• Changes in consumer behavior, which may affect our ability to sell our products and retain business;

• The timely development of and acceptance of new products of the Company and perceived overall value of these products and services by existing potential customers;

• Fluctuations in experience regarding current mortality, morbidity, persistency and interest rates relative to expected amounts used in pricing our products;

• Changes in assumptions related to deferred acquisition costs and the value of business acquired;

• Regulatory, accounting or tax changes that may affect the cost of, or the demand for, our products or services; and

• Our concentration of business from persons residing in Latin America and the Pacific Rim; and, our success at managing the risks involved in the foregoing.

Such forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. We make available, free of charge, through our Internet website (http://www.citizensinc.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 reports filed by officers and directors, news releases, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. We are not including any of the information contained on our website as part of, or incorporating it by reference into, this Quarterly Report on Form 10-Q.

Overview
We are an insurance holding company serving the life insurance needs of individuals in the United States and in more than 35 countries around the world. We pursue a strategy of offering ordinary whole life insurance with a focus on cash accumulation and final expense insurance products in niche markets where we believe we are able to achieve competitive advantages. Our core operations include issuing and servicing:
• U.S. Dollar-denominated ordinary whole life insurance policies predominantly to high net worth, high income foreign residents, principally in Latin America and the Pacific Rim, through approximately 2,350 independent marketing consultants;

• ordinary whole life insurance policies to middle income households in the Midwest and the southern United States through approximately 400 independent marketing consultants; and

• final expense and limited liability property policies to middle and lower income households in Louisiana through approximately 320 employee agents in our home service distribution channel.

We primarily operate through two segments as follows:
Life Insurance. For more than 30 years, CICA and its predecessors have participated in the foreign marketplace through the issuance of U.S. Dollar-denominated ordinary whole life insurance to foreign nationals. Traditionally, this market has focused on the top 3-5% of the population of a country in terms of income and net worth. In recent years, however, there has been a shift to encompass a broader spectrum of the population, as upper middle classes develop in Latin America and the Pacific Rim. We make our insurance products available using third-party marketing organizations and independent marketing consultants. The number of our producing independent consultants has expanded over the years in this segment to approximately 2,350, and we presently receive applications from more than 35 countries outside of the U.S. Historically, the majority of our international business has come from Latin America. However, in 2004 the Pacific Rim began to represent a meaningful and growing source of new business.
In the first nine months of 2008, our Life Insurance segment generated revenue of $85.1 million, which accounted for 69.0% of our total revenue, compared to revenue of $81.4 million, or 67.4% of total revenue for the same period in 2007. In the second quarter of 2008, CICA introduced a new set of international life insurance products. We anticipate these new products will be well received in the international market. Our strategy in operating our Life Insurance segment is to increase new business written through our existing marketers as well as recruit new marketers and expand the number of countries from which we receive policy applications.
Through the domestic market of our Life Insurance segment, we provide ordinary whole life, credit life insurance, and final expense policies to middle income families or individuals in certain markets in the Midwest and southern U.S. The majority of our revenues in this market are the result of acquisitions of domestic life insurance companies since 1987.
Home Service Insurance. Through a subsidiary, SPLIC, we provide final expense ordinary life insurance to middle and lower income individuals, primarily in Louisiana. Our policies in this segment are sold and serviced through the home service marketing distribution system utilizing employee-agents who work on a route system to collect premiums and service policyholders.
At December 31, 2007, the Security Plan in force policies were transitioned to the Company's integrated policy administration system and Security Plan's original computer system was eliminated for production purposes and continues to be available only for historical information inquiry. The conversion was successful and all in force amounts were reconciled between systems. The Company recognized, due to the uniqueness of home service business, that some actuarial estimates would be necessary on an interim basis until the home service administrative modifications and enhancements are completed later in 2008 or early 2009.

During the first nine months of 2008, revenue from this segment was $38.6 million, which accounted for 31.3% of our total revenue, compared to revenue from this segment of $39.2 million, or 32.4% of total revenue, during the same period in 2007. Our business strategy in this segment is to continue to serve existing customers in Louisiana as well as expand the business through the acquisition of similar operations. Premiums were adversely affected by Hurricane Gustav, which hit Louisiana in the third quarter of 2008, as SPFIC had to pay additional catastrophe reinsurance premiums of $478,000 for second event reinstatement and third event coverage on potential future hurricanes in 2008. Marketplace Conditions and Trends
Described below are some of the significant recent events and trends affecting the life insurance industry and the possible effects they may have on our future operations.
• As an increasing percentage of the world population reaches retirement age, we believe we will benefit from increased demand for living products rather than death products, as aging baby boomers will require cash accumulation to provide expenses to meet their lifetime needs. Our ordinary life products are designed to accumulate cash values to provide for living expenses in a policy owner's later years, while continuously providing a death benefit.

