,650
    
    
    
    Total investments
    
    
    585,296
    
    
    
    515,055Cash and cash equivalents
    
    
    21,123
    
    
    
    24,521Accrued investment income
    
    
    7,115
    
    
    
    7,107Reinsurance recoverable
    
    
    13,492
    
    
    
    16,044Deferred policy acquisition costs
    
    
    100,655
    
    
    
    86,975Cost of customer relationships acquired
    
    
    31,636
    
    
    
    34,812Goodwill
    
    
    11,386
    
    
    
    11,386Other intangible assets
    
    
    1,066
    
    
    
    1,093Federal income tax receivable
    
    
    715
    
    
    
    Property and equipment, net
    
    
    6,795
    
    
    
    7,350Due premiums, net
(less $1,780 and $1,440 allowance for doubtful accounts in 2007
and 2006, respectively)
    
    
    7,656
    
    
    
    6,078Other assets
    
    
    974
    
    
    
    763Total assets
    
    $
    787,909
    
    
    
    711,184
  42




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Financial Position, Continued
December 31, 2007 and 2006
(In thousands)
 2007
    
    
    2006Liabilities and Stockholders
EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    508,209
    
    
    
    473,355Annuities
    
    
    22,792
    
    
    
    20,761Accident and health
    
    
    8,293
    
    
    
    10,604Dividend accumulations
    
    
    4,825
    
    
    
    5,027Premium deposits
    
    
    14,148
    
    
    
    11,897Policy claims payable
    
    
    6,908
    
    
    
    9,448Unearned premiums
    
    
    1,992
    
    
    
    1,812Other policyholders funds
    
    
    4,357
    
    
    
    3,771Total policy liabilities
    
    
    571,524
    
    
    
    536,675Commissions payable
    
    
    2,385
    
    
    
    2,581Federal income tax payable
    
    
    
    
    
    
    2,031Deferred Federal and state income taxes
    
    
    4,810
    
    
    
    1,498Payable for securities in process of settlement
    
    
    7,000
    
    
    
    Warrants outstanding
    
    
    1,003
    
    
    
    1,831Other liabilities and funds held for others
    
    
    10,810
    
    
    
    14,074Total liabilities
    
    
    597,532
    
    
    
    558,690Commitments and contingencies (Notes 5 and 8)Cumulative convertible preferred stock 
Series A(Series A-1 - $500 stated value per share, 25,000 shares
issued, authorized and outstanding in 2007 and
2006; Series A-2 - $935 stated value per share, 5,000 shares authorized, 4,014 shares issued and
outstanding in 2007 and 2006)
    
    
    14,220
    
    
    
    12,883Stockholders equity:Common stock:Class A,
no par value, 100,000,000 shares authorized,
46,205,830 shares issued in 2007 and 43,425,524 shares
issued in 2006, including shares in treasury of
3,135,738 in 2007 and 2006
    
    
    225,812
    
    
    
    210,066Class B, no
par value, 2,000,000 shares authorized,
1,001,714 shares issued and outstanding in 2007 and 2006
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (39,725
    )
    
    
    (56,282
    )Accumulated other comprehensive loss:Unrealized losses on securities, net of tax
    
    
    (2,103
    )
    
    
    (6,346
    )187,168
    
    
    
    150,622Treasury stock, at cost
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    176,157
    
    
    
    139,611Total liabilities and stockholders equity
    
    $
    787,909
    
    
    
    711,184
  43




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005
(In thousands)
 2007
    
    
    2006
    
    
    2005Revenues:Premiums:Life insurance
    
    $
    134,422
    
    
    
    123,258
    
    
    
    111,087Accident and health insurance
    
    
    1,558
    
    
    
    1,461
    
    
    
    1,560Property insurance
    
    
    4,925
    
    
    
    3,777
    
    
    
    3,627Net investment income
    
    
    30,743
    
    
    
    26,975
    
    
    
    23,568Realized gains (losses), net
    
    
    (94
    )
    
    
    1,286
    
    
    
    419Decrease (increase) in fair value of warrants
    
    
    828
    
    
    
    (244
    )
    
    
    489Other income
    
    
    1,412
    
    
    
    1,546
    
    
    
    1,363Total revenues
    
    
    173,794
    
    
    
    158,059
    
    
    
    142,113Benefits and expenses:Insurance benefits paid or provided:Claims and surrenders
    
    
    54,728
    
    
    
    56,261
    
    
    
    51,705Increase in future policy benefit reserves
    
    
    36,420
    
    
    
    30,719
    
    
    
    23,603Policyholders dividends
    
    
    6,401
    
    
    
    5,384
    
    
    
    4,789Total insurance benefits paid or provided
    
    
    97,549
    
    
    
    92,364
    
    
    
    80,097Commissions
    
    
    35,641
    
    
    
    35,691
    
    
    
    32,985Other underwriting, acquisition and insurance
expenses
    
    
    27,583
    
    
    
    27,607
    
    
    
    25,429Capitalization of deferred policy acquisition costs
    
    
    (26,210
    )
    
    
    (26,986
    )
    
    
    (24,388
    )Amortization of deferred policy acquisition costs
    
    
    12,530
    
    
    
    11,391
    
    
    
    10,313Amortization of cost of customer relationships
acquired and other intangibles
    
    
    3,203
    
    
    
    4,650
    
    
    
    5,881Total benefits and expenses
    
    
    150,296
    
    
    
    144,717
    
    
    
    130,317Income before income tax expense
    
    
    23,498
    
    
    
    13,342
    
    
    
    11,796Income tax expense
    
    
    6,941
    
    
    
    4,665
    
    
    
    4,494Net income
    
    $
    16,557
    
    
    
    8,677
    
    
    
    7,302Net income applicable to common stockholders
    
    $
    14,555
    
    
    
    6,654
    
    
    
    5,326Per Share AmountsBasic and diluted earnings per share of
Class A common stock
    
    $
    0.35
    
    
    
    0.16
    
    
    
    0.13Basic and diluted earnings per share of
Class B common stock
    
    $
    0.18
    
    
    
    0.08
    
    
    
    0.07
  44




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Consolidated Statements of Stockholders Equity and Comprehensive
Income
Years ended December 31, 2007, 2006 and 2005
(In thousands)
 Accumulatedother
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    StockholdersClass A
    
    
    Class B
    
    
    deficit
    
    
    loss
    
    
    stock
    
    
    equityBalance at December 31, 2004
    
    $
    197,338
    
    
    
    2,827
    
    
    
    (54,392
    )
    
    
    (749
    )
    
    
    (9,893
    )
    
    
    135,131Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    7,302
    
    
    
    
    
    
    
    
    
    
    
    7,302Unrealized investment losses, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,052
    )
    
    
    
    
    
    
    (4,052
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    7,302
    
    
    
    (4,052
    )
    
    
    
    
    
    
    3,250Accretion of deferred issuance costs and
discounts on preferred stock
    
    
    (1,418
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,418
    )Stock dividend
    
    
    15,483
    
    
    
    357
    
    
    
    (14,722
    )
    
    
    
    
    
    
    (1,118
    )
    
    
    Balance at December 31, 2005
    
    
    211,403
    
    
    
    3,184
    
    
    
    (61,812
    )
    
    
    (4,801
    )
    
    
    (11,011
    )
    
    
    136,963Cummulative effect of adopting SEC StaffAccounting 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
    )Common stock dividend on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    
    176,157
  45




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Income,
Continued
Years ended December 31, 2007, 2006 and 2005
(In thousands)
  Common Stock
    
    
    TreasuryClass A
    
    
    Class B
    
    
    StockBalance at December 31, 2004
    
    
    40,364
    
    
    
    936
    
    
    
    (2,931
    )Stock dividends
    
    
    2,937
    
    
    
    66
    
    
    
    (205
    )Balance 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
    )
  46




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005
(In thousands)
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    16,557
    
    
    
    8,677
    
    
    
    7,302Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses (gains) on sale of investments and other
assets
    
    
    94
    
    
    
    (1,286
    )
    
    
    (419
    )Net deferred policy acquisition costs
    
    
    (13,680
    )
    
    
    (16,565
    )
    
    
    (14,075
    )Amortization of cost of customer relationships
acquired and other intangibles
    
    
    3,203
    
    
    
    4,650
    
    
    
    5,881Increase (decrease) in fair value of warrants
    
    
    (828
    )
    
    
    244
    
    
    
    (489
    )Depreciation
    
    
    1,076
    
    
    
    1,297
    
    
    
    897Amortization of premiums and discounts on
fixed maturities
    
    
    1,243
    
    
    
    1,467
    
    
    
    1,154Deferred federal income tax expense
    
    
    1,202
    
    
    
    829
    
    
    
    2,903Change in:Accrued investment income
    
    
    (8
    )
    
    
    (644
    )
    
    
    (364
    )Reinsurance recoverable
    
    
    2,552
    
    
    
    3,452
    
    
    
    (1,311
    )Due premiums and other receivables
    
    
    (1,702
    )
    
    
    (1,089
    )
    
    
    Future policy benefit reserves
    
    
    34,132
    
    
    
    31,741
    
    
    
    23,003Other policy liabilities
    
    
    275
    
    
    
    (46
    )
    
    
    4,867Federal income tax
    
    
    (2,746
    )
    
    
    1,330
    
    
    
    (859
    )Commissions payable and other liabilities
    
    
    (3,367
    )
    
    
    4,854
    
    
    
    2,469Other, net
    
    
    (86
    )
    
    
    166
    
    
    
    3,547Net cash provided by operating activities
    
    
    37,917
    
    
    
