CITIZENS INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the quarterly period ended SEPTEMBER 30, 2002

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition period from to
--------------------- ------------------------

Commission File Number: 1-13004
--------------------------------------------------------

CITIZENS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Colorado 84-0755371
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

400 East Anderson Lane, Austin, Texas 78752
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(512) 837-7100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No

As of November 10, 2002, Registrant had 29,303,287 shares of Class A
common stock, No Par Value, outstanding and 817,696 shares of Class B common
stock, No Par Value, outstanding.

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES

INDEX

2

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001

See accompanying notes to consolidated financial statements. (Continued)

3

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION, CONTINUED
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001

See accompanying notes to consolidated financial statements.

4

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements.

5

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements.

6

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(UNAUDITED)

See accompanying notes to consolidated financial statements. (Continued)

7

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(UNAUDITED)

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In the first quarter of 2002, the Company issued 752,701 Class A common shares
to purchase all the capital stock of Combined Underwriters Life Insurance
Company and issued 304,928 Class A common shares to purchase all the capital
stock of Lifeline Underwriters Life Insurance Company. In conjunction with the
acquisitions, cash and cash equivalents were provided by acquisitions as
follows:

See accompanying notes to consolidated financial statements.

8

CITIZENS, INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002

(UNAUDITED)

(1) FINANCIAL STATEMENTS

The interim consolidated financial statements include the accounts and
operations of Citizens, Inc. (Citizens), incorporated in the state of
Colorado on November 8, 1977, and its wholly-owned subsidiaries,
Citizens Insurance Company of America (CICA), Computing Technology,
Inc. (CTI), Funeral Homes of America, Inc. (FHA), Insurance Investors,
Inc. (III), Central Investors Life Insurance Company of Illinois
(CILIC), First Investors Group, Inc. (Investors), Excalibur Insurance
Corporation (Excalibur), Combined Underwriters Life Insurance Company
(Combined) and Lifeline Underwriters Life Insurance Company (Lifeline).
Citizens and its consolidated subsidiaries are collectively referred to
as "the Company."

The statement of financial position for September 30, 2002, the
statements of operations for the three-month and nine-month periods
ended September 30, 2002 and 2001, and the statements of cash flows for
the nine-month periods then ended have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows
at September 30, 2002 and for comparative periods presented have been
made.

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP) have
been omitted. It is suggested that these financial statements be read
in conjunction with the financial statements and notes thereto included
in the Company's December 31, 2001 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. The results of operations
for the period ended September 30, 2002 are not necessarily indicative
of the operating results for the full year.

(2) ACQUISITION

On March 19, 2002, Citizens consummated the acquisition of Combined and
Lifeline. Pursuant to the terms of the agreements, which were approved
by Combined's and Lifeline's shareholders and regulatory authorities,
Citizens issued approximately 753,000 shares of its Class A Common
Stock to acquire Combined and approximately 305,000 shares of its Class
A Common Stock to acquire Lifeline. The aggregate market value of the
consideration was approximately $12.0 million. The transactions were
accounted for as purchases. The excess of cost over net assets acquired
amounted to approximately $2.9 million.

9

(3) SEGMENT INFORMATION

The Company has two reportable segments identified by geographic area:
international business and domestic business. International business,
consisting of ordinary whole-life business, is offered worldwide. The
Company has no assets, offices or employees outside of the United
States of America (U.S.) and requires that all transactions be in U.S.
dollars and paid in the U.S. Domestic business, consisting of
traditional life and burial insurance, pre-need policies, accident and
health specified disease, hospital indemnity and accidental death
policies, is sold throughout the southern U.S. The accounting policies
of the segments are in accordance with U.S. GAAP and are the same as
those described in the summary of significant accounting policies. The
Company evaluates performance based on U.S. GAAP income before federal
income taxes for its two reportable segments.

Geographic Areas - The following summary represents financial data of
the Company's continuing operations based on their location for the
nine months ended September 30, 2002 and 2001.

The following summary, representing revenues, amortization expense and
pre-tax income from continuing operations and identifiable assets for
the Company's reportable segments as of and for the nine months ended
September 30, 2002 and 2001, is as follows:

Major categories of premiums are summarized as follows:

(4) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

For the three and nine months ended September 30, 2002, the other
comprehensive income amounts included in total comprehensive income
consisted of unrealized gains (losses) on investments in fixed
maturities and equity securities available-for-sale of $(291,660) and
$34,078, respectively, net of tax and for the same period in 2001
unrealized gains of $2,621,207 and $3,196,641, respectively. Total
comprehensive income (loss) for the three and nine months ended
September 30, 2002 was $(68,728) and $2,933,714 and for the same period
in 2001 total comprehensive income of $3,981,550 and $5,660,172,
respectively.