• We are exposed to a variety of risks, including the current market conditions as well as the credit crisis and corresponding potential changes in the fair value of our investments. In the normal course of business, we employ established policies and procedures to manage our exposure to fluctuations in the current market and changes in the fair value of our investments. We have not experienced any significant impairment in the value of our securities due to the current credit crisis in world financial markets. An immaterial impairment was recorded in the third quarter of 2008 as noted below. We have no subprime or collateralized debt investments.

• The volatility in the equity markets over the past few years has posed a number of problems for some companies in the life insurance industry. Our equity holdings have been limited to 8.2% of total invested assets as of September 30, 2008 and 6.1% at December 31, 2007.

• Corporate bond defaults and credit downgrades, which have resulted in other-than-temporary impairments in the value of some securities, have had a material impact on life insurers in the past few years. The Company recorded a loss of $223,000 during the quarter ended September 30, 2008, resulting from the other-than-temporary impairment of one Lehman Brothers bond holding. No bond other-than-temporary impairments were taken during 2007. The majority of our investment portfolio is held in debt instruments in U.S. Government-sponsored enterprises. Most of the municipal bonds we own are privately insured. We intend to manage our investment portfolio in the future using these types of debt instruments. At September 30, 2008, 71.5% of our fixed maturity securities were invested in U.S. Government-sponsored enterprises, including Fannie Mae and Freddie Mac. The recent stock market turmoil related to these companies has not affected our bond holdings in these entities. The Company continues to monitor these investments, and has not seen any material decrease in the prices of these bonds.

• Because of the trends described above coupled with increasing costs of regulatory compliance such as the Sarbanes-Oxley Act of 2002, we believe there is a trend towards consolidation of domestic life insurance companies. We believe this should be a benefit to our acquisition strategy because there should be more complementary acquisition candidates available for us to consider.

• Many of the events and trends affecting the life insurance industry have had an impact on the life reinsurance industry. These events led to a decline in the availability of reinsurance. While we currently cede a limited amount of our primary insurance business to reinsurers, we may find it difficult to obtain reinsurance in the future, forcing us to seek reinsurers who are more expensive to us. If we cannot obtain affordable reinsurance coverage, either our net exposures will increase or we will have to reduce our underwriting commitments.

Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007 All comparisons below state the 2008 third fiscal quarter first and the 2007 third fiscal quarter second.
Consolidated Results of Operations
We incurred a net loss of $814,000 compared to net income of $4.7 million for the same period of 2007. The primary causes of this variance was due to a decrease in income in the Home Service segment. This was caused by property losses incurred by SPFIC from Hurricanes Gustav and Ike, higher commissions, and higher death claims. This resulted in a loss of $2.3 million for the quarter in the Home Service segment. Additionally, in the consolidated results of operations there was a loss from an increase in fair value of warrants associated with the Company's preferred stock and higher expenses. Total consolidated revenues were $40.2 million, a 3.8% decrease compared to $41.7 million. Total revenues from our Life Insurance segment amounted to $28.8 million, compared to $28.6 million. Total revenues from Home Service were $12.5 million during the third quarter of 2008 and $13.2 million during the same period in 2007.
During the quarter, SPFIC was impacted by two hurricanes, Gustav and Ike. The Company has catastrophic reinsurance covering both events. Claims from Hurricane Gustav will exceed $3.2 million, but are reinsured above our retention of $500,000. Hurricane Ike is expected to be a less significant event. The financial statement impact of both hurricanes for the quarter was approximately $1.1 million. The incurred loss on Gustav included our $500,000 retention limit and reinsurance reinstatement premiums of $478,000. Reserves for Hurricane Ike were $135,000. Additionally, $104,000 in reserves was accrued related to ongoing litigation on disputed claims from Hurricane Katrina, which occurred on 2005. The Company believes it is properly reserved for these storms, and does not anticipate future losses.
Premium Income. Premium income decreased to $34.0 million from $34.3 million. The decrease was attributable to a slowdown in new business written internationally, as well as additional casualty reinsurance premiums. International business is down, due to a longer than anticipated acceptance period for our new products, and market disruptions in some of our larger areas. Net Investment Income. Net investment income increased 2.6% to $7.5 million compared to $7.4 million, due primarily to the growth in our investment portfolio during 2008. Additionally, during 2007 and through the third quarter of 2008, we invested $60.7 million in equity mutual funds. We expect to use equity mutual fund investments of about 10% of total invested assets to diversify our holdings. We continue to invest primarily in bonds of U.S. Government-sponsored enterprises, such as Fannie Mae and Freddie Mac. Increase in Fair Value of Warrants. We incurred a loss on the increase in fair value of warrants of $1.5 million in 2008 compared to a loss of $300,000 in 2007. The sizeable loss in 2008 was directly related to the increase in the price of our Class A common stock, as well as an increase in volatility. The warrant liability is calculated using the Black-Scholes option pricing model, which attempts to predict the value of the options when they expire in July 2011 and 2012. Current accounting standards require that the change in the value of the warrant liability is a component of revenues. When the liability goes up we incur a loss, and when the liability goes down we generate income. The warrant liability has no affect on the Company's cash flows, as the Company expects the warrants will be converted into our Class A common stock in July 2011, or sooner, at the election of the warrant holders, or expire.