    39,077
    
    
    
    34,506Cash flows from investing activities:Sale of fixed maturities, held-to-maturity
    
    
    
    
    
    
    2,472
    
    
    
    Sale of fixed maturities, available-for-sale
    
    
    3,844
    
    
    
    14,006
    
    
    
    14,569Maturity of fixed maturities, available-for-sale
    
    
    75,939
    
    
    
    57,473
    
    
    
    93,746Purchase of fixed maturities, available-for-sale
    
    
    (78,845
    )
    
    
    (107,080
    )
    
    
    (132,557
    )Sale of equity securities, available-for-sale
    
    
    248
    
    
    
    334
    
    
    
    616Purchase of equity securities available-for-sale
    
    
    (36,666
    )
    
    
    
    
    
    
    Principal payments on mortgage loans
    
    
    165
    
    
    
    201
    
    
    
    89Mortgage loans funded
    
    
    
    
    
    
    
    
    
    
    (100
    )Sale of other long-term investments and property
and equipment
    
    
    428
    
    
    
    264
    
    
    
    686Principal payments on note receivable
    
    
    2
    
    
    
    475
    
    
    
    396
  47




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 Consolidated
Statements of Cash Flows, Continued
Years ended December 31, 2007, 2006 and 2005
(In thousands)
 2007
    
    
    2006
    
    
    2005Decrease (increase) in policy loans, net
    
    $
    (1,948
    )
    
    
    (428
    )
    
    
    398Purchase of other long-term investments and property
and equipment
    
    
    (4,357
    )
    
    
    (1,277
    )
    
    
    (432
    )Purchase of short-term investments
    
    
    (17,650
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (58,840
    )
    
    
    (33,560
    )
    
    
    (22,589
    )Cash flows from financing activities:Proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    3,751Payment of convertible preferred stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (187
    )Proceeds from sale of Class A common stock
    
    
    17,083
    
    
    
    
    
    
    
    Payoff of note payable
    
    
    
    
    
    
    
    
    
    
    (30,000
    )Annuity and universal life deposits
    
    
    2,279
    
    
    
    2,520
    
    
    
    3,021Annuity and universal life withdrawals
    
    
    (1,837
    )
    
    
    (1,827
    )
    
    
    (1,912
    )Net cash provided by (used in) financing activities
    
    
    17,525
    
    
    
    693
    
    
    
    (25,327
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,398
    )
    
    
    6,210
    
    
    
    (13,410
    )Cash, and cash equivalents at beginning of year
    
    
    24,521
    
    
    
    18,311
    
    
    
    31,721Cash, and cash equivalents at end of year
    
    $
    21,123
    
    
    
    24,521
    
    
    
    18,311Supplemental Disclosure of Operating ActivitiesCash paid during the year for:Interest
    
    $
    
    
    
    
    
    
    
    
    695Income taxes
    
    $
    8,476
    
    
    
    2,506
    
    
    
    2,450
 Supplemental disclosures of non-cash investing and
financing activities:
    48




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
 (1)
    
    Summary of Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts and operations of Citizens,
Inc. (Citizens), incorporated in the state of Colorado on November 8, 1977, and its
wholly-owned subsidiaries, CICA Life Insurance Company of America (CICA), Computing
Technology, Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors, Inc.
(III), Citizens National Life Insurance Company (CNLIC), Security Plan Life Insurance
Company (SPLIC), and Security Plan Fire Insurance Company (SPFIC). 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.Citizens provides life and health insurance policies through three of its subsidiaries -
CICA, SPLIC and CNLIC. 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.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. Fixed maturities that may be sold prior to maturity to
support the Companys 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. This 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 for securities classified as
available-for-sale 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
$9,607,000 and $6,571,000 at December 31, 2007 and 2006, respectively, on deposit with
various state regulatory authorities to fulfill statutory requirements.Short-term investments 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.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (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 (FAS) 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 discussed in Note
1(p) below.Premiums on life policies are recognized as earned when due. Due premium on the balance
sheet are net of allowances of $1,780,000 in 2007 and $1,440,000 in 2006. 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 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 deferred policy acquisition costs (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 than the previous assumptions presumed. Consequently, management lowered the
DAC mortality assumption beginning in 2006, as compared to previous years. Additionally,
management changed the DAC persistency assumption beginning in 2006 compared to previous
years, due to greater geographic diversity of our business. 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 2007,
2006 and 2005. The CCRA assumptions did not change in 2007 because assumptions are
locked in at purchase unless a premium deficiency exists. In the third quarter of 2005,
the Company amortized approximately $2.3 million of CCRA in the Home Service segment
because of the expected decrease in collected premiums due to Hurricanes Katrina and
Rita. Due to the lower life insurance in force amount as reflected in the 2005 write
down, the Company adopted a new amortization table dated effective January 1, 2006. The
revised amortization table reflects a change in the amount of life insurance in force and
not a change in key assumptions.Due to the reasons mentioned
above, the DAC mortality assumption for 2006 and later policy issues was adjusted
downward by updating the mortality tables to better reflect improved
longevity. However, persistency is the more critical assumption as
most policies will lapse before the policyholder dies. Management has
seen an improvement in persistency and has amended the DAC
persistency assumption for 2006 and later policy issues to better
reflect the actual experience from 1996 to 2005. These changes assume
higher persistency through policy year four compared to 2005 but a
lower persistency for policy years five and beyond. The consequence
of this action was a shift in the amortization of DAC with the net
effect being lower amortization in the earlier years. Thus,
amortization occurs later in the policy life under the new
assumptions.A new GAAP era was created in 2006 for new CICA policies issued to reflect the better
mortality and persistency experienced in the last few years. As a result of using this
new GAAP era, DAC amortization was approximately $800,000 lower in 2006, as compared to
the amount that would have been calculated using the previous GAAP era. There were no
changes in assumptions or new GAAP eras created in 2007.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 The significant majority of the life insurance written by the Company is traditional
whole life business. As such, the Company operates under the guidance of FAS 60. In
accordance with FAS 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 FAS 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, the Companys DAC
assumptions also include a provision for adverse deviation, are set at the time of policy
issue, and are locked in for the life of the policy unless management concludes that DAC
is not recoverable.  In such circumstances, DAC 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, the Company uses reasonably likely deviations from its 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
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 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.Deferred policy acquisition costs 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 the Companys 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%. In 2005 the Company recorded additional amortization of $2.3 million
related to the Louisiana hurricanes. In conjunction with this loss recognition,
management revised the Companys amortization methodology to (a) reduce its projection of
future collected premiums by approximately 4% and (b) to amortize the acquired paid up
block over in force balances, which resulted in a $400,000 decrease in amortization
expense in 2006. As a result, for premium-paying policies, the CCRA is being amortized
over the anticipated premium paying period of the related policies. For paid-up
policies, amortization is based on the change in in-force balances. Prior to 2006,
amortization for premium paying and paid-up policies was amortized over the anticipated
premium paying period of the premium paying policies.(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 the Companys and industry experience,
which provide for possible unfavorable deviation.A new GAAP era was created in 2006 for new CICA policies issued to reflect the
better mortality and persistency experienced in the last few years. As a result of using
this new GAAP era, reserves were approximately $400,000 lower in 2006, as compared to the
amount that would have been calculated using the previous GAAP era. The new GAAP era only
affected policies issued beginning in 2006. This prospective change is consistent with
FAS 60 guidance. Annuity benefits are carried at accumulated contract values based on
consideration paid by participants and annuity rates of return ranging from 3.0% to 7.5%.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
devastated the Gulf Coast. The Company suffered losses of $3.7 million in excess of its
reinsurance coverage related to this storm. At the end of 2006, the Company was still
receiving claims related to Katrina. As a result, loss reserves were increased by
$500,000 in anticipation of newly reported or adjusted claims. In 2007, the Company
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
it was determined that no losses were payable on these policies due to the expiration of
the August 29, 2007 filing deadline for claims.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 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
the deposit account.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.(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. Other intangible assets include various
state insurance licenses, which have been determined to have an 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 2005 or
2007.(h)
    
    Participating PoliciesAt December 31, 2007 and 2006, participating business approximated 57.6% and 56.4%,
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 contract. The average rate of investment yields used
in the determination of expected gross margin was 6.0% in 2007, 2006 and 2005. Earnings
and dividends on participating policies are allocated based on policies in force.Policyholder dividends are determined based on the discretion of the Companys Board of
Directors. Policyholder dividends are accrued over the premium paying periods of the
insurance contract.(i)
    
    Earnings Per ShareBasic earnings per share is 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 is 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 2005 stock dividend resulted in the issuance of 2,841,000 Class A shares (including
205,000 treasury shares) and 66,000 Class B shares.On December 4, 2007, the Company sold approximately 2.7 million shares of 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, 2007, 2006 and 2005
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Basic and diluted earnings per share:Numerator:Net income
    
    $
    16,557
    
    
    
    8,677
    
    
    
    7,302Less: Preferred stock dividends
    
    
    (665
    )
    
    
    (686
    )
    
    
    (558
    )Accretion of deferred issuance costs
and discounts on preferred stock
    
    
    (1,337
    )
    
    
    (1,337
    )
    
    
    (1,418
    )Net income available to common stockholders
    
    $
    14,555
    
    
    
    6,654
    
    
    
    5,326Net income allocated to Class A common stock
    
    $
    14,377
    
    
    
    6,572
    
    
    
    5,260Net income allocated to Class B common stock
    
    
    178
    
    
    
    82
    
    
    
