nwl10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2007
 
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission File Number: 2-17039
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
 
 
   
COLORADO
84-0467208
(State of Incorporation)
(I.R.S. Employer Identification Number)
   
850 EAST ANDERSON LANE
 
AUSTIN, TEXAS 78752-1602
(512) 836-1010
(Address of Principal Executive Offices)
(Telephone Number)
   
   
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:   Yes þ   No o
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated file" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o     Accelerated filer  þ     Non-accelerated filer   o
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No þ
   
As of November 7, 2007, the number of shares of Registrant's common stock outstanding was:   Class A – 3,422,324 and Class B - 200,000.





   
 
Page
   
3
   
3
   
3
September 30, 2007 (Unaudited) and December 31, 2006
 
   
5
For the Three Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
6
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
7
For the Three Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
8
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
9
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
10
For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)
 
   
12
   
24
Financial Condition and Results of Operations
 
   
48
   
48
   
48
   
48
   
48
   
49
   
49
   
50


 
   
 
   
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
(In thousands)
 
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
   
2007
   
2006
 
ASSETS
           
Investments:
           
Securities held to maturity, at amortized cost
  $
3,750,933
     
3,603,434
 
Securities available for sale, at fair value
   
1,893,854
     
1,902,568
 
Mortgage loans, net of allowances for possible
               
losses ($3,566 and $2,100)
   
98,852
     
103,325
 
Policy loans
   
84,377
     
86,856
 
Derivatives
   
51,797
     
72,012
 
Other long-term investments
   
16,965
     
22,822
 
                 
Total investments
   
5,896,778
     
5,791,017
 
                 
Cash and short-term investments
   
41,036
     
49,901
 
Deferred policy acquisition costs
   
653,893
     
643,964
 
Deferred sales inducements
   
101,888
     
93,139
 
Accrued investment income
   
63,469
     
64,393
 
Federal income tax receivable
   
10,922
     
-
 
Other assets
   
47,197
     
51,029
 
                 
    $
6,815,183
     
6,693,443
 
                 
                 
Note:  The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.
 

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
2007
   
2006
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $
138,720
     
138,382
 
Universal life and annuity contracts
   
5,454,962
     
5,395,075
 
Other policyholder liabilities
   
117,342
     
112,449
 
Federal income tax liability:
               
Current
   
-
     
1,666
 
Deferred
   
46,366
     
32,207
 
Other liabilities
   
77,727
     
80,680
 
                 
Total liabilities
   
5,835,117
     
5,760,459
 
                 
COMMITMENTS AND CONTINGENCIES (Note 5 and 9)
               
                 
STOCKHOLDERS' EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,422,324 and
               
3,420,824 issued and outstanding in 2007 and 2006
   
3,422
     
3,421
 
Class B - $1 par value; 200,000 shares authorized, issued,
               
and outstanding in 2007 and 2006
   
200
     
200
 
Additional paid-in capital
   
36,236
     
36,110
 
Accumulated other comprehensive loss
    (9,458 )     (3,731 )
Retained earnings
   
949,666
     
896,984
 
                 
Total stockholders' equity
   
980,066
     
932,984
 
                 
    $
6,815,183
     
6,693,443
 
                 
                 
Note:  The condensed consolidated balance sheet at December 31, 2006, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2007
   
2006
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $
4,755
     
3,654
 
Universal life and annuity contract revenues
   
30,025
     
26,923
 
Net investment income
   
75,075
     
96,049
 
Other income
   
3,786
     
3,064
 
Realized gains (losses) on investments
    (1,505 )    
190
 
                 
Total premiums and other revenue
   
112,136
     
129,880
 
                 
Benefits and expenses:
               
Life and other policy benefits
   
11,337
     
9,212
 
Amortization of deferred acquisition costs
   
25,238
     
24,430
 
Universal life and annuity contract interest
   
38,219
     
59,065
 
Other operating expenses
   
12,871
     
12,513
 
                 
Total benefits and expenses
   
87,665
     
105,220
 
                 
Earnings before Federal income taxes
   
24,471
     
24,660
 
                 
Provision (benefit) for Federal income taxes:
               
Current
    (2,836 )    
8,214
 
Deferred
   
11,685
     
374
 
                 
Total Federal income taxes
   
8,849
     
8,588
 
                 
Net earnings
  $
15,622
     
16,072
 
                 
                 
Basic Earnings Per Share
  $
4.31
     
4.44
 
                 
                 