(5) EARNINGS PER SHARE

Basic and diluted earnings per share have been computed using the
weighted average number of shares of common stock outstanding during
each period. The weighted average shares outstanding for the three and
nine months ended September 30, 2002 were 30,120,983 and 29,774,120,
respectively. The weighted average shares

11

outstanding for both the three and nine months ended September 30, 2001
were 28,897,382. The per share amounts have been adjusted retroactively
for all periods presented to reflect a 15% stock dividend declared on
March 26, 2002, paid on June 1, 2002 to holders of record as of May 1,
2002. The stock dividend resulted in the issuance of 4,162,413 Class A
shares (including 333,873 shares in treasury) and 106,656 Class B
shares.

(6) ACCOUNTING PRONOUNCEMENTS

On January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 142 "Goodwill and Other Intangible
Assets." Under the guidelines of SFAS No. 142, excess of cost over net
assets acquired (goodwill) amounting to $9,688,669 and other intangible
assets amounting to $2,018,125 as of September 30, 2002 were determined
to have an indefinite useful life and will no longer be amortized.
Instead goodwill and other intangible assets will be subjected to
annual impairment analyses under SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." Prior to the adoption of
SFAS No. 142, the amortization of goodwill and other intangible assets
(primarily state insurance licenses) for the nine months ended
September 30, 2001 was $451,828 and $230,400, respectively. Had SFAS
No. 142 been adopted for the nine months ended September 30, 2001, pro
forma net income would approximate $3,146,000 or $0.11 per share.

(7) LEGAL PROCEEDINGS

The Company is from time to time involved in litigation, which is
incidental to its business. Other than as set forth below, the Company
is not a party to any material legal proceedings.

On July 31, 2002, class action certification was granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed
in 1999 style Delia Bolanos Andrade, et al v. Citizens Insurance
Company of America, Citizens, Inc., Negocios Savoy, S.A., Harold E.
Riley, and Mark A. Oliver, Case Number 99-09099. The suit alleges that
life insurance policies sold to certain non-U.S. residents by Citizens
Insurance Company of America are securities and were sold in violation
of the registration provisions of the Texas securities laws. The suit
seeks class action status naming as a class all non-U.S. residents who
made premium payments since August 1996 and assigned policy dividends
to a trust for the purchase of Citizens, Inc. Class A common stock. The
remedy sought is rescission of the insurance premium payments. An
appeal of the class action certification by the district court has been
made to the Texas Court of Appeals. Litigation counsel and defendants
believe that the district court ruling is significantly in error and
that there are substantial grounds for reversal. During the time of the
appeal, the district court proceedings will be stayed. In the event the
case proceeds to a trial, the defendants intend to defend vigorously
against the claims. The Company is unable to determine the potential
magnitude of the claims in the event of a final class action
certification and the plaintiffs prevailing in the substantive action.

12

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS

Certain statements contained in this Form 10-Q are not statements of historical
fact and constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the "Act"), including, without limitation, the
italicized statements and the statements specifically identified as
forward-looking statements within this document. 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
plans and objectives of the Company or its 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 involve risks and uncertainties that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of foreign and U.S.
economies in general and the strength of the local economies from which
applications for insurance may be received; (ii) the effects of and changes in
trade, monetary and fiscal policies and laws on insurance sales and operations;
(iii) inflation, interest rates, market and monetary fluctuations and
volatility; (iv) the timely development and acceptance of new products and
services and perceived overall value of these products and services of the
Company by existing and potential customers; (v) changes in consumer spending,
borrowing and saving habits; (vi) concentrations of business from persons
residing in third world countries; (vii) acquisitions and the ability of the
Company to make them on an economic basis and integrate newly acquired insurance
companies into the Company's operations; (viii) the persistency of existing and
future insurance policies sold by the Company and its subsidiaries; (ix) the
dependence of the Company on its Chairman of the Board; (x) the ability to
control expenses; (xi) the effect of changes in laws and regulations (including
laws and regulations concerning insurance) with which the Company and its
subsidiaries must comply; (xii) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as the Financial
Accounting Standards Board; (xiii) changes in the Company's organization and
compensation plans; (xiv) the costs and effects of litigation and of unexpected
or adverse outcomes in such litigation; and (xv) 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.

13

On March 19, 2002, Citizens acquired all outstanding shares of Combined
Underwriters Life Insurance Company (Combined) and Lifeline Underwriters Life
Insurance Company (Lifeline), two Texas life insurance companies, for shares of
Citizens Class A Common stock. The exchange was based upon a market value of
$8.64 per share for Combined and $5.00 per share for Lifeline. The price for
Citizens shares of $11.479 was based upon its average closing price for the 20
trading days preceding closing. The total aggregate consideration issued by
Citizens amounted to approximately 1.1 million shares of Class A common stock.