    66Net income available to common stockholders
    
    $
    14,555
    
    
    
    6,654
    
    
    
    5,326Denominator:Weighted average shares of Class A
outstanding  basic
    
    
    40,519
    
    
    
    40,216
    
    
    
    40,103Weighted average shares of Class B
outstanding  basic and diluted
    
    
    1,002
    
    
    
    1,002
    
    
    
    1,002Total weighted average shares
outstanding  basic
    
    
    41,521
    
    
    
    41,218
    
    
    
    41,105Basic and diluted earnings per share of
Class A common stock
    
    $
    0.35
    
    
    
    0.16
    
    
    
    0.13Basic and diluted earnings per share of
Class B common stock
    
    $
    0.18
    
    
    
    0.08
    
    
    
    0.07
 In 2007, certain of the warrants on the Convertible Preferred Stock became dilutive. As
such, the diluted weighted average shares of Class A stock outstanding for 2007 was
40,574,000. Total diluted weighted average shares was 41,576,000. Diluted earnings per
Class A share is unchanged from basic earnings per share at $0.35. The basic and diluted
weighted average shares outstanding for the year ended December 31, 2006 were 41,218,000,
and were 41,105,000 for the year ended December 31, 2005.The Series A-1 and A-2 Convertible Preferred Stock is anti-dilutive because the amount of
the dividend and accretion of deferred issuance costs and discounts for the years ended
December 31, 2007, 2006 and 2005 per Class A common stock share obtainable on conversion
exceeds basic income per share available to common stockholders. The warrants were
anti-dilutive in 2006 and 2005 because the exercise price was in excess of the average
Class A common stock market price for those years.(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 the Company expects to
realize.
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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (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 31,2007
    
    
    2006(In thousands)Property and equipmentHome office land and buildings
    
    $
    6,475
    
    
    
    6,754Furniture and equipment
    
    
    1,719
    
    
    
    1,773Electronic data processing equipment
    
    
    3,732
    
    
    
    4,036Automobiles and marine assets
    
    
    445
    
    
    
    394Airplane
    
    
    3,282
    
    
    
    3,166Total property and equipment
    
    
    15,653
    
    
    
    16,123Accumulated depreciation
    
    
    (8,858
    )
    
    
    (8,773
    )Net property and equipment
    
    $
    6,795
    
    
    
    7,350
 (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.(n)
    
    DepreciationDepreciation 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.
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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (p)
    
    Accounting PronouncementsIn September 2005, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts
(SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a
modification in product benefits, features, rights, or coverages that occurs by the
exchange of a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. Under SOP 05-1,
modifications that result in a substantially unchanged contract will be accounted for as
a continuation of the replaced contract. A replacement contract that is substantially
changed will be accounted for as an extinguishment of the replaced contract resulting in
a release of unamortized deferred acquisition costs and unearned inducements associated
with the replaced contract. SOP 05-1 was implemented in the first quarter of 2007.
Later clarification from the AICPA on SOP 05-1 implementation addressed reinstatements of
previously lapsed policies. The unamortized DAC of lapsed policies should be written off
per the clarification. The Company had previously restored the DAC on lapsed policies
that were subsequently reinstated. SOP 05-1 is only applied prospectively for
reinstatements occurring in quarters beginning after December 31, 2006. The effect of
adopting SOP 05-01 has been to increase DAC amortization by $917,000 over what it would
have otherwise been.In September 2006, the FASB issued FAS No. 157, Fair Value Measurements(FAS 157). FAS
157 defines fair value, establishes a framework for measuring fair value in GAAP and
requires enhanced disclosures about fair value measurements. However, FAS 157 does not
require new fair value measurements. The guidance in FAS 157 will be applied
prospectively with the exception of certain financial and hybrid instruments measured at
initial recognition under FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,and for block discounts of financial instruments. Additionally, FAS 157 will
increase the disclosures required. The pronouncement is effective for fiscal years
beginning after November 15, 2007. The statement will not have a significant effect on
the Companys consolidated financial statements, but could result in additional
disclosures.In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities(FAS 159). FAS 159 permits the option to measure most
financial instruments and certain other items at fair value at specified election dates.
The change in value represents the unrealized gains and losses that will be included in
earnings. The fair value option will generally be applied on an instrument-by-instrument
basis and is generally an irrevocable election. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company will not elect the fair value option for
any of its financial assets or liabilities.On July 13, 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes  an interpretation of FASB Statement No. 109(FIN 48), which clarifies
the accounting for uncertainty in income tax positions. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, and additional disclosures. The effective date of this
implementation guidance was January 1, 2007, with the cumulative effect of the change in
accounting principles recorded as an adjustment to opening retained earnings. The
implementation of FIN 48 had no effect on the Companys consolidated financial
statements, as the Company has no significant uncertain tax positions.On September 13, 2006, the SEC released SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
The issuance provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a current year
misstatement. There are two common approaches used to quantify such errors. Under the
first approach, the rollover approach, the error(s) are quantified as the amount by which
the current year income statement is misstated. The second approach, the iron curtain
approach, quantifies the error as the cumulative amount by which the current year balance
sheet is misstated. Exclusive reliance on either approach can produce results that are
still misleading. This is possible by either accumulating errors on the balance sheet
that may not have been material to any individual income statement, but which nonetheless
may misstate one or more balance sheet accounts or by disregarding the effects of errors
in the current year income statement that result from the correction of an error existing
in previously issued financial statements.
 55




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 SAB 108 requires companies to quantify the impact of correcting all misstatements,
including both the carryover and
reversing effects of prior year misstatements, on the current year financial statements.
This quantification is performed using both a balance sheet and an income statement
approach, and errors are to be evaluated under each approach. Thus, a companys
financial statements would require adjustment when either approach results in quantifying
a material misstatement after considering all relevant quantitative and qualitative
factors.The Company adopted SAB 108 effective January 1, 2006. As such, the Company evaluated
the balance sheet and prior period income statements to determine if any material
misstatements had occurred. The Company identified misstatements in several balance
sheet accounts, but determined that no errors were material to any prior year; therefore,
prior year financial statements were not amended. The Companys SAB 108 adjustment
increased the retained deficit by $3.1 million at January 1, 2006.The adoption was done through a cumulative adjustment comprised of several error
corrections, as shown below:
 AMOUNT
    
    
    NOTE(In thousands)Errors corrected in 1-1-2006 cumulative adjustmentStatutory to GAAP accounting technique misstatements
    
    $
    (2,633
    )
    
    
    ADue premium
    
    
    955
    
    
    
    BSPLIC purchase accounting
    
    
    (266
    )
    
    
    CSPLIC negative reserves
    
    
    (544
    )
    
    
    COther intangibles
    
    
    (952
    )
    
    
    DReinsurance recoverables
    
    
    378
    
    
    
    EPending life claim liability
    
    
    (225
    )
    
    
    FMiscellaneous liability
    
    
    184
    
    
    
    GIntercompany payable elimination
    
    
    162
    
    
    
    HProperty and equipment depreciation
    
    
    (120
    )
    
    
    IAccident and health excess mortality reserve
    
    
    (67
    )
    
    
    JMortgage loan allowance reversal
    
    
    50
    
    
    
    KNet adjustments other than income taxes
    
    
    (3,078
    )Deferred income tax effect
    
    
    1,047
    
    
    
    MAdjustments net of tax
    
    
    (2,031
    )Correction of current taxes payable
    
    
    (253
    )
    
    
    LDeferred taxes
    
    
    (863
    )
    
    
    MNet adjustment to beginning retained deficit
as of January 1, 2006
    
    $
    (3,147
    )
 56




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  12/31/2005
    
    
    Correction
    
    
    Note
    
    
    1/1/2006AssetsInvestments:Fixed maturities and equity securities
    
    $
    458,181
    
    
    
    
    
    
    
    
    
    
    
    458,181Mortgage loans on real estate
    
    
    833
    
    
    
    50
    
    
    
    K
    
    
    
    883Policy loans
    
    
    23,918
    
    
    
    (804
    )
    
    
    A
    
    
    
    23,114Real estate and other long-term investments
    
    
    1,879
    
    
    
    972
    
    
    
    A
    
    
    
    2,851Cash and cash equivalents
    
    
    18,311
    
    
    
    
    
    
    
    
    
    
    
    18,311Accrued investment income
    
    
    6,478
    
    
    
    (14
    )
    
    
    A
    
    
    
    6,464Reinsurance recoverable
    
    
    19,118
    
    
    
    378
    
    
    
    E
    
    
    
    19,496DAC and CCRA
    
    
    109,669
    
    
    
    (863
    )
    
    
    C
    
    
    
    108,806Other intangible assets
    
    
    2,095
    
    
    
    (952
    )
    
    
    D
    
    
    
    1,143Excess of cost over net assets acquired
    
    
    12,402
    
    
    
    
    
    
    
    
    
    
    
    12,402Property and equipment
    
    
    7,737
    
    
    
    (120
    )
    
    
    I
    
    
    
    7,617Due premium, net
    
    
    28
    
    
    
    4,955
    
    
    
    B
    
    
    
    4,983Other assets
    
    
    1,240
    
    
    
    (306
    )
    
    
    A
    
    
    
    934Total assets
    
    $
    661,889
    
    
    
    3,296
    
    
    
    
    
    
    
    665,185
 12/31/2005
    
    
    Correction
    
    
    Note
    
    
    1/1/2006Liabilities and Stockholders EquityLiabilities:Future policy benefit reserves:Life insurance
    
    $
    436,717
    
    
    
    4,544
    
    
    
    B,C
    
    
    
    441,261Annuities
    
    
    19,440
    
    
    
    
    
    
    
    
    
    
    
    19,440Accident and health
    
    
    11,580
    
    
    
    5
    
    
    
    A
    
    
    
    11,585Policyholder deposits, accumulations,
claims payable and other funds
    
    
    31,709
    
    
    
    292
    
    
    
    F,J
    
    
    
    32,001Commissions payable
    
    
    2,667
    
    
    
    (541
    )
    
    
    A
    
    
    
    2,126Federal income tax payable
    
    
    448
    
    
    
    253
    
    
    
    L
    
    
    
    701Deferred Federal income tax
    
    
    1,621
    
    
    
    (184
    )
    
    
    M
    
    
    
    1,437Warrants outstanding
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    1,587Funds held in trust and other liabilities
    
    
    7,611
    
    
    
    2,074
    
    
    
    A,C,H
    
    
    
    9,685Total liabilities
    
    
    513,380
    
    
    
    6,443
    
    
    
    
    
    
    
    519,823Convertible preferred stock
    
    
    11,546
    
    
    
    
    
    
    
    
    
    
    
    11,546Total stockholders equity
    
    
    136,963
    
    
    
    (3,147
    )
    
    
    
    
    
    
    133,816Total liabilities and stockholders equity
    
    $
    661,889
    
    
    
    3,296
    
    
    
    
    
    
    
    665,185
 A.
    
