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 June 30, 2008
 
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 August 4, 2008, the number of shares of Registrant's common stock outstanding was:   Class A – 3,425,966 and  Class B - 200,000.

 
 

 



   
 
Page
   
3
   
3
   
3
June 30, 2008 (Unaudited) and December 31, 2007
 
   
5
For the Three Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
6
For the Six Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
7
For the Three Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
8
For the Six Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
9
For the Six Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
10
For the Six Months Ended June 30, 2008 and 2007 (Unaudited)
 
   
12
   
28
Financial Condition and Results of Operations
 
   
53
   
53
   
53
   
53
   
53
   
54
   
54
   
54
   
55

2



 
   
 
   
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
(In thousands)
 
             
             
             
             
   
(Unaudited)
       
   
June 30,
   
December 31,
 
ASSETS
 
2008
   
2007
 
             
Investments:
           
Securities held to maturity, at amortized cost
  $ 3,804,745       3,778,603  
Securities available for sale, at fair value
    1,884,442       1,900,714  
Mortgage loans, net of allowance for possible losses
               
($3,571 and $3,567)
    90,857       99,033  
Policy loans
    81,877       83,772  
Derivatives
    6,880       25,907  
Other long-term investments
    17,638       16,562  
                 
Total investments
    5,886,439       5,904,591  
                 
Cash and short-term investments
    33,385       45,206  
Deferred policy acquisition costs
    678,825       664,805  
Deferred sales inducements
    110,021       104,029  
Accrued investment income
    64,862       65,034  
Federal income tax receivable
    6,369       10,010  
Other assets
    46,429       41,651  
                 
    $ 6,826,330       6,835,326  

See accompanying notes to condensed consolidated financial statements.


3



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share amounts)
 
             
             
   
(Unaudited)
       
   
June 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2008
   
2007
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 138,070       138,672  
Universal life and annuity contracts
    5,419,712       5,441,871  
Other policyholder liabilities
    123,821       120,400  
Federal income tax liability:
               
Current
    -       -  
Deferred
    58,320       61,720  
Other liabilities
    56,863       60,978  
                 
Total liabilities
    5,796,786       5,823,641  
                 
COMMITMENTS AND CONTINGENCIES (Notes 5 and 9)
               
                 
STOCKHOLDERS’ EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,425,966 and
               
3,422,324 issued and outstanding in 2008 and 2007
    3,426       3,422  
Class B - $1 par value; 200,000 shares authorized, issued,
               
and outstanding in 2008 and 2007
    200       200  
Additional paid-in capital
    36,680       36,236  
Accumulated other comprehensive loss
    (22,242 )     (7,065 )
Retained earnings
    1,011,480       978,892  
                 
Total stockholders’ equity
    1,029,544       1,011,685  
                 
    $ 6,826,330       6,835,326  

Note:  The condensed consolidated balance sheet at December 31, 2007, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.


4



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2008
   
2007
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 4,624       4,586  
Universal life and annuity contract revenues
    33,593       28,653  
Net investment income
    72,278       107,932  
Other income
    3,153       3,359  
Realized gains (losses) on investments
    (267 )     4,165  
                 
Total premiums and other revenue
    113,381       148,695  
                 
Benefits and expenses:
               
Life and other policy benefits
    7,655       10,437  
Amortization of deferred policy acquisition costs
    30,263       25,637  
Universal life and annuity contract interest
    33,555       67,385  
Other operating expenses
    14,627       16,367  
                 
Total benefits and expenses
    86,100       119,826  
                 
Earnings before Federal income taxes
    27,281       28,869  
                 
Provision for Federal income taxes:
               
Current
    7,928       5,073  
Deferred
    1,211       1,945  
                 
Total Federal income taxes
    9,139       7,018  
                 
Net earnings
  $ 18,142       21,851  
                 
Basic Earnings Per Share:
               
Class A
  $ 5.15       6.20  
Class B
  $ 2.57       3.10  
                 
Diluted Earnings Per Share:
               
Class A
  $ 5.10       6.12  
Class B
  $ 2.57       3.10  

See accompanying notes to condensed consolidated financial statements.