Diluted Earnings Per Share
  $
4.28
     
4.40
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               


 
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2007
   
2006
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $
14,074
     
11,742
 
Universal life and annuity contract revenues
   
87,474
     
79,477
 
Net investment income
   
260,033
     
261,059
 
Other income
   
10,461
     
11,271
 
Realized gains on investments
   
2,901
     
3,229
 
                 
Total premiums and other revenue
   
374,943
     
366,778
 
                 
Benefits and expenses:
               
Life and other policy benefits
   
32,748
     
28,300
 
Amortization of deferred acquisition costs
   
74,660
     
69,443
 
Universal life and annuity contract interest
   
143,037
     
138,678
 
Other operating expenses
   
43,354
     
51,611
 
                 
Total benefits and expenses
   
293,799
     
288,032
 
                 
Earnings before Federal income taxes
   
81,144
     
78,746
 
                 
Provision (benefit) for Federal income taxes:
               
Current
   
6,551
     
28,987
 
Deferred
   
18,448
      (2,585 )
                 
Total Federal income taxes
   
24,999
     
26,402
 
                 
Net earnings
  $
56,145
     
52,344
 
                 
                 
Basic Earnings Per Share
  $
15.50
     
14.46
 
                 
                 
Diluted Earnings Per Share
  $
15.37
     
14.32
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
 
For the Three Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Net earnings
  $
15,622
     
16,072
 
                 
Other comprehensive income (loss), net of effects of
               
deferred policy acquisition costs and taxes:
               
Net unrealized gains on securities:
               
Net unrealized holding gains arising during period
   
4,860
     
15,866
 
Reclassification adjustment for (gains) and losses included
               
in net earnings
   
16
      (42 )
Amortization of net unrealized gains
               
related to transferred securities
   
25
     
6
 
                 
Net unrealized gains on securities
   
4,901
     
15,830
 
                 
Foreign currency translation adjustments
   
47
      (317 )
Benefit plan adjustment
   
308
     
-
 
                 
Other comprehensive income
   
5,256
     
15,513
 
                 
Comprehensive income
  $
20,878
     
31,585
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Net earnings
  $
56,145
     
52,344
 
                 
Other comprehensive income (loss), net of effects of
               
deferred policy acquisition costs and taxes:
               
Net unrealized losses on securities:
               
Net unrealized holding losses arising during period
    (3,745 )     (4,394 )
Reclassification adjustment for gains included in net earnings
    (2,848 )     (1,740 )
Amortization of net unrealized gains (losses)
               
related to transferred securities
   
79
      (90 )
                 
Net unrealized losses on securities
    (6,514 )     (6,224 )
                 
Foreign currency translation adjustments
    (139 )     (152 )
Benefit plan adjustment
   
926
     
-
 
                 
Other comprehensive loss
    (5,727 )     (6,376 )
                 
Comprehensive income
  $
50,418
     
45,968
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
Common stock:
           
Balance at beginning of year
  $
3,621
     
3,613
 
Shares exercised under stock option plan
   
1
     
8
 
                 
Balance at end of period
   
3,622
     
3,621
 
                 
Additional paid-in capital:
               
Balance at beginning of year
   
36,110
     
37,923
 
Shares exercised under the stock option plan
   
126
     
510
 
Adjustment for stock option liability classification
   
-
      (1,211 )
                 
Balance at end of period
   
36,236
     
37,222
 
                 
Accumulated other comprehensive income:
               
Unrealized gains (losses) on securities:
               
Balance at beginning of year
   
3,148
     
10,401
 
Change in unrealized losses during period
    (6,514 )     (6,224 )
                 
Balance at end of period
    (3,366 )    
4,177
 
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
   
3,122
     
3,300
 
Change in translation adjustments during period
    (139 )     (152 )
                 
Balance at end of period
   
2,983
     
3,148
 
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (10,001 )     (3,137 )
Change in benefit plan liability adjustment during period
   
926
     
-
 
                 
Balance at end of period
    (9,075 )     (3,137 )
                 
Accumulated other comprehensive loss at end of period
    (9,458 )    
4,188
 
                 
Retained earnings:
               
Balance at beginning of year
   
896,984
     
821,908
 
Cumulative effect of change in accounting principle, net of tax
    (2,195 )    
-
 
Net earnings
   
56,145
     
52,344
 
Stockholder dividends
    (1,268 )     (1,267 )
                 
Balance at end of period
   
949,666
     
872,985
 
                 
Total stockholders' equity
  $
980,066
     
918,016
 
                 
                 