    The Company has historically used a manual technique for converting its statutory
insurance accounting trial balances to a GAAP basis. Due to the nature of this method,
certain detail supporting various balance sheet account adjustments was lost through the
years. During the process of performing account reconciliations during the third and
fourth quarters of 2006, misstatements of these balance sheet accounts were identified. The analysis
indicated that these errors occurred prior to 2006. The accounts affected and their net
effect included in the beginning SAB 108 adjustment are as follows:
 57




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 Decrease (Increase)to Retained Deficit(In thousands)Other liabilities understated
    
    $
    (3,017
    )Other long-term investments understated
    
    
    972Policy loans overstated
    
    
    (804
    )Other assets overstated
    
    
    (656
    )Commissions payable overstated
    
    
    541Agent accounts receivable understated
    
    
    350Accrued investment income overstated
    
    
    (14
    )Accident and health reserve understated
    
    
    (5
    )Net increase in retained deficit
    
    $
    (2,633
    )
 B.
    
    Prior to 2006, the Company recognized premium revenue on its traditional SFAS 60 life
insurance policies when received, rather than when due. Also, the future policy benefit
reserves were reduced by the net due premium, rather than presented at their gross amount.
As of December 31, 2005, there was $4,955,000 of unrecorded gross due premiums
receivable, and $4,000,000 of net due premiums netted against future policy benefit
reserves. The net effect of correcting this accounting was an increase in pre-tax income
of $955,000. Although previously corrected in our first quarter 2006 financial
statements, this amount has now been reversed out of 2006 income and is included in the
SAB 108 adjustment.C.
    
    When the Company acquired SPLIC in 2004, as part of the beginning purchase accounting
balance sheet, the Company initially set up a liability for future payments on operating
leases for district offices, which were inappropriately capitalized. This liability had a
balance of $497,000 at December 31, 2005. A liability was also initially set up in the
beginning purchase accounting balance sheet in the amount of $100,000 for general
contingencies, which ultimately was not supportable. These liabilities have been
eliminated through the SAB 108 adjustment. The correction of these liabilities would have
resulted in additional negative goodwill at the time of acquisition, which was recorded as
a reduction of the initial CCRA. As a result, CCRA was also reduced by $863,000 as of
December 31, 2005 and has been recorded as a part of the SAB 108 adjustment. The net of
these items is an increase in the retained deficit of $266,000.The Company also determined that certain plans of insurance of SPLIC had negative future
policy benefit reserves. Accordingly, an adjustment was recorded in the amount of
$544,000.D.
    
    While preparing the first quarter of 2006 financial statements, the Company
determined that there was $350,000 of other intangible assets related to state insurance
licenses of acquired companies which had been merged into CICA in prior years. These
intangible assets should have been written off when the companies were merged and were
written off in the first quarter of 2006. While preparing the year-end 2006 financial
statements, the Company determined that an additional $602,000 of intangible assets of a
previously merged company and intangibles with definite lives should have also been
written off. The combined $952,000 reduction of other intangibles was included in the SAB
108 adjustment, $350,000 of which was reversed out of 2006 income.E.
    
    During the preparation of quarterly financial statements in 2006, the Company
determined that it had certain adjustable reinsurance contract provisions that had been
recorded when settled, rather than when earned. CICAs accidental death benefit
reinsurance contract had a favorable experience refund of $216,000 for the 2005 contract
year, which should have been accrued at December 31, 2005. SPFICs catastrophe
reinsurance contract had a premium refund of $162,000, which should have been accrued at
December 31, 2005. Although previously included in our 2006 quarterly financial
statements, the total reinsurance receivable of $378,000 has now been reversed out of 2006
income and is a part of the SAB 108 adjustment.F.
    
    A life claim liability in the amount of $225,000 was erroneously eliminated in 2005
while the Company converted its statutory trial balances to GAAP. This adjustment has
been corrected through the SAB 108 adjustment.
 58




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 G.
    
    During its 2006 account reconciliations, the Company identified $75,000 of expense
accruals, $60,000 of state tax accruals and $49,000 of miscellaneous payables that were
general reserves established in prior years and not based on known specifics; as such,
they were not supportable. The $184,000 total for these items is included in the SAB 108
adjustment.H.
    
    While preparing the year-end 2006 financial statements, it was determined that a
prior year $162,000 intercompany payable from the insurance company subsidiaries to
Citizens was not eliminated. This amount is included in the SAB 108 adjustment.I.
    
    During its 2006 account reconciliations, a prior year entry to reverse excess
statutory accounting depreciation was discovered. This entry was not supportable and is
included in the SAB 108 adjustment in the amount of $120,000.J.
    
    During its 2006 account reconciliations, the Company identified $67,000 of accident
and health morbidity reserves that were general reserves established in a prior year and
not based on known specifics; as such, they were not supportable and are included in the
SAB 108 adjustment.K.
    
    An allowance for losses on mortgage loans for $50,000, which was not related to a
specific loan, and has existed for many years, was reversed and included in the beginning
SAB 108 adjustment.L.
    
    As part of its 2006 account reconciliations, current income taxes payable were
analyzed and increased by $253,000. This adjustment was to adjust the December 31, 2005
liability to the 2005 tax returns as filed, and is included in the SAB 108 adjustment.M.
    
    Prior to 2006, the Company used the roll forward method to calculate deferred income
taxes. During 2006, the Company began using the tax basis balance sheet method, which
identified errors that resulted in an increase to deferred taxes payable at December 31,
2005 of $863,000.
 2) Investments
 The cost, gross unrealized gains and losses and fair value of investments of fixed maturities
and equity securities, as of December 31, 2007 and 2006, are as follows:
 December 31, 2007(In thousands)Gross
    
    
    Grossunrealized
    
    
    unrealizedCost
    
    
    gains
    
    
    (losses)
    
    
    Fair valueFixed 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
 59




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 December 31, 2006(In thousands)Gross
    
    
    Grossunrealized
    
    
    unrealizedCost
    
    
    gains
    
    
    (losses)
    
    
    Fair valueFixed Maturities Available-for-Sale:U.S. Treasury securities and obligations of
U.S. Government corporations and agencies
    
    $
    13,862
    
    
    
    809
    
    
    
    (4
    )
    
    
    14,667U.S. Government-sponsored enterprises
    
    
    266,554
    
    
    
    102
    
    
    
    (5,933
    )
    
    
    260,723States of the United States and political
subdivisions of the states
    
    
    59,844
    
    
    
    220
    
    
    
    (438
    )
    
    
    59,626Foreign governments
    
    
    106
    
    
    
    17
    
    
    
    
    
    
    
    123Public utilities
    
    
    2,016
    
    
    
    
    
    
    
    (33
    )
    
    
    1,983Corporate
    
    
    101,197
    
    
    
    85
    
    
    
    (2,929
    )
    
    
    98,353Securities not due at a single maturity date
    
    
    54,360
    
    
    
    26
    
    
    
    (1,543
    )
    
    
    52,843Total fixed maturities available-for-sale
    
    $
    497,939
    
    
    
    1,259
    
    
    
    (10,880
    )
    
    
    488,318Total Equity Securities
    
    $
    279
    
    
    
    40
    
    
    
    (7
    )
    
    
    312
  60




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 December 31, 2007Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) moreCost
    
    
    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
    )
    
    
    45,684Public utilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    States 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
     61




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 December 31, 2006Gross
    
    
    Grossunrealized
    
    
    unrealized(losses) less
    
    
    (losses) moreCost
    
    
    than 12 months
    
    
    than 12 months
    
    
    Fair value(In thousands)Fixed maturities available-for-sale:U.S. Government-sponsored enterprises
    
    $
    67,672
    
    
    
    (531
    )
    
    
    
    
    
    
    67,141U.S. Government-sponsored enterprises
    
    
    195,099
    
    
    
    
    
    
    
    (5,406
    )
    
    
    189,693States of the United States and political
subdivisions of the states
    
    
    17,690
    
    
    
    (248
    )
    
    
    
    
    
    
    17,442States of the United States and political
subdivisions of the states
    
    
    18,291
    
    
    
    
    
    
    
    (190
    )
    
    
    18,101Public Utilities
    
    
    2,016
    
    
    