Combined and Lifeline continue to operate from their offices in Tyler, with a
combined management team. Management believes that the acquisitions should
enhance premium income and total revenue and provide the Company an established
domestic marketing program. The marketing operations of these companies continue
to write the supplemental accident and health products that have historically
been the foundation of their new business, but will also provide a new division
to offer the domestic ordinary life products developed by CICA.

On November 8, 2002, the Company executed a definitive agreement to acquire all
outstanding shares of First Alliance Corporation ("First Alliance") for shares
of Citizens Class A Common stock to be offered through a prospectus. First
Alliance is the parent of First Alliance Insurance Company, a Kentucky life
insurer.

The agreement is subject to approval by First Alliance's shareholders and
insurance regulatory authorities in Kentucky, Missouri and Arkansas. The
exchange will be based upon a market value of $3.02 per share for First
Alliance, while the price for the Citizens shares will be based upon its average
20 day price preceding closing. The transaction is valued at approximately $17.2
million.

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Net income for the nine months ended September 30, 2002 was $2,899,636 or $0.10
per share, compared to net income of $2,463,531, or $0.09 per share, for the
same period in 2001. The acquisition of Combined and Lifeline increased net
income for the nine months ended September 30, 2002 by $148,618. SFAS No. 142
was adopted on January 1, 2002, which changed the accounting for goodwill and
intangibles, as discussed below. Had SFAS No. 142 been adopted for the nine
months ended September 30, 2001, pro forma net income would approximate
$3,146,000 or $0.11 per share. Increased production of new business coupled with
a 4.5% increase in net investment income and the change in amortization of
goodwill and intangibles contributed to the increased earnings for the nine
months ended September 30, 2002.

Total revenues increased 20.0% in 2002 to $59,319,630 compared to the first nine
months of 2001 when revenues were $49,418,264. The acquisition of Combined and
Lifeline increased 2002 revenues by $7,415,103. The increase in revenues for the
first nine months of 2002 compared to the same period in 2001 was related to a
13.8% increase in new life sales (measured in issued and paid annualized
premium), a 4.5% increase in net investment income and a 137.3% increase in
accident and health premiums.

Premium income for the first nine months of 2002 was $48,028,142 compared to
$38,819,800 for the same period in 2001. The 2002 increase is comprised of a
$3,853,046 increase in life

14

premiums and a $5,355,296 increase in accident and health premiums. The March
2002 acquisition of Combined and Lifeline discussed above increased life
premiums by $1,025,139 and accident and health premiums by $6,026,664,
offsetting a $671,368 reduction in the Company's existing book of accident and
health business as a result of previous terminations and rate increases.
Management's plan to continue to implement significant rate increases in
supplemental non-cancelable accident and health products, if loss ratios
increase, and to non-renew unprofitable blocks of major medical business may
contribute to future decreases in accident and health premiums.

Net investment income increased 4.5% for the nine months ended September 30,
2002, to $10,562,276 compared to $10,110,224 for the first nine months of 2001.
This increase reflects continued expansion of the Company's asset base that was
accelerated by the acquisition of Combined and Lifeline. The acquisition
increased invested assets by $15.9 million and 2002 investment income by
$333,293. In 2001, management shifted the mix of the portfolio to place less
emphasis on government guaranteed mortgage pass-through instruments and more
emphasis on investments in callable instruments issued by U.S. government
agencies. Available bond yields have dropped sharply over the past 12 months,
which has slowed the growth in income.

Policyholder dividends increased to $2,490,803 during the first nine months of
2002, up 8.2% over dividends of $2,301,322 during the same period of 2001.
Virtually all of CICA's international policies that have been issued since 1984
are participating. Participating policies represent, approximately 54% of the
Company's business in-force, although the percentage of participating business
has declined due to acquisitions in recent years. Management expects continued
growth in participating policies because CICA will continue to focus on
participating products in its international business.

Claims and surrenders expense increased 25.4% from $21,606,679 for the nine
months ended September 30, 2001 to $27,084,175 for the same period in 2002.
Death claims increased 21.8% from $4,111,047 for the first nine months of 2001
to $5,007,107 for the first nine months of 2002 due to the impact of the
acquisitions, which increased such expense by $427,862, as well as increases in
claim volume and average claim amount. After review of the incurred claims,
management does not believe the increase reflects a negative trend in the
overall mortality of the Company's life business but rather, an aberration in
the historical experience. Surrender expense increased 8.0% from $10,992,511 for
the first nine months of 2001 to $11,877,313 for the first nine months of 2002.
The current economic climate in several Latin American countries was the primary
reason for the increased surrender activity. Endowments increased 4.5% from
$3,932,776 for the first nine months of 2001 to $4,111,654 for the first nine
months of 2002. Like policy dividends, endowments are factored into the premiums
and as such the increase should have no adverse impact on profitability.
Accident and health benefits were $5,826,722 for the first nine months of 2002
compared to $2,308,277 for the same period of 2001. This increase in accident
and health benefits is directly related to the acquisition of Combined and
Lifeline discussed above, which generated $3,741,703 in claims, offsetting a
$223,258 reduction in the Company's existing book of accident and health
business.