See accompanying notes to condensed consolidated financial statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Cash flows from operating activities:
           
Net earnings
  $
56,144
     
52,344
 
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
   
143,037
     
138,678
 
Surrender charges and other policy revenues
    (26,776 )     (24,226 )
Realized gains on investments
    (2,901 )     (3,229 )
Accrual and amortization of investment income
    (3,829 )     (3,793 )
Depreciation and amortization
   
746
     
1,030
 
(Increase) decrease in value of derivatives
   
26,393
      (7,901 )
Increase in deferred policy acquisition and sales inducement costs
    (9,730 )     (6,479 )
(Increase) decrease in accrued investment income
   
924
      (615 )
(Increase) decrease in other assets
   
582
      (7,126 )
Increase (decrease) in liabilities for future policy benefits
   
338
      (612 )
Increase in other policyholder liabilities
   
4,893
     
15,913
 
Increase (decrease) in Federal income tax liability
   
6,861
     
987
 
Increase (decrease) in other liabilities
    (5,924 )    
14,941
 
Other
   
168
      (72 )
                 
Net cash provided by operating activities
   
190,926
     
169,840
 
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
   
5,175
     
-
 
Securities available for sale
   
28,418
     
21,502
 
Other investments
   
33,255
     
32,951
 
Proceeds from maturities and redemptions of:
               
Securities held to maturity
   
106,023
     
199,590
 
Securities available for sale
   
268,999
     
86,848
 
Purchases of:
               
Securities held to maturity
    (256,014 )     (254,994 )
Securities available for sale
    (284,742 )     (160,576 )
Other investments
    (35,619 )     (33,039 )
Principal payments on mortgage loans
   
21,623
     
8,867
 
Cost of mortgage loans acquired
    (18,480 )     (3,999 )
Decrease in policy loans
    (2,309 )     (29 )
Other
    (2,006 )     (247 )
                 
Net cash used in investing activities
    (135,677 )     (103,126 )
                 
                 
   
(Continued on next page)
 



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Nine Months Ended September 30, 2007 and 2006
 
(Unaudited)
 
(In thousands)
 
             
             
   
2007
   
2006
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $
380,708
     
419,003
 
Return of account balances on universal life
               
and annuity contracts
    (444,877 )     (393,077 )
Issuance of common stock under stock option plan
   
127
     
510
 
                 
Net cash (used in) provided by financing activities
    (64,042 )    
26,436
 
                 
Effect of foreign exchange
    (72 )    
738
 
                 
Net increase (decrease) in cash and short-term investments
    (8,865 )    
93,888
 
Cash and short-term investments at beginning of year
   
49,901
     
31,355
 
                 
Cash and short-term investments at end of period
  $
41,036
     
125,243
 
                 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
                 
Cash paid during the nine month period for:
               
Interest
  $
30
     
30
 
Income taxes
   
19,155
     
24,990
 
                 
                 
                 
See accompanying notes to condensed consolidated financial statements.
 



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)  CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements.  In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 2007, and the results of its operations and its cash flows for the three months and nine months ended September 30, 2007 and 2006.  The results of operations for the three months and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 accessible free of charge through the Company's internet site at www.nationalwesternlife.com or the Securities and Exchange Commission internet site at www.sec.gov.

The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries ("Company"), The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., and NWL Financial, Inc.  All significant intercorporate transactions and accounts have been eliminated in consolidation.

Certain reclassifications have been made to the prior periods to conform to the reporting categories used in 2007.


(2)  CHANGES IN ACCOUNTING PRINCIPLES

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts ("SOP 05-1") which is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. 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 FASB No. 97. 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.  The Company has an impact related to the adoption of SOP 05-1 for contracts which have annuitized and relative to reinstatements of contracts in that the unamortized deferred acquisition costs and deferred sales inducement assets must be written-off at the time of annuitization and may not be continued related to reinstatements.  SOP 05-1 results in changes in assumptions relative to estimated gross profits which affects unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement balances as of the beginning of the year.  The effect of this SOP on beginning retained earnings as of January 1, 2007 was a decrease of $2.2 million, net of tax, as detailed below.