    (33
    )
    
    
    
    
    
    
    1,983Corporate
    
    
    27,081
    
    
    
    (627
    )
    
    
    
    
    
    
    26,454Corporate
    
    
    65,970
    
    
    
    
    
    
    
    (2,302
    )
    
    
    63,668Securities not due at a single maturity date
    
    
    405
    
    
    
    (8
    )
    
    
    
    
    
    
    397Securities not due at a single maturity date
    
    
    48,998
    
    
    
    
    
    
    
    (1,535
    )
    
    
    47,463Total fixed maturities available-for-sale
    
    $
    443,222
    
    
    
    (1,447
    )
    
    
    (9,433
    )
    
    
    432,342Total equity securities available-for-sale
    
    $
    79
    
    
    
    
    
    
    
    (7
    )
    
    
    72
  Fixed maturities available-for-sale  (In thousands)
 Amortized Cost
    
    
    Fair ValueDue in one year or less
    
    $
    12,991
    
    
    
    12,924Due after one year through five years
    
    
    28,190
    
    
    
    27,672Due after five years through ten years
    
    
    14,268
    
    
    
    14,038Due after ten years
    
    
    392,142
    
    
    
    391,074447,591
    
    
    
    445,708Securities not due at a single maturity date
    
    
    55,044
    
    
    
    54,718Totals
    
    $
    502,635
    
    
    
    500,426
   62




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Investment income on:Fixed maturities
    
    $
    26,925
    
    
    
    25,386
    
    
    
    21,572Equity securities
    
    
    2,171
    
    
    
    6
    
    
    
    16Mortgage loans on real estate
    
    
    33
    
    
    
    46
    
    
    
    330Policy loans
    
    
    1,919
    
    
    
    1,219
    
    
    
    1,494Long-term investments
    
    
    (47
    )
    
    
    479
    
    
    
    468Other
    
    
    191
    
    
    
    255
    
    
    
    57931,192
    
    
    
    27,391
    
    
    
    24,459Investment expenses
    
    
    (449
    )
    
    
    (416
    )
    
    
    (891
    )Net investment income
    
    $
    30,743
    
    
    
    26,975
    
    
    
    23,568
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Proceeds
    
    $
    3,844
    
    
    $
    14,006
    
    
    
    14,569Gross realized gains
    
    $
    18
    
    
    $
    1,090
    
    
    
    324Gross realized (losses)
    
    $
    (141
    )
    
    $
    (122
    )
    
    
    (121
    )
   Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Proceeds
    
    $
    248
    
    
    
    334
    
    
    
    616Gross realized gains
    
    $
    30
    
    
    
    183
    
    
    
    322Gross realized losses
    
    $
    (32
    )
    
    
    
    
    
    
    
 63




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Realized gains (losses):Fixed maturities
    
    $
    (123
    )
    
    
    1,251
    
    
    
    203Equity securities
    
    
    (2
    )
    
    
    183
    
    
    
    322Property and equipment
    
    
    
    
    
    
    
    
    
    
    505Other long-term investments
    
    
    31
    
    
    
    (148
    )
    
    
    (611
    )Net realized gains (losses)
    
    $
    (94
    )
    
    
    1,286
    
    
    
    419
 (3) Cost of Customer Relationships Acquired and Goodwill
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Balance at beginning of period
    
    $
    34,812
    
    
    
    39,259
    
    
    
    44,904SAB 108 adjustment
    
    
    
    
    
    
    (863
    )
    
    
    Adjusted balance at beginning of period
    
    
    34,812
    
    
    
    38,396
    
    
    
    44,904Amortization
    
    
    (3,176
    )
    
    
    (3,584
    )
    
    
    (5,645
    )Balance at end of period
    
    $
    31,636
    
    
    
    34,812
    
    
    
    39,259
   (In thousands)Year
    
    Amount2008
    
    $
    2,7502009
    
    
    2,5002010
    
    
    2,2712011
    
    
    2,0742012
    
    
    1,905Thereafter
    
    
    20,136
   64




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (4) Policy Liabilities
   Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Policy claims payable at January 1
    
    $
    9,448
    
    
    
    11,227
    
    
    
    8,282Less: reinsurance recoverable
    
    
    2,039
    
    
    
    4,337
    
    
    
    2,714Net balance at January 1
    
    
    7,409
    
    
    
    6,890
    
    
    
    5,568SAB 108
adjustment (see note 1(q))
    
    
    
    
    
    
    292
    
    
    
    Adjusted balance at January 1
    
    
    7,409
    
    
    
    7,182
    
    
    
    5,568Add: claims incurred, related to:Current year
    
    
    22,985
    
    
    
    24,790
    
    
    
    27,928Prior years
    
    
    (883
    )
    
    
    2,838
    
    
    
    (1,212
    )22,102
    
    
    
    27,628
    
    
    
    26,716Deduct: claims paid, related to:Current year
    
    
    18,736
    
    
    
    18,731
    
    
    
    21,037Prior years
    
    
    5,785
    
    
    
    8,670
    
    
    
    4,35724,521
    
    
    
    27,401
    
    
    
    25,394Net balance December 31
    
    
    4,990
    
    
    
    7,409
    
    
    
    6,890Plus: reinsurance recoverable
    
    
    1,918
    
    
    
    2,039
    
    
    
    4,337Policy claims payable, December 31
    
    $
    6,908
    
    
    
    9,448
    
    
    
    11,227
  (5) Reinsurance
  65




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
   At December 31,2007
    
    
    2006(In thousands)Aggregate assumed life insurance in force
    
    $
    644,242
    
    
    
    669,787Aggregate ceded life insurance in force
    
    $
    (273,553
    )
    
    
    (258,756
    )Net life insurance in force
    
    $
    4,538,202
    
    
    
    4,382,530
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Premiums from short-duration contracts:Direct
    
    $
    6,803
    
    
    
    5,747
    
    
    
    5,907Assumed
    
    
    
    
    
    
    
    
    
    
    Ceded
    
    
    (843
    )
    
    
    (1,025
    )
    
    
    (1,131
    )Net premiums earned
    
    
    5,960
    
    
    
    4,722
    
    
    
    4,776Premiums from long-duration contracts:Direct
    
    
    143,763
    
    
    
    133,434
    
    
    
    123,663Assumed
    
    
    1,462
    
    
    
    1,126
    
    
    
    571Ceded
    
    
    (10,280
    )
    
    
    (10,786
    )
    
    
    (12,736
    )Net premiums earned
    
    
    134,945
    
    
    
    123,774
    
    
    
    111,498Total premiums earned
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274Claims and surrenders assumed
    
    $
    1,422
    
    
    
    1,056
    
    
    
    561Claims and surrenders ceded
    
    $
    (9,338
    )
    
    
    (10,448
    )
    
    
    (20,433
    )
 nd st
 66




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (6) Stockholders Equity and Restrictions
   At December 31,2007
    
    
    2006(In thousands)Combined Statutory Stockholders EquityLife insurance operations
    
    $
    110,340
    
    
    
    99,693Property insurance operations
    
    
    4,570
    
    
    
    3,393Total statutory capital and surplus
    
    $
    114,910
    
    
    
    103,086
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Combined Statutory Net Income (Loss)Life insurance operations
    
    $
    14,644
    
    
    
    9,104
    
    
    
    7,747Property insurance operations
    
    
    1,184
    
    
    
    (3,783
    )
    
    
    (3,812
    )Total statutory net income
    
    $
    15,828
    
    
    
    5,321
    
    
    
    3,935
   (7) Convertible Preferred Stock
   67




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
          68




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
    (8) Commitments and Contingencies
 We have committed to the following contractual obligations as of December 31, 2007 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
    
    $
    1,108
    
    
    
    451
    
    
    
    551
    
    
    
    90
    
    
    
    16Other
    
    
    44
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    Total operating and other leases
    
    
    1,152
    
    
    
    495
    
    
    
    551
    
    
    
    90
    
    
    
    16Future policy benefit reserves:Life insurance
    
    
    508,209
    
    
    
    189
    
    
    
    1,060
    
    
    
    9,952
    
    
    
    497,008Annuities
    
    
    22,792
    
    
    
    11,923
    
    
    
    5,344
    
    
    
    2,304
    
    
    
    3,221Accident and health
    
    
    8,293
    
    
    
    8,293
    
    
    
    
    
    
    
    
    
    
    
    Total future policy benefit
reserves
    
    
    539,294
    
    
    
    20,405
    
    
    
    6,404
    
    
    
    12,256
    
    
    
    500,229Policy claims payable:Life insurance
    
    
    4,704
    
    
    
    4,704
    
    
    
    
    
    
    
    
    
    
    
    Accident and health
    
    
    1,545
    
    
    
    1,545
    
    
    
    
    
    
    
    
    
    
    
    Casualty
    
    
    659
    
    
    
    659
    
    
    
    
    
    
    
    
    
    
    
    Total policy claims payable
    
    
    6,908
    
    
    
    6,908
    
    
    
    
    
    
    
    
    
    
    
    Convertible Preferred Stock
    
    
    16,251
    
    
    
    
    
    
    
    16,251
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    563,605
    
    
    
    27,808
    
    
    
    23,206
    
    
    
    12,346
    
    
    
    500,245
  69




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 Citizens Insurance Company of America, Citizens, Inc., Harold
E. Riley and Mark A. Oliver, Petitioners v. Fernando Hakim Daccach Respondent
 Connie Abadie, et al v. Aegis Security Insurance Co., et al., Connie Abadie Connie Abadie In Re: Katrina Canal Breaches Consolidated
Litigation
  The State of Louisiana v. AAA Insurance
 Cheneau
 70