The remaining components of claims and surrenders amounted to $261,379 for the
first nine months of 2002, compared to $262,068 for the first nine months of
2001. These are made up of supplemental contract benefits, interest on policy
funds and assorted other miscellaneous policy benefits.

15

Commissions increased from $9,633,958 for the first nine months of 2001 to
$11,493,195 for the same period in 2002, an increase of 19.3%. The increase is
attributable to the acquisition of Combined and Lifeline discussed above, whose
commissions were $1,441,862 for the period. The remainder of the increase is due
to a 13.8% increase in production of new life insurance premiums.

Underwriting, acquisition and insurance expenses increased from $7,879,929 for
the first nine months of 2001 to $10,229,464 for the same period in 2002, an
increase of 29.8%. The increase is primarily attributable to the acquisition of
Combined and Lifeline discussed above, whose operating expenses were $1,487,243
for the period. Additionally, the Company incurred several unusual expenses
totaling approximately $300,000 during the third quarter of 2002, relating to
additional listing fees for the acquisition of Combined and Lifeline and the 15%
stock dividend paid in June, 2002 with the American Stock Exchange and
cost-associated with listing the Company's Class A common stock on the New York
Stock Exchange.

Deferred policy acquisition costs capitalized for the first nine months of 2002
were $9,910,941 compared to $7,969,420 for the same period of the previous year,
an increase of 24.4%. Amortization of these costs was $7,118,730 for the first
nine months of 2002 compared to $6,333,518 for the same period of 2001, an
increase of 12.4%. Amortization of cost of insurance acquired, excess of cost
over net assets acquired ("goodwill") and other intangible assets increased to
$1,895,733 during the first nine months of 2002 from $1,366,393 for the same
period in 2001, or more than 38.7%. The increase relates to the amortization of
cost of insurance acquired with respect to the acquisition of Combined and
Lifeline that offset the Company's adoption of the new Financial Accounting
Standards Board's (FASB) accounting statement where amortization of goodwill and
other intangibles ceased since management determined that these intangibles have
an indefinite life. Persistency of the accident and health business of Combined
has historically been poor, which accelerates the amortization of the cost of
insurance acquired. During the six months since the acquisition, the Company has
amortized 12.4% of such cost of insurance acquired. The Company's analysis of
goodwill and other intangibles indicated that there was no impairment as of
September 30, 2002.

THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

Net income for the three months ended September 30, 2002 was $222,932 or $0.01
per share, compared to net income of $1,360,343, or $0.05 per share, for the
same period in 2001. The acquisition of Combined and Lifeline decreased net
income for the three months ended September 30, 2002 by $205,847. SFAS No. 142
was adopted on January 1, 2002, which changed the accounting for goodwill and
intangibles. Had SFAS No. 142 been adopted for the quarter ended September 30,
2001, pro forma net income would approximate $1,581,000 or $0.05 per share.
Increases in claims and surrenders and other underwriting, acquisition and
insurance expenses contributed to the decreased earnings for the quarter ended
September 30, 2002.

Total revenues increased 26.6% in 2002 to $22,253,889 compared to the third
quarter of 2001 when revenues were $17,582,734. The acquisition of Combined and
Lifeline increased total revenues for the three months ended September 30, 2002
by $3,790,921. The third quarter 2002

16

increase in revenues compared to third quarter 2001 was related to a 9.3%
increase in new life sales (measured in issued and paid, annualized premium) and
a 243.5% increase in accident and health premiums.

Premium income for the third quarter of 2002 was $18,537,959 compared to
$13,892,419 for the same period in 2001. The increase is comprised of a
$1,705,138 increase in life premiums and a $2,940,402 increase in accident and
health premiums. The acquisitions discussed above increased life premiums by
$504,226 and accident and health premiums by $3,058,193, offsetting a $117,791
reduction in the Company's existing book of accident and health premiums as a
result of previous terminations and rate increases. Management's plan to
continue to implement significant rate increases in supplemental non-cancelable
accident and health products if loss ratios increase, and to non-renew
unprofitable blocks of major medical may contribute to future decreases in
accident and health premiums.

Net investment income increased slightly in third quarter 2002, amounting to
$3,505,043 compared to $3,489,266 for third quarter 2001. This slight increase
reflects continued expansion of the Company's asset base that was accelerated by
the acquisition of Combined and Lifeline that was offset by decreasing yields on
new purchases of fixed maturity investments. The acquisition increased invested
assets by $15.9 million and third quarter 2002 investment income by $226,414. In
2001, management shifted the mix of the portfolio to place less emphasis on
government guaranteed mortgage pass-through instruments and more emphasis on
investments in callable instruments issued by U.S. government agencies. Sharp
drops in available yields during 2002 have made it difficult for the Company to
increase yield on such investments.