Claims and Surrenders. As noted in the table below, claims and surrenders increased to $13.9 million from $12.7 million, due primarily to an increase in property claims and an increase in endowment benefits.

                                          Three Months Ended September 30,
                                             2008                  2007
                                                   (In thousands)

         Death claims                   $         5,156                 5,215
         Surrender benefits                       3,591                 3,680
         Endowments                               3,415                 3,152
         Property claims                          1,178                  (176 )
         Other policy benefits                      419                   732
         Accident and health benefits                96                    93

         Total claims and surrenders    $        13,855                12,696

Endowments were up $263,000, or 8.3%, as maturities within the block of business that features the endowment benefit continue to grow. This benefit is priced into the premium and does not have a negative impact on results of operations. Property claims were up $1.4 million. Hurricanes Gustav and Ike swept through Louisiana during the third quarter of 2008, accounting for $635,000 of the increase. During the third quarter of 2007, we released reserves of $524,000 related to the 2005 hurricanes.
Change in Reserves. Reserves increased from $8.7 million in 2007 to $10.2 million in 2008. There were $1.0 million of reserve increases in the third quarter that related to the manual lapse adjustment in the second quarter. This adjustment was for policies which paid up in the third quarter or were adjustments to the original estimate.
Other Underwriting, Acquisition and Insurance Expenses. Expenses increased to $7.3 million from $6.7 million, primarily due to an increase in staff at the Austin office, as well as a $161,000 increase in international shipping costs. Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs ("DAC") decreased 13.1% to $5.7 million from $6.6 million. This was also a direct consequence of reduced international new business production, as less commissions and expenses were capitalized. Amortization of these costs was $3.9 million and $3.0 million in 2008 and 2007, respectively. This increase is primary due to changes in our product mix, which have a shorter amortization period.
Federal Income Tax. We have a tax expense of $316,000 in 2008 on a pretax loss of $498,000. This is because the increase in fair value of warrants is not deductible for tax purposes. Without the $1.5 million change in warrant loss, the effective tax rate is 32.1%. The tax rate was low in 2007, due to the release of a tax valuation allowance of $1.2 million in the third quarter of 2007.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007 All comparisons below state the 2008 nine months first and the 2007 nine months second.
Consolidated Results of Operations
Net income for the nine months ended September 30, 2008 was $4.9 million, compared to $10.6 million for the same period of 2007. The primary cause of this variance was due to a decrease in income in the Home Service segment. This was caused by property losses incurred by SPFIC from Hurricanes Gustav and Ike, higher commissions, and higher death claims. Additionally, in the consolidated results of operations there was a loss from an increase in fair value of warrants associated with the Company's preferred stock.