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  Cheneau
   
    
    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.
  (9) Segment and Other Operating Information
 Operating Segment Information
    71




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  Years Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Profit (Loss) MeasurementIncome (loss) before federal income tax:Life Insurance
    
    $
    11,636
    
    
    
    10,803
    
    
    
    4,715Home Service Insurance
    
    
    11,545
    
    
    
    3,531
    
    
    
    5,902Other Non-Insurance Enterprises
    
    
    317
    
    
    
    (992
    )
    
    
    1,179Total consolidated income before Federal
income taxes
    
    $
    23,498
    
    
    
    13,342
    
    
    
    11,796Selected Components of Profit MeasurementTotal revenue:Life Insurance
    
    $
    119,003
    
    
    
    105,747
    
    
    
    90,649Home Service Insurance
    
    
    52,879
    
    
    
    51,235
    
    
    
    49,655Other Non-Insurance Enterprises
    
    
    1,912
    
    
    
    1,077
    
    
    
    1,809Total consolidated revenue
    
    $
    173,794
    
    
    
    158,059
    
    
    
    142,113Premium income:Life Insurance
    
    $
    101,449
    
    
    
    90,479
    
    
    
    78,592Home Service Insurance
    
    
    39,456
    
    
    
    38,017
    
    
    
    37,682Other Non-Insurance Enterprises
    
    
    
    
    
    
    
    
    
    
    Total consolidated premium income
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274Net investment income:Life Insurance
    
    $
    16,891
    
    
    
    14,243
    
    
    
    11,780Home Service Insurance
    
    
    13,502
    
    
    
    12,232
    
    
    
    11,573Other Non-Insurance Enterprises
    
    
    350
    
    
    
    500
    
    
    
    215Total consolidated net investment income
    
    $
    30,743
    
    
    
    26,975
    
    
    
    23,568Amortization expense:Life Insurance
    
    $
    12,050
    
    
    
    12,102
    
    
    
    11,424Home Service Insurance
    
    
    3,683
    
    
    
    3,939
    
    
    
    4,770Other Non-Insurance Enterprises
    
    
    
    
    
    
    
    
    
    
    Total consolidated amortization expense
    
    $
    15,733
    
    
    
    16,041
    
    
    
    16,194Realized gains (losses):Life Insurance
    
    $
    3
    
    
    
    321
    
    
    
    (105
    )Home Service Insurance
    
    
    (85
    )
    
    
    983
    
    
    
    305Other Non-Insurance Enterprises
    
    
    (12
    )
    
    
    (18
    )
    
    
    219Total consolidated realized gains (losses)
    
    $
    (94
    )
    
    
    1,286
    
    
    
    419
 72




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 At December 31,2007
    
    
    2006(In thousands)Assets:Life Insurance
    
    $
    449,719
    
    
    
    395,297Home Service Insurance
    
    
    305,997
    
    
    
    300,368Other Non-Insurance Enterprises
    
    
    32,193
    
    
    
    15,519Total
    
    $
    787,909
    
    
    
    711,184
  Years Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Year Ended December 31:Premium income:Ordinary life
    
    $
    133,257
    
    
    
    122,277
    
    
    
    110,519Group life
    
    
    1,165
    
    
    
    981
    
    
    
    568Accident and health
    
    
    1,558
    
    
    
    1,461
    
    
    
    1,560Casualty
    
    
    4,925
    
    
    
    3,777
    
    
    
    3,627Total premium income
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274
 Geographic Information
  Years Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)AreaUnited States
    
    $
    57,447
    
    
    
    56,717
    
    
    
    59,562Columbia
    
    
    24,427
    
    
    
    23,088
    
    
    
    20,699Taiwan
    
    
    12,607
    
    
    
    10,173
    
    
    
    7,057Argentina
    
    
    9,133
    
    
    
    9,060
    
    
    
    8,476Venezuela
    
    
    11,652
    
    
    
    8,995
    
    
    
    7,228Ecuador
    
    
    9,673
    
    
    
    7,482
    
    
    
    5,296Other foreign countries
    
    
    25,627
    
    
    
    23,666
    
    
    
    21,252Reinsurance
    
    
    (9,661
    )
    
    
    (10,685
    )
    
    
    (13,296
    )Total
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274
 73




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (10) Income Taxes
  Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Expected tax expense
    
    $
    8,224
    
    
    
    4,536
    
    
    
    4,011Change in valuation allowance
    
    
    (1,177
    )
    
    
    41
    
    
    
    1,102Tax-exempt interest
    
    
    (241
    )
    
    
    (281
    )
    
    
    (230
    )Goodwill impairment loss
    
    
    
    
    
    
    345
    
    
    
    Change in fair value of options and
warrants
    
    
    (290
    )
    
    
    83
    
    
    
    (166
    )Adjustment of prior year taxes
    
    
    294
    
    
    
    (33
    )
    
    
    (144
    )Taxable portion of intercompany dividend
    
    
    175
    
    
    
    
    
    
    
    State income tax credits
    
    
    (149
    )
    
    
    
    
    
    
    Change in expected tax rate related to
deferred taxes
    
    
    48
    
    
    
    
    
    
    
    Other
    
    
    48
    
    
    
    (26
    )
    
    
    (79
    )Federal income tax expense
    
    
    6,932
    
    
    
    4,665
    
    
    
    4,494State income tax expense
    
    
    9
    
    
    
    
    
    
    
    Total income tax expense
    
    $
    6,941
    
    
    
    4,665
    
    
    
    4,494Income tax expense consists of:
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Current
    
    $
    5,739
    
    
    
    3,836
    
    
    
    1,591Deferred
    
    
    1,202
    
    
    
    829
    
    
    
    2,903Total income tax expense
    
    $
    6,941
    
    
    
    4,665
    
    
    
    4,494
 74




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  At December 31,2007
    
    
    2006(In thousands)Deferred tax assets:Future policy benefit reserves
    
    $
    22,918
    
    
    
    21,309Net operating loss carryforwards
    
    
    6,741
    
    
    
    6,768Due and accrued dividends and expenses
    
    
    1,122
    
    
    
    935Investments available-for-sale
    
    
    1,132
    
    
    
    3,259State income tax credits
    
    
    149
    
    
    
    Other
    
    
    712
    
    
    
    915Total gross deferred tax assets
    
    
    32,774
    
    
    
    33,186Valuation allowance
    
    
    
    
    
    
    (1,177
    )Total gross deferred tax assets net of valuation
allowance
    
    
    32,774
    
    
    
    32,009Deferred tax liabilities:Deferred policy acquisition costs, cost of customer
relationships acquired and intangible assets
    
    
    (35,324
    )
    
    
    (31,064
    )Investments amortization
    
    
    (1,751
    )
    
    
    (1,956
    )Other
    
    
    (509
    )
    
    
    (487
    )Total gross deferred tax liabilities
    
    
    (37,584
    )
    
    
    (33,507
    )Net deferred tax liability
    
    $
    (4,810
    )
    
    
    (1,498
    )
  At December 31,2007
    
    
    2006(In thousands)Deferred tax liabilities:Balance January 1
    
    $
    (1,498
    )
    
    
    (1,621
    )SAB 108 adjustment (see note 1(q))
    
    
    
    
    
    
    184Adjusted balance at January 1
    
    
    (1,498
    )
    
    
    (1,437
    )Deferred tax expense
    
    
    (1,202
    )
    
    
    (829
    )Investments available-for-sale
    
    
    (2,110
    )
    
    
    768Balance December 31
    
    $
    (4,810
    )
    
    
    (1,498
    )
  75




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
     (11) Fair Value of Financial Instruments
  At December 31,2007
    
    
    2006Carrying amount
    
    
    Fair value
    
    
    Carrying amount
    
    
    Fair value(In thousands)Financial assets:Fixed maturities
    
    $
    500,426
    
    
    
    500,426
    
    
    
    488,318
    
    
    
    488,318Equity securities
    
    
    35,669
    
    
    
    35,669
    
    
    
    312
    
    
    
    312Mortgage loans
    
    
    291
    
    
    
    334
    
    
    
    456
    
    
    
    469Policy loans
    
    
    25,490
    
    
    
    25,490
    
    
    
    23,542
    
    
    
    23,542Cash and cash equivalents
    
    
    21,123
    
    
    
    21,123
    
    
    
    24,521
    
    
    
    24,521Short-term investments
    
    
    17,650
    
    
    
    17,650
    
    
    
    
    
    
    
    Financial liabilities:Annuities
    
    
    22,792
    
    
    
    22,792
    
    
    
    20,761
    
    
    
    20,761
    76




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
   (12) Other Comprehensive Income (Loss)
  77




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 Pre-tax
    
    
    Tax
    
    
    NetAmount
    
    
    Effect
    
    
    Amount(In Thousands)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
    )Year ended December 31, 2005Unrealized loss on securities:Unrealized holding loss arising
during the period
    
    $
    (5,614
    )
    
    
    1,909
    
    
    
    (3,705
    )Add: reclassification adjustment for
gains included in net income
    
    
    (525
    )
    
    
    178
    
    
    
    (347
    )Other comprehensive loss
    
    $
    (6,139
    )
    
    
    2,087
    
    
    
    (4,052
    )
 (13) Profit-Sharing Plan
  (14) Related Party Transactions
  78




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 (15) Quarterly Financial Information (Unaudited)
  Fourth
    
    
    Third
    
    
    Second
    
    
    FirstQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(In thousands)2007Revenues
    