   
Amounts
 
   
(In thousands)
 
       
Write-off of deferred acquisition cost
  $
3,321
 
Adjustment to deferred annuity revenue
   
56
 
     
3,377
 
         
Federal income tax
    (1,182 )
         
Cumulative effect of change in accounting for
       
internal replacements and investment contracts
  $
2,195
 


The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FIN 48"), dated June, 2006. The interpretation requires public companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. The amount recognized would be the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability would be recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. FIN 48 requires a tabular reconciliation of the change in the aggregate unrecognized tax benefits claimed, or expected to be claimed, in tax returns and disclosure relating to accrued interest and penalties for unrecognized tax benefits. Discussion is required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial statements.

On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS No. 133, Accounting for Derivatives and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Hybrid financial instruments are single financial instruments that contain an embedded derivative. Under SFAS No. 155, entities can elect to record certain hybrid financial instruments at fair value as individual financial instruments. Prior to this amendment, certain hybrid financial instruments were required to be separated into two instruments – a derivative and host – and generally only the derivative was recorded at fair value. SFAS No. 155 also requires that beneficial interests in securitized assets be evaluated for either freestanding or embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after January 1, 2007.  SFAS No. 155 did not have a material effect on the Company's consolidated financial statements on the date of adoption.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and requires additional disclosures about fair value measurements. This Statement does not require any new fair value measurements, but the application of this Statement could change current practices in determining fair value. The Company plans to adopt this guidance effective January 1, 2008. The Company is currently assessing the impact of SFAS No. 157 on the Company's consolidated financial position and results of operations.

In February of 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS No. 159.


(3)  STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The Company paid no cash dividends on common stock during the nine months ended September 30, 2007 and 2006.  However, the Company declared a cash dividend on August 24, 2007 payable November 29, 2007 to stockholders on record as of October 31, 2007.  The dividends declared were $0.36 per common share to Class A stockholders and $0.18 per common share to Class B stockholders.  The dividend payment was approved by the Colorado Division of Insurance.  A dividend in the same amounts per share on Class A and Class B shares was declared in August and payable in November of 2006.


(4)  EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period.  Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except per share data)
 
                         
Numerator for basic and diluted
                       
earnings per share:
                       
Earnings available to common stockholders
                       
before and after assumed conversions
  $
15,622
     
16,072
     
56,145
     
52,344
 
                                 
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
   
3,622
     
3,621
     
3,622
     
3,620
 
                                 
Effect of dilutive stock options
   
31
     
34
     
31
     
36
 
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed conversions
   
3,653
     
3,655
     
3,653
     
3,656
 
                                 
                                 
Basic earnings per share
  $
4.31
     
4.44
     
15.50
     
14.46
 
                                 
                                 
Diluted earnings per share
  $
4.28
     
4.40
     
15.37
     
14.32
 


(5)  PENSION AND OTHER POSTRETIREMENT PLANS

(A)  Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering substantially all employees. The Plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").  The following summarizes the components of net periodic benefit cost.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Service cost
  $
180
     
175
     
540
     
518
 
Interest cost
   
272
     
279
     
815
     
766
 
Expected return on plan assets
    (275 )     (255 )     (825 )     (710 )
Amortization of prior service cost
   
1
     
1
     
3
     
3
 
Amortization of net loss
   
80
     
99
     
240
     
264
 
                                 
Net periodic benefit cost
  $
258
     
299
     
773
     
841
 

The Company has contributed $1.8 million to the qualified plan in 2007.  No further contributions are expected in 2007.


Effective October 19, 2007, the Company’s Board of Directors approved an amendment to freeze the Plan as of December 31, 2007.  As of that date, the freeze will cease future benefit accruals to all participants and close the Plan to any new participants.  In addition, all participants will become immediately 100% vested in their accrued benefits as of that date.  Using estimated assumptions the cumulative estimated minimum required contribution for the next five years is $2.1 million at which time the Plan is expected to be fully funded.  Future pension expense is projected to be minimal.

The Company also sponsors a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation.  The pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension obligations under the plan.  However, the Company has a contingent liability with respect to the pension plan should these entities be unable to meet their obligations under the existing agreements.  Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with the Company beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan.  If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items.  Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the Chairman of the Company.  As previously mentioned, these additional obligations are a liability to the Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the Chairman and the President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, the Company established a second non-qualified defined benefit plan for the benefit of the Chairman of the Company.  This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified plan, while complying with the requirements of the Act.

Effective November 1, 2005, the Company established a third non-qualified defined benefit plan for the benefit of the President of the Company.  This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified plan as previously discussed, while complying with the requirements of the Act.