Policyholder dividends increased to $922,888 during third quarter 2002, up 1.9%
over dividends of $905,569 during third quarter 2001. Virtually all of CICA's
policies that have been sold since 1984 are participating. Participating
policies represent, approximately 54% of the Company's business in-force,
although the percentage of participating business has declined due to
acquisitions in recent years. Management expects continued growth in
participating policies because CICA will continue to focus on participating
products in its international business.

Claims and surrenders expense increased 44.3% from $7,445,642 for third quarter
2001 to $10,741,046 for the same period in 2002. Death claims increased 17.2%
from $1,310,495 for third quarter 2001 to $1,535,834 for third quarter 2002
primarily due to the impact of the Combined and Lifeline acquisition that
increased such expense by $152,057. Surrender expense increased 30.8% from
$3,757,211 for third quarter 2001 to $4,913,922 for third quarter 2002. The
economic disruption in many Latin American economies was the primary reason for
the increased surrender activity. Endowments decreased 1.1% from $1,523,142 in
third quarter 2001 to $1,506,529 in third quarter 2002. Like policy dividends,
endowments are factored into the premiums and as such the increase should have
no adverse impact on profitability. Accident and health benefits were $2,685,782
for third quarter 2002 compared to $778,427 for the same period of 2001. This
increase in accident and health benefits is directly related to the acquisition
discussed above, which generated $1,866,504 in claims.

The remaining components of claims and surrenders amounted to $98,979 for the
third quarter of 2002, compared to $76,367 for the same period in 2001. These
are made up of supplemental contract benefits, interest on policy funds and
assorted other miscellaneous policy benefits.

17

Commissions increased from $3,663,972 in third quarter 2001 to $4,362,659 for
the same period in 2002, an increase of 19.1%. The increase is attributable to
the acquisition of Combined and Lifeline discussed above, whose commissions were
$739,562 for the period.

Underwriting, acquisition and insurance expenses increased from $2,514,909 in
third quarter 2001 to $4,052,063 for the same period in 2002, an increase of
61.1%. The increase is primarily attributable to the acquisitions discussed
above, whose expenses were $867,063 for the period. Additionally, the Company
incurred several unusual expenses totaling approximately $300,000 during the
third quarter of 2002, relating to additional listing fees for the acquisition
and the 15% stock dividend paid in June, 2002 with the American Stock Exchange
and the cost associated with listing its Class A common stock on the New York
Stock Exchange.

Deferred policy acquisition costs capitalized in third quarter 2002 were
$3,979,716 compared to $3,065,171 for the same period of the previous year, an
increase of 29.8%. Amortization of these costs was $3,030,402 in third quarter
2002 compared to $2,209,468 for the same period of 2001, an increase of 37.2%.
Amortization of cost of insurance acquired, excess of cost over net assets
acquired ("goodwill") and other intangible assets increased to $1,107,176 during
third quarter 2002 from $523,757 for the same period in 2001, or more than
111.4%. The increase relates to the amortization of cost of insurance acquired
with respect to the acquisition of Combined and Lifeline that more than offset
the Company's adoption of the new Financial Accounting Standards Board's (FASB)
accounting statement where amortization of goodwill and other intangibles ceased
since management determined that these intangibles have an indefinite life.
Persistency of the Accident and Health business of Combined has historically
been poor, which accelerates the amortization of the cost of insurance acquired.
During the third quarter the Company amortized 7.5% of such cost of insurance
acquired. The Company's analysis of goodwill and other intangibles indicated
that there was no impairment as of September 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Stockholders' equity increased to $97,617,296 at September 30, 2002 from
$82,721,798 at December 31, 2001. The increase was attributable to $11,961,784
of Class A common stock issued for the acquisition of Combined and Lifeline, net
income of $2,899,636 earned during the first nine months of 2002 and unrealized
gains, net of tax increasing $34,078 during the period. Increases in the market
value of the Company's available-for-sale bond portfolio caused by higher bond
prices resulted in the change in unrealized gains, net of tax.

Invested assets increased from $206,695,811 at December 31, 2001 to $216,758,585
at September 30, 2002. The acquisitions described above were the primary reason
for the increase, adding $15.9 million to invested assets. At September 30, 2002
and December 31, 2001, fixed maturities have been categorized into two
classifications: Fixed maturities held-to-maturity, which were valued at
amortized cost, and fixed maturities available-for-sale which were valued at
fair value. Fixed maturities available-for-sale and fixed maturities
held-to-maturity were 84.1% and 5.2%, respectively, of invested assets at
September 30, 2002. Fixed maturities held-to-maturity, amounting to $11,340,682,
consist primarily of U.S. Treasury and U.S. government agency securities.
Management has the intent and believes the Company has the ability to hold the
securities to maturity. The Company has only minimal investments in equity
securities, and

18

as such has not incurred significant losses as a result of significant downturns
in equity markets during 2002.