    $
    49,958
    
    
    
    42,807
    
    
    
    41,633
    
    
    
    39,396Benefits and expenses
    
    
    41,386
    
    
    
    36,981
    
    
    
    36,451
    
    
    
    35,478Federal 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 earnings per share of
Class A common stock
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.05Diluted earnings per share of
Class B common stock
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.04
    
    
    
    0.03
 79




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
 SAB 108As Reported
    
    
    Adjustments
    
    
    Inter period
    
    
    Ason Form 10-Q
    
    
    (See Note 1(q))
    
    
    Adjustments
    
    
    Adjusted(In thousands)2006Fourth Quarter:Revenues
    
    
    43,270
    
    
    
    955       A162       B216       C
    
    
    
    
    
    
    
    44,603Benefits and expenses
    
    
    38,145
    
    
    
    350       D
    
    
    
    (589)      E65       F
    
    
    
    37,971Federal income tax expense
    
    
    2,039
    
    
    
    334
    
    
    
    178
    
    
    
    2,551Net income
    
    
    3,086
    
    
    
    649
    
    
    
    346
    
    
    
    4,081Net income available to common shareholders
    
    
    2,585
    
    
    
    649
    
    
    
    346
    
    
    
    3,580Basic and diluted earnings per share
    
    
    0.06
    
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.08Third Quarter:Revenues
    
    
    38,485
    
    
    
    (65)      C
    
    
    
    180       G
    
    
    
    38,600Benefits and expenses
    
    
    34,522
    
    
    
    
    
    
    
    65       F48       E(225)      H(135)      I
    
    
    
    34,275Federal income tax expense
    
    
    1,375
    
    
    
    (22
    )
    
    
    145
    
    
    
    1,498Net income
    
    
    2,588
    
    
    
    (43
    )
    
    
    282
    
    
    
    2,827Net income available to common shareholders
    
    
    2,080
    
    
    
    (43
    )
    
    
    282
    
    
    
    2,319Basic and diluted earnings per share
    
    
    0.05
    
    
    
    (0.00
    )
    
    
    0.01
    
    
    
    0.06Second Quarter:Revenues
    
    
    38,196
    
    
    
    (151)      C
    
    
    
    
    
    
    
    38,045Benefits and expenses
    
    
    37,000
    
    
    
    
    
    
    
    65       F75       H38       I(17)      E
    
    
    
    37,161Federal income tax expense
    
    
    242
    
    
    
    (51
    )
    
    
    (55
    )
    
    
    136Net income
    
    
    954
    
    
    
    (100
    )
    
    
    (106
    )
    
    
    748Net income available to common shareholders
    
    
    446
    
    
    
    (100
    )
    
    
    (106
    )
    
    
    240Basic and diluted earnings per share
    
    
    0.01
    
    
    
    (0.00
    )
    
    
    (0.00
    )
    
    
    0.01First Quarter:Revenues
    
    
    38,108
    
    
    
    (955)      A
    
    
    
    (180)      G(162)      B
    
    
    
    
    
    
    
    36,811Benefits and expenses
    
    
    35,050
    
    
    
    (350)      D
    
    
    
    (195)      F150       H97       I558       E
    
    
    
    35,310Federal income tax expense
    
    
    1,009
    
    
    
    (261
    )
    
    
    (268
    )
    
    
    480Net income
    
    
    2,049
    
    
    
    (506
    )
    
    
    (522
    )
    
    
    1,021Net income available to common shareholders
    
    
    1,543
    
    
    
    (506
    )
    
    
    (522
    )
    
    
    515Basic and diluted earnings per share
    
    
    0.04
    
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    0.01
  80




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
December 31, 2007, 2006 and 2005
  A.
    
    Accrual of $955,000 due premium originally recorded in the first quarter, and then
transferred to the SAB 108 adjustment in the fourth quarter. See note
1(p) B.B.
    
    Accrual of $162,000 catastrophe reinsurance premium refund originally recorded in the
first quarter, and then transferred to the SAB 108 adjustment in the fourth quarter. See
note 1 (p) E.C.
    
    Accrual of $216,000 in reinsurance recoverables originally recorded in the second and
third quarters, and then transferred to the SAB 108 adjustment in the fourth quarter. See
note 1 (p) E.D.
    
    Impairment of $350,000 of intangibles originally recorded in the first quarter, and
then transferred to the SAB 108 adjustment in the fourth quarter. See
note 1 (p) D.E.
    
    Additional $589,000 amortization of cost of customer relationships recorded in the
fourth quarter, but pertaining to the first, second, and third quarters.F.
    
    $195,000 workers compensation insurance premium expensed in the first quarter, but
pertaining to the second, third, and fourth quarters.G.
    
    $180,000 impairment of an other long-term investment recorded in the third quarter, but
pertaining to the first quarter.H.
    
    Accrual of $225,000 interest expense on policyholder dividends recorded in the third
quarter, but pertaining to the first and second quarters.I.
    
    Correction of purchased lease accounting recorded in the third quarter, but pertaining
to errors originating in the first and second quarters. See note 1 (p) B.
  81




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
 
 Schedule II
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Balance Sheet
 At December 31,2007
    
    
    2006(In thousands)AssetsInvestment in subsidiaries (1)
    
    $
    161,399
    
    
    
    142,108Fixed maturities available-for-sale, at fair value
    
    
    5,989
    
    
    
    8,297Mortgage loans
    
    
    
    
    
    
    24Real estate
    
    
    4,913
    
    
    
    1,111Short-term investments
    
    
    17,650
    
    
    
    Cash
    
    
    106
    
    
    
    1,360Accrued investment income
    
    
    79
    
    
    
    107Other assets
    
    
    2,268
    
    
    
    1,989Total assets
    
    $
    192,404
    
    
    
    154,996Liabilities and Stockholders EquityLiabilities:Accrued expense and other liabilities
    
    $
    1,024
    
    
    
    671Liabilities for options and warrants
    
    
    1,003
    
    
    
    1,831Total Liabilities
    
    
    2,027
    
    
    
    2,502Cumulative convertible preferred stock
    
    
    14,220
    
    
    
    12,883Stockholders equity:Common stock:Class A
    
    
    225,812
    
    
    
    210,066Class B
    
    
    3,184
    
    
    
    3,184Retained deficit
    
    
    (39,725
    )
    
    
    (56,282
    )Unrealized investment losses on securities held by
parent and subsidiaries, net of tax
    
    
    (2,103
    )
    
    
    (6,346
    )Treasury stock
    
    
    (11,011
    )
    
    
    (11,011
    )Total stockholders equity
    
    
    176,157
    
    
    
    139,611Total liabilities and stockholders equity
    
    $
    192,404
    
    
    
    154,996
 
 (1)
    
    Eliminates in consolidation.  82




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
 
 Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Operations
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Revenues:Management service fees (1)
    
    $
    27,110
    
    
    
    28,076
    
    
    
    27,372Investment income
    
    
    342
    
    
    
    471
    
    
    
    187Decrease (increase) in fair value of warrants
    
    
    828
    
    
    
    (244
    )
    
    
    489Other
    
    
    6
    
    
    
    65
    
    
    
    7Realized gains (losses)
    
    
    (12
    )
    
    
    (18
    )
    
    
    59Total revenues
    
    
    28,274
    
    
    
    28,350
    
    
    
    28,114Expenses:General
    
    
    25,547
    
    
    
    26,497
    
    
    
    25,323Taxes
    
    
    1,345
    
    
    
    1,387
    
    
    
    1,472Total expenses
    
    
    26,892
    
    
    
    27,884
    
    
    
    26,795Income before equity in income of consolidated subsidiaries
    
    
    1,382
    
    
    
    466
    
    
    
    1,319Equity in income of consolidated subsidiaries
    
    
    15,175
    
    
    
    8,211
    
    
    
    5,983Net income
    
    $
    16,557
    
    
    
    8,677
    
    
    
    7,302
 
 (1)
    
    Eliminates in consolidation.  83




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
 Schedule II, Continued
Condensed Financial Information of Registrant
CITIZENS, INC. (Parent Company)
Statements of Cash Flows
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Cash flows from operating activities:Net income
    
    $
    16,557
    
    
    
    8,677
    
    
    
    7,302Adjustments to reconcile net income to net cash
provided by operating activities:Realized losses (gains)
    
    
    12
    
    
    
    18
    
    
    
    (59
    )Equity in net income of consolidated subsidiaries
    
    
    (15,175
    )
    
    
    (8,211
    )
    
    
    (5,983
    )Increase (decrease) in fair value of options and
warrants
    
    
    (828
    )
    
    
    244
    
    
    
    (489
    )Accrued expenses and other liabilities
    
    
    353
    
    
    
    (64
    )
    
    
    329Depreciation
    
    
    94
    
    
    
    82
    
    
    
    79Change in accrued investment income
    
    
    28
    
    
    
    (15
    )
    
    
    (54
    )Other
    
    
    (419
    )
    
    
    534
    
    
    
    395Net cash provided by operating activities
    
    
    622
    
    
    
    1,265
    
    
    
    1,520Cash flows from investing activities:Purchase of fixed maturities, available-for-sale
    
    
    
    
    
    
    (2,999
    )
    
    
    (5,500
    )Sale of fixed maturities, available-for-sale
    
    
    1,988
    
    
    
    
    
    
    
    Maturities of fixed maturities, available-for-sale
    
    
    500
    
    
    
    2,000
    
    
    
    950Payoff of note receivable
    
    
    
    
    
    
    
    
    