Total revenues were $123.4 million, a 2.1% increase over revenues of $120.9 million. Total revenues from our Life Insurance segment amounted to $85.1 million, compared to $81.4 million, reflecting continued strong renewal premium on the international business. Total revenues from Home Service decreased slightly to $38.6 million from $39.2 million.
Premium Income. Premium income increased to $101.9 million from $98.8 million, or 3.1%. The increase was attributable to persistency on the international business written in the Life Insurance segment, which had $72.6 million of premium income during the period. First year premiums in the Life Insurance segment during the first nine months of 2008 were down $1.9 million from comparable levels in 2007. This was primarily due to the slow production in the first quarter of 2008, as the international associates awaited the release of the new products. In the future, we expect our international sales production to reach or exceed the level achieved in 2007, as our new products gain additional popularity.
Net Investment Income. Net investment income increased 4.7% to $22.5 million, compared to $21.5 million, due primarily to the growth in our investment portfolio during 2008. Additionally, during 2007 and through the third quarter of 2008, we invested $60.7 million in equity mutual funds. We expect to keep equity mutual fund investments at about 10% of total invested assets to diversify our holdings and enhance potential returns. We continue to invest primarily in bonds of U.S. Government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Increase in Fair Value of Warrants. We incurred a loss on increase in fair value of warrants of $1.7 million in 2008 compared to a loss of $496,000 in 2007. The sizeable loss in 2008 was directly related to the increase in the price of our Class A common stock, as well as an increase in volatility. The warrant liability is calculated using the Black-Scholes option pricing model, which attempts to predict the value of the options when they expire in July 2011 and 2012. Current accounting standards require that the change in the value of the warrant liability is a component of revenues. When the liability goes up we incur a loss, and when the liability goes down we generate income. The warrant liability has no affect on the Company's cash flows, as the Company expects the warrants will be converted into our Class A common stock in July 2011, or sooner, at the election of the warrant holders, or expire.
Claims and Surrenders. As noted in the table below, claims and surrenders increased to $41.7 million from $37.9 million, due primarily to an increase in death and property claims and an increase in endowments.

                                           Nine Months Ended September 30,
                                             2008                  2007
                                                   (In thousands)

         Death claims                   $        17,058                16,152
         Surrender benefits                      10,768                10,154
         Endowments                              10,209                 9,183
         Property claims                          2,226                   649
         Other policy benefits                    1,146                 1,498
         Accident and health benefits               256                   264

         Total claims and surrenders    $        41,663                37,900

Death claims were up $906,000, comparatively, primarily due to a one-time 2007 period correction of an overstated prior year's claim liability of $650,000, which reduced 2007 death claim expense.
Surrenders were up $614,000 in 2008 as a result of the growth of insurance in force. Surrenders as a percent of ordinary whole life insurance were 0.3% of insurance in force in both 2008 and 2007.
Endowments were up 11.2%, or $1.0 million, as maturities within this block of policies have grown in recent years. The benefit is priced into the premium and does not have an adverse impact on results of operation.

Property claims were up $1.6 million. Hurricanes Gustav and Ike swept through Louisiana during the third quarter of 2008, accounting for $635,000 of the increase. During the third quarter of 2007, we released reserves of $524,000 related to the 2005 hurricanes.
Policyholder Dividends. Policyholder dividends increased 5.9% to $4.6 million from $4.3 million, due to the continued sale and persistency of participating ordinary whole life products in the international market. All of our international policies are participating, and the growth of this block of business has contributed to the growth in dividends. The dividends are factored into the premiums and have minimal impact on profitability. Change in Reserves. Reserves increased from $24.0 million in 2007 to $24.9 million in 2008 on an increase in life premium income of approximately $3.0 million.
Commissions. Commissions decreased to $25.9 million from $26.3 million in 2007, primarily due to the previously mentioned slowdown of new international policies issued in 2008. Offsetting a decrease in the Life Insurance segment commissions is an increase in Home Service commissions. Since conversion, Home Service commission calculations are manually estimated outside of the policy administration system based on growth of the in force annualized premium block. This estimation method has resulted in payment of commissions to agents in excess of the historical commissions during the nine months ended September 30, 2008 of approximately $1.0 million. The goal is to complete home service system enhancements by the end of 2008, which management believes will reflect commissions more in line with those paid prior to conversion.
Other Underwriting, Acquisition and Insurance Expenses. Expenses increased slightly to $21.2 million from $21.0 million, due primarily to an increase in salary expense, legal costs and international shipping, offset by a decrease in audit fees.
Deferred Policy Acquisition Costs. Capitalized deferred policy acquisition costs decreased 13.4% to $16.9 million from $19.5 million. This was a direct consequence of the reduction in new international business, as less commissions and expenses were capitalized. Amortization of these costs was $11.5 million and $9.5 million in 2008 and 2007, respectively. This increase is primarily due to changes in our product mix, which have a shorter amortization period. Federal Income Tax. The effective tax rate for 2008 is 40.2%. If the non-deductible loss on the increase in the fair value of warrants is factored out, the effective tax rate is 33.4%. The effective tax rate for 2007 is 28.8%. This is low because a tax valuation allowance of $1.2 million was released in 2007, causing a reduction in tax expense.

We are committed to the following contractual obligations as of September 30, 2008 with the payments due by the period indicated below:

                                                Less than 1                                                More than 5
Contractual Obligations          Total             Year            1 to 3 Years        3 to 5 Years           Years
                                                                    (In thousands)
Operating leases               $      834                383                 409                  42                  -

Future policy benefit
reserves:
Life insurance                    529,565                197               1,105              10,370            517,893
. . .