Policy loans comprised 9.6% of invested assets at September 30, 2002. These
loans, which are secured by the underlying policy values, have yields ranging
from 5% to 10% percent and maturities that are related to the maturity or
termination of the applicable policies. Management believes that the Company
maintains more than adequate liquidity despite the uncertain maturities of these
loans.

Cash balances of the Company in its primary depository, J.P. Morgan Chase,
Austin, Texas, were significantly in excess of Federal Deposit Insurance
Corporation coverage at September 30, 2002 and December 31, 2001. At September
30, 2002, such balances were more than $17.7 million. A substantial portion of
the balances resulted from the timing difference between the collection of the
proceeds of called bonds and the subsequent investment of the funds after
September 30 in bonds issued by Federal government agencies. Management monitors
the solvency of all financial institutions in which it has funds to minimize the
exposure for loss. Management does not believe the Company is at risk for such a
loss.

The Company's mortgage loan portfolio, which constituted 0.3% of invested assets
at September 30, 2002, has historically been composed primarily of small
residential loans in Texas. During 2002, a purchase money mortgage in the amount
of approximately $358,000 originated in 1998 was paid in full. Management
continues to hold a reserve of $50,000 at September 30, 2002 (approximately 8%
of the mortgage portfolio's balance) to cover potential unforeseen losses in the
Company's mortgage portfolio. At September 30, 2002, no loans were past due more
than ninety days.

CICA owned 2,398,031 shares of Citizens Class A common stock at September 30,
2002 and 2,085,244 at December 31, 2001. (CICA received 312,787 shares on June
1, 2002 related to the 15% stock dividend on Class A common stock discussed
below.) In the Citizens consolidated financial statements, the shares of
Citizens Class A common stock owned by CICA are combined with the other treasury
shares and the aggregate treasury shares are reported at cost in conformity with
U.S. GAAP. The Statutory Accounting Practices for these shares prescribed by the
National Association of Insurance Commissioners (NAIC) and the State of Colorado
are not applicable to the U.S. GAAP consolidated financial statements of
Citizens. Those Statutory Accounting Practices are only followed with respect to
filings made in accordance with the rules and regulations of the various state
insurance departments and the NAIC and require that CICA carry its investment in
Citizens shares at market value reduced by the percentage ownership of Citizens
by CICA, limited to 2% of admitted assets.

The NAIC has established minimum capital requirements in the form of Risk-Based
Capital ("RBC"). Risk-based capital factors the type of business written by a
company, the quality of its assets, and various other factors into account to
develop a minimum level of capital called "authorized control level risk-based
capital" and compares this level to an adjusted statutory capital that includes
capital and surplus as reported under Statutory Accounting Principles, plus
certain investment reserves. Should the ratio of adjusted statutory capital to
control level risk-based capital fall below 200%, a series of actions by the
Company would begin. At December 31, 2001 and September 30, 2002, all life
insurance subsidiaries were above required minimum levels.

19

On March 26, 2002, the Board of Directors of the Company declared a 15% stock
dividend payable June 1, 2002 to holders of record as of May 1, 2002. This
dividend resulted in the issuance of 4,162,413 shares of Class A common stock
(including 333,873 in treasury) and 106,656 shares of Class B common stock. A
charge to retained earnings and a credit to capital stock of $35,416,772 were
recorded at the time the dividend was paid.

FINANCIAL ACCOUNTING STANDARDS

Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, was effective
January 1, 2001. The Company adopted SFAS No. 133, as amended, during 2001.
Implementation did not have an impact on the Company's financial statements
since it has no derivative instruments and does not participate in any hedging
activities. Based on current operations, the Company does not anticipate that
SFAS No. 133 will have a material effect on the financial position, results of
operation or liquidity of the Company.

SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - A Replacement of FASB Statement 125" was
effective after March 31, 2001. The Company adopted SFAS No. 140 during 2001.
Implementation did not have an impact on the Company's financial statements
since it was not involved in any such transfers, servicing or extinguishments.
Based on current operations, the Company does not anticipate that SFAS No. 140
will have a material effect on the financial position, results of operation or
liquidity of the Company.