The following summarizes the components of net periodic benefit costs for these non-qualified plans.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Service cost
  $
194
     
574
     
580
     
1,222
 
Interest cost
   
240
     
385
     
721
     
531
 
Amortization of prior service cost
   
260
     
457
     
780
     
780
 
Amortization of net loss
   
101
     
137
     
303
     
137
 
                                 
Net periodic benefit cost
  $
795
     
1,553
     
2,384
     
2,670
 

The Company expects to contribute $1.4 million to these plans in 2007.  As of September 30, 2007, the Company has contributed $1.0 million to the plan.


(B)  Defined Benefit Postretirement Plans

The Company sponsors two healthcare plans to provide postretirement benefits to certain fully-vested individuals.  The following summarizes the components of net periodic benefit costs.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(In thousands)
 
                         
Interest cost
  $
36
     
38
     
106
     
88
 
Amortization of prior service cost
   
25
     
26
     
77
     
77
 
Amortization of net loss
   
7
     
-
     
22
     
-
 
                                 
Net periodic benefit cost
  $
68
     
64
     
205
     
165
 

As previously disclosed in its financial statements for the year ended December 31, 2006, the Company expects to contribute minimal amounts to the plan in 2007.



(6)  SEGMENT AND OTHER OPERATING INFORMATION

Under Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information for the quarters ended September 30, 2007 and 2006 is provided below.

Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2007:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $
57,063
     
189,866
     
508,852
     
-
     
755,781
 
Total segment assets
   
392,465
     
769,225
     
5,513,462
     
104,786
     
6,779,938
 
Future policy benefits
   
318,171
     
541,526
     
4,733,985
     
-
     
5,593,682
 
Other policyholder liabilities
   
10,915
     
17,225
     
89,202
     
-
     
117,342
 
                                         
Three Months Ended
                                       
September 30, 2007:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $
6,875
     
21,826
     
6,079
     
-
     
34,780
 
Net investment income
   
4,774
     
6,460
     
62,833
     
1,008
     
75,075
 
Other income
   
7
     
19
     
543
     
3,217
     
3,786
 
                                         
Total revenues
   
11,656
     
28,305
     
69,455
     
4,225
     
113,641
 
                                         
Life and other policy benefits
   
3,969
     
6,353
     
1,015
     
-
     
11,337
 
Amortization of deferred
                                       
policy acquisition costs
   
2,229
     
8,045
     
14,964
     
-
     
25,238
 
Universal life and annuity
                                       
contract interest
   
2,396
     
6,131
     
29,692
     
-
     
38,219
 
Other operating expenses
   
2,877
     
3,616
     
3,593
     
2,785
     
12,871
 
Federal income taxes (benefit)
   
42
     
1,457
     
7,314
     
563
     
9,376
 
                                         
Total expenses
   
11,513
     
25,602
     
56,578
     
3,348
     
97,041
 
                                         
Segment earnings
  $
143
     
2,703
     
12,877
     
877
     
16,600
 
                                         



   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Nine Months Ended
                             
September 30, 2007:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $
19,522
     
64,061
     
17,965
     
-
     
101,548
 
Net investment income
   
13,967
     
21,075
     
220,263
     
4,728
     
260,033
 
Other income
   
34
     
106
     
909
     
9,412
     
10,461
 
                                         
Total revenues
   
33,523
     
85,242
     
239,137
     
14,140
     
372,042
 
                                         
Life and other policy benefits
   
12,727
     
17,330
     
2,691
     
-
     
32,748
 
Amortization of deferred
                                       
policy acquisition costs
   
5,041
     
25,401
     
44,218
     
-
     
74,660
 
Universal life and annuity
                                       
contract interest
   
7,028
     
19,227
     
116,782
     
-
     
143,037
 
Other operating expenses
   
9,084
     
12,388
     
13,673
     
8,209
     
43,354
 
Federal income taxes (benefit)
    (109 )    
3,340
     
18,936
     
1,817
     
23,984
 
                                         
Total expenses
   
33,771
     
77,686
     
196,300
     
10,026
     
317,783
 
                                         
Segment earnings (losses)
  $ (248 )    
7,556
     
42,837
     
4,114
     
54,259
 



Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2006:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $
49,041
     
177,482
     
499,212
     
-
     
725,735
 
Total segment assets
   
377,777
     
691,455
     
5,414,024
     
98,269
     
6,581,525
 
Future policy benefits
   
312,671
     
479,838
     
4,671,975
     
-
     
5,464,484
 
Other policyholder liabilities
   
9,702
     
21,680
     
85,089
     
-