    
    30,000Sale of real estate and other long-term investments
    
    
    104
    
    
    
    58
    
    
    
    213Payoff of collateral loan
    
    
    
    
    
    
    
    
    
    
    100Purchase of other long-term investments
and property and equipment
    
    
    (3,901
    )
    
    
    (191
    )
    
    
    (22
    )Purchase of short-term investments
    
    
    (17,650
    )
    
    
    
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (18,959
    )
    
    
    (1,132
    )
    
    
    25,741Cash flows from financing activities:Proceeds from sale of Class A common stock
    
    
    17,083
    
    
    
    
    
    
    
    Payoff of note payable
    
    
    
    
    
    
    
    
    
    
    (30,000
    )Proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    3,751Payment of convertible preferred stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (187
    )Net cash provided by (used in) financing activities
    
    
    17,083
    
    
    
    
    
    
    
    (26,436
    )Net increase (decrease) in cash
    
    
    (1,254
    )
    
    
    133
    
    
    
    825Cash at beginning of year
    
    
    1,360
    
    
    
    1,227
    
    
    
    402Cash at end of year
    
    $
    106
    
    
    $
    1,360
    
    
    
    1,227
  84




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CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
 
 Schedule III
Supplementary Insurance Information
 At December 31,2007
    
    
    2006(In thousands)Deferred policy acquisition cost:Life Insurance
    
    $
    90,260
    
    
    
    80,482Home Service Insurance
    
    
    10,395
    
    
    
    6,493Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated deferred policy acquisition costs:
    
    $
    100,655
    
    
    
    86,975Future policy benefit reserves and policy
claims payable:Life Insurance
    
    $
    342,429
    
    
    
    310,592Home Service Insurance
    
    
    203,773
    
    
    
    203,576Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated future policy benefits, reserves
and policy claims payable
    
    $
    546,202
    
    
    
    514,168Unearned premiums:Life Insurance
    
    $
    925
    
    
    
    632Home Service Insurance
    
    
    1,067
    
    
    
    1,180Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated unearned premiums
    
    $
    1,992
    
    
    
    1,812Other policy claims and benefits payable:Life Insurance
    
    $
    22,897
    
    
    
    20,361Home Service Insurance
    
    
    433
    
    
    
    334Other Non-Insurance Enterprises
    
    
    
    
    
    
    Total consolidated other policy claims and benefits
payable
    
    $
    23,330
    
    
    
    20,695
  85




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
 Schedule III, continued
Supplementary Insurance Information, continued
 Years ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Premiums:Life Insurance
    
    $
    101,449
    
    
    
    90,479
    
    
    
    78,592Home Service Insurance (1)
    
    
    39,456
    
    
    
    38,017
    
    
    
    37,682Other Non-Insurance Enterprises
    
    
    
    
    
    
    
    
    
    
    Total consolidated premium revenue
    
    $
    140,905
    
    
    
    128,496
    
    
    
    116,274Net investment income:Life Insurance
    
    $
    16,891
    
    
    
    14,243
    
    
    
    11,780Home Service Insurance
    
    
    13,502
    
    
    
    12,232
    
    
    
    11,573Other Non-Insurance Enterprises
    
    
    350
    
    
    
    500
    
    
    
    215Total consolidated net investment income
    
    $
    30,743
    
    
    
    26,975
    
    
    
    23,568Benefits, claims, losses and settlement expenses:Life Insurance
    
    $
    79,022
    
    
    
    66,939
    
    
    
    59,334Home Service Insurance
    
    
    18,527
    
    
    
    25,425
    
    
    
    20,763Other Non-Insurance Enterprises
    
    
    
    
    
    
    
    
    
    
    Total consolidated benefits, claims, losses and
settlement expenses
    
    $
    97,549
    
    
    
    92,364
    
    
    
    80,097Amortization of deferred policy acquisition costs:Life Insurance
    
    $
    10,874
    
    
    
    9,786
    
    
    
    9,354Home Service Insurance
    
    
    1,656
    
    
    
    1,605
    
    
    
    959Other Non-Insurance Enterprises
    
    
    
    
    
    
    
    
    
    
    Total consolidated amortization of deferred policy
acquisition costs
    
    $
    12,530
    
    
    
    11,391
    
    
    
    10,313Other operating expenses:Life Insurance
    
    $
    14,803
    
    
    
    15,245
    
    
    
    15,261Home Service Insurance
    
    
    11,185
    
    
    
    10,292
    
    
    
    9,571Other Non-Insurance Enterprises
    
    
    1,595
    
    
    
    2,070
    
    
    
    597Total consolidated other operating expenses
    
    $
    27,583
    
    
    
    27,607
    
    
    
    25,429
 
 (1)
    
    Premiums written for property insurance approximates premiums earned.  86




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##### Table of Contents



CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
Financial Schedules
For the Years Ended December 31, 2007, 2006 and 2005
  
 Schedule IV
Reinsurance
 % ofCeded to
    
    
    Assumed
    
    
    
    
    
    
    AmountDirect
    
    
    Other
    
    
    From Other
    
    
    
    
    
    
    Assumed to(In thousands)
    
    Amount
    
    
    Companies
    
    
    Companies
    
    
    Net Amount
    
    
    NetYear ended December 31, 2007Life insurance in force
    
    $
    4,167,513
    
    
    
    273,553
    
    
    
    644,242
    
    
    
    4,538,202
    
    
    
    14.2
    %Premiums:Life insurance
    
    
    135,078
    
    
    
    2,118
    
    
    
    1,462
    
    
    
    134,422
    
    
    
    1.1Accident and health insurance
    
    
    9,720
    
    
    
    8,162
    
    
    
    
    
    
    
    1,558Property
    
    
    5,768
    
    
    
    843
    
    
    
    
    
    
    
    4,925Total premiums
    
    $
    150,566
    
    
    
    11,123
    
    
    
    1,462
    
    
    
    140,905
    
    
    
    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
    
    
    123,976
    
    
    
    1,844
    
    
    
    1,126
    
    
    
    123,258
    
    
    
    0.9Accident and health insurance
    
    
    10,403
    
    
    
    8,942
    
    
    
    
    
    
    
    1,461Property
    
    
    4,802
    
    
    
    1,025
    
    
    
    
    
    
    
    3,777Total premiums
    
    $
    139,181
    
    
    
    11,811
    
    
    
    1,126
    
    
    
    128,496
    
    
    
    0.9
    %Year ended December 31, 2005Life insurance in force
    
    $
    3,687,229
    
    
    
    221,793
    
    
    
    592,636
    
    
    
    4,058,072
    
    
    
    14.6
    %Premiums:Life insurance
    
    
    112,423
    
    
    
    1,907
    
    
    
    571
    
    
    
    111,087
    
    
    
    0.5Accident and health insurance
    
    
    12,389
    
    
    
    10,829
    
    
    
    
    
    
    
    1,560Property
    
    
    4,758
    
    
    
    1,131
    
    
    
    
    
    
    
    3,627Total premiums
    
    $
    129,570
    
    
    
    13,867
    
    
    
    571
    
    
    
    116,274
    
    
    
    0.5
    %
  87




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##### Table of Contents



Signatures
  CITIZENS, INC.Date:  March 14, 2008
    By:
    /s/ Harold E. RileyHarold E. RileyChief Executive Officer and ChairmanBy:
    /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/ Geoffrey M. KolanderGeoffrey M. Kolander, Director
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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)
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##### Table of Contents



10.6
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Converium Reinsurance (Germany) Ltd.(i)10.7
    
    Self-Administered Automatic Reinsurance Agreement between Citizens Insurance Company of
America and Scottish Re Worldwide (England) (j)11
    
    Statement re: Computation of per share earnings (see financial statements)21
    
    Subsidiaries of Registrant (k)23(a)
    
    Consent of Independent Registered Public Accounting Firm  KPMG LLP*23(b)
    
    Consent of Independent Registered Public Accounting Firm  Ernst & Young LLP*24
    
    Power of Attorney *31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act*32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*
 
 *
    
    Filed herewith.(a)
    
    Filed on March 15, 2004 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2003 as Exhibit 3.1, and incorporated herein by reference.(b)
    
    Filed with the Registrants Annual Report on Form 10-K for the Year Ended December 31, 1998,
as Exhibit 3.2,, and incorporated herein by reference.(c)
    
    Filed on July 15, 2004, with the Registrants Current Report on Form 8-K as Exhibit 4.1, and
incorporated herein by reference.(d)
    
    Filed as Exhibit 10.8 with the Registration Statement on Form S-4, SEC File No. 333-16163, on
November 14, 1996 and incorporated herein by reference.(e)
    
    Filed on April 9, 1997 as Exhibit 10.9 with the Registrants Annual Report on Form 10-K for
the Year Ended December 31, 1996, Amendment No. I, and incorporated herein by reference.(f)
    
    Filed on March 22, 2004 as Exhibit 10.8 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(g)
    
    Filed on March 22, 2004 as Exhibit 10.9 of the Registrants Current Report on Form 8-K, and
incorporated herein by reference.(h)
    
    Filed on July 15, 2004 as part of Exhibit 10.12 with the Registrants Current Report on Form
8-K, and incorporated herein by reference.(i)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(m), and incorporated herein by reference.(j)
    
    Filed on March 31, 2005, with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2004, as Exhibit 10.10(n), and incorporated herein by reference.(k)
    
    Filed on March 30, 2007 with the Registrants Annual Report on Form 10-K for the Year Ended
December 31, 2006 as Exhibit 21, and incorporated herein by reference.
 90