In December 2000, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 00-3, "Accounting by Insurance Enterprises
for Demutualizations and Formations of Mutual Life Insurance Holding Companies
and for Certain Long-Duration Participating Contracts." SOP 00-3 provided
guidance on accounting by insurance enterprises for demutualizations and the
formation of mutual insurance holding companies. SOP 00-3 also applies to stock
insurance enterprises that apply SOP 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises" to account for participating
policies. Based on current operations, SOP 00-3 has no impact on the Company
since it is already a stock life insurance company and does not pay dividends
based on actual experience of the Company. The Company utilizes contractual life
insurance dividend scales as shown in published dividend illustrations at the
date the insurance contracts are issued in determining policyholder dividends.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," (SFAS No.
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142).
SFAS No. 141 required that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 141 also
specified criteria that intangible assets acquired in a business combination
must meet to be recognized and reported separately from goodwill. SFAS No. 142
will require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions

20

of SFAS No. 142. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and adopted the provisions of SFAS No. 142 as of January 1, 2002.

At adoption of SFAS No. 142 on January 1, 2002, the Company evaluated its
existing intangible assets and goodwill that were acquired in purchase business
combinations and made necessary reclassifications in order to conform with the
new classification criteria in SFAS No. 141 for recognition separate from
goodwill. The Company's analysis determined that all intangible assets had an
indefinite useful life. The Company tested the intangible assets for impairment
in accordance with the provisions of SFAS No. 142 during 2002 and determined
that no intangible assets were impaired.

The Company performed an assessment of whether there was indication that
goodwill was impaired as of January 1, 2002. To accomplish this, the Company
identified its reporting units and determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined the fair value of each reporting unit and compared it to
the carrying amount of the reporting unit. The fair value of the reporting units
exceeded the carrying amount, and the Company concluded that no goodwill was
impaired. This same analysis was performed with respect to the intangible assets
and goodwill recognized in the acquisition of Combined and Lifeline. That
analysis concluded that there was no goodwill or intangible asset impairment as
of September 30, 2002. As of September 30, 2002, the Company had unamortized
goodwill in the amount of $9,688,669 and unamortized identifiable intangible
assets in the amount of $2,018,125. Amortization expense related to goodwill and
intangible assets was $682,228 for the nine months ended September 30, 2001.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development or normal operations of a
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. Management does not believe SFAS No. 143 will have a significant
effect on the financial position, results of operations or liquidity of the
Company.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 superseded and amended SFAS No. 121
and relevant portions of SFAS No. 30. SFAS No. 144 was adopted on January 1,
2002. SFAS No. 144 did not have a material effect on the financial position,
results of operation or liquidity of the Company.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 will affect income statement classification of gains and losses from
extinguishment of debt and make certain other technical corrections. Based on
current operations, the Company does not

21

anticipate that SFAS No. 145 will have a material effect on the financial
position, results of operations or liquidity of the Company.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 spreads out the reporting of
expenses related to restructurings initiated after 2002. Commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be enough
evidence to record a one-time charge for most anticipated exit or disposal
activities. Companies will instead record exit or disposal costs when they are
"incurred" and can be measured by fair value and the recorded liability will
subsequently be adjusted for changes in estimated cash flows. SFAS No. 146 will
also revise accounting for specified employee and contract terminations that are
part of restructuring activities. Based on current operations, the Company does
not anticipate that SFAS No. 146 will have a material effect on the financial
position, results of operations or liquidity of the Company.

22

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The unrealized gains (losses) that could be caused by decreases and increases in
the interest rates of 100, 200 and 300 basis points, respectively, on the
Company's available-for-sale fixed maturities is as follows at September 30,
2002:

At September 30, 2002 and December 31, 2001, there were no fixed maturities or
other investments that the Company classified as trading instruments. At
September 30, 2002 and December 31, 2001, there were no investments in
derivative instruments.

ITEM 4

CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rules 13a-14(c) and 15d-14(c) of the Securities Exchange
Act of 1934. Based upon that evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information required to be
included in this quarterly report on Form 10-Q.

There have been no significant changes in our internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date that we carried out our evaluation.

Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These limitations
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failure such as simple
errors or mistakes or because of intentional circumvention of established
processes.

23

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is from time to time involved in litigation, which is
incidental to its business. Other than as set forth below, the Company
is not a party to any material legal proceedings.

On July 31, 2002, class action certification was granted by a Travis
County, Texas district court judge to the plaintiffs in a lawsuit filed
in 1999 style Delia Bolanos Andrade, et al v. Citizens Insurance
Company of America, Citizens, Inc., Negocios Savoy, S.A., Harold E.
Riley, and Mark A. Oliver, Case Number 99-09099. The suit alleges that
life insurance policies sold to certain non-U.S. residents by Citizens
Insurance Company of America are securities and were sold in violation
of the registration provisions of the Texas securities laws. The suit
seeks class action status naming as a class all non-U.S. residents who
made premium payments since August 1996 and assigned policy dividends
to a trust for the purchase of Citizens, Inc. Class A common stock. The
remedy sought is rescission of the insurance premium payments. An
appeal of the class action certification by the district court has been
made to the Texas Court of Appeals. Litigation counsel and defendants
believe that the district court ruling is significantly in error and
that there are substantial grounds for reversal. During the time of the
appeal, the district court proceedings will be stayed. In the event the
case proceeds to a trial, the defendants intend to defend vigorously
against the claims. The Company is unable to determine the potential
magnitude of the claims in the event of a final class action
certification and the plaintiffs prevailing in the substantive action.

ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 26, 2002, the Company's Board of Directors declared a 15%
Class A and Class B common stock dividend, payable on June 1, 2002 to
holders of record as of May 1, 2002.

The Company filed a Form 8-A regarding the listing of its Class A
Common Stock on the New York Stock Exchange on July 25, 2002. The
listing was effective on August 22, 2002.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

24

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS:

99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
99.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350

REPORTS ON FORM 8-K:

None.

25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CITIZENS, INC.

By: /s/ Mark A. Oliver
----------------------------------------
Mark A. Oliver, FLMI
President

By: /s/ Jeffrey J. Wood
----------------------------------------
Jeffrey J. Wood, CPA
Executive Vice President, Treasurer and
Chief Financial Officer

Date: November 13, 2002

26

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
OF CITIZENS, INC. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

As adopted by the SEC, Rules 13a-14 and 15d-14 under the Securities
and Exchange Act of 1934 (the "Exchange Act"), I Rick D. Riley, Chief Executive
Officer of Citizens, Inc., hereby certify that:

o I have reviewed this report on Form 10-Q of Citizens, Inc. (the
"Company").

o based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading with respect
to the period covered by this quarterly report;

o based on my knowledge, the financial statements and other financial
information in the report fairly present in all material respects the
financial condition, results of operations and cash flows for the
periods presented in this quarterly report;

o Along with Jeffrey J. Wood, Chief Financial Officer, I:

o am responsible for establishing and maintaining corporate
"disclosure controls and procedures" for the Company;

o have designed such disclosures and procedures to ensure that
material information is made known, particularly during the
period in which this quarterly report is being prepared;

o have evaluated the effectiveness of the Company's disclosure
controls and procedures as of the date within 90 days prior
to the filing date of this quarterly report; and

o have presented in the report my conclusions about the
effectiveness of the disclosure controls and procedures
based on the required evaluation as of that date; and

o Along with Jeffrey J. Wood, Chief Financial Officer, I have disclosed
to the Company's auditors and to the audit committee of the Board of
Directors:

o all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process,

27

summarize and report financial data and have identified for
the Company's auditor's any material weaknesses in internal
controls; and

o any fraud, whether or not material, that involves management
or any employees who have a significant role in the
Company's internal controls; and

o Along with Jeffrey J. Wood, have indicated in this quarterly report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

/s/ Rick D. Riley
---------------------------------
Name: Rick D. Riley
Title: Chief Executive Officer
Date: November 13, 2002

28

CERTIFICATION OF CHIEF FINANCIAL OFFICER
OF CITIZENS, INC. PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

As adopted by the SEC, Rules 13a-14 and 15d-14 under the Securities
and Exchange Act of 1934 (the "Exchange Act"), I Jeffrey J. Wood, Chief
Financial Officer of Citizens, Inc., hereby certify that:

o I have reviewed this report on Form 10-Q of Citizens, Inc. (the
"Company").

o based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading with respect
to the period covered by this quarterly report;

o based on my knowledge, the financial statements and other financial
information in the report fairly present in all material respects the
financial condition, results of operations and cash flows for the
periods presented in this quarterly report;

o Along with Rick D. Riley, Chief Executive Officer, I:

o am responsible for establishing and maintaining corporate
"disclosure controls and procedures" for the Company;

o have designed such disclosures and procedures to ensure that
material information is made known, particularly during the
period in which this quarterly report is being prepared;

o have evaluated the effectiveness of the Company's disclosure
controls and procedures as of the date within 90 days prior
to the filing date of this quarterly report; and

o have presented in the report my conclusions about the
effectiveness of the disclosure controls and procedures
based on the required evaluation as of that date; and

o Along with Rick D. Riley, Chief Executive Officer, I have disclosed to
the Company's auditors and to the audit committee of the Board of
Directors:

o all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process,

29

summarize and report financial data and have identified for
the Company's auditor's any material weaknesses in internal
controls; and

o any fraud, whether or not material, that involves management
or any employees who have a significant role in the
company's internal controls; and

o Along with Rick D. Riley, have indicated in this quarterly report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.

/s/ Jeffrey J. Wood
---------------------------------
Name: Jeffrey J. Wood
Title: Chief Financial Officer
Date: November 13, 2002

30

EXHIBIT INDEX