5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Six Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2008
   
2007
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 8,518       9,319  
Universal life and annuity contract revenues
    65,811       57,449  
Net investment income
    131,708       184,958  
Other income
    6,292       6,675  
Realized gains (losses) on investments
    (311 )     4,406  
                 
Total premiums and other revenue
    212,018       262,807  
                 
Benefits and expenses:
               
Life and other policy benefits
    18,111       21,411  
Amortization of deferred policy acquisition costs
    56,511       49,422  
Universal life and annuity contract interest
    60,172       104,818  
Other operating expenses
    28,057       30,483  
                 
Total benefits and expenses
    162,851       206,134  
                 
Earnings before Federal income taxes
    49,167       56,673  
                 
Provision for Federal income taxes:
               
Current
    11,819       9,387  
Deferred
    4,760       6,763  
                 
Total Federal income taxes
    16,579       16,150  
                 
Net earnings
  $ 32,588       40,523  
                 
Basic Earnings Per Share:
               
Class A
  $ 9.25       11.51  
Class B
  $ 4.62       5.75  
                 
Diluted Earnings Per Share:
               
Class A
  $ 9.18       11.35  
Class B
  $ 4.62       5.75  

See accompanying notes to condensed consolidated financial statements.


6



 
 
For the Three Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Net earnings
  $ 18,142       21,851  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized losses on securities:
               
Net unrealized holding losses arising during period
    (15,503 )     (13,326 )
Reclassification adjustment for net gains
               
included in net earnings
    (574 )     (2,697 )
Amortization of net unrealized gains (losses) related to
               
transferred securities
    (30 )     34  
                 
Net unrealized losses on securities
    (16,107 )     (15,989 )
                 
Foreign currency translation adjustments
    39       (99 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    375       618  
                 
Other comprehensive loss
    (15,693 )     (15,470 )
                 
Comprehensive income
  $ 2,449       6,381  

See accompanying notes to condensed consolidated financial statements.


7



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Six Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Net earnings
  $ 32,588       40,523  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized losses on securities:
               
Net unrealized holding losses arising during period
    (15,095 )     (8,605 )
Reclassification adjustment for net gains
               
included in net earnings
    (610 )     (2,864 )
Amortization of net unrealized gains (losses) related to
               
transferred securities
    (14 )     54  
                 
Net unrealized losses on securities
    (15,719 )     (11,415 )
                 
Foreign currency translation adjustments
    (142 )     (186 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    684       618  
                 
Other comprehensive loss
    (15,177 )     (10,983 )
                 
Comprehensive income
  $ 17,411       29,540  

See accompanying notes to condensed consolidated financial statements.


8



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Six Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
Common stock:
           
Balance at beginning of year
  $ 3,622       3,621  
Shares exercised under stock option plan
    4       1  
                 
Balance at end of period
    3,626       3,622  
                 
Additional paid-in capital:
               
Balance at beginning of year
    36,236       36,110  
Shares exercised under the stock option plan
    444       126  
                 
Balance at end of period
    36,680       36,236  
                 
Accumulated other comprehensive income (loss):
               
Unrealized gains (losses) on securities:
               
Balance at beginning of year
    1,184       3,148  
Change in unrealized gains (losses) during period
    (15,719 )     (11,415 )
                 
Balance at end of period
    (14,535 )     (8,267 )
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
    3,078       3,122  
Change in translation adjustments during period
    (142 )     (186 )
                 
Balance at end of period
    2,936       2,936  
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (11,327 )     (10,001 )
Amortization of net prior service cost and net gain
    684       618  
                 
Balance at end of period
    (10,643 )     (9,383 )
                 
Accumulated other comprehensive loss at end of period
    (22,242 )     (14,714 )
                 
Retained earnings:
               
Balance at beginning of year
    978,892       896,984  
Cumulative effect of change in accounting principle, net of tax
    -       (2,195 )
Net earnings
    32,588       40,523  
                 
Balance at end of period
    1,011,480       935,312  
                 
Total stockholders' equity
  $ 1,029,544       960,456  

See accompanying notes to condensed consolidated financial statements.


9



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net earnings
  $ 32,588       40,523  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    60,172       104,818  
Surrender charges and other policy revenues
    (19,667 )     (17,630 )
Realized losses (gains) on investments
    311       (4,406 )
Accrual and amortization of investment income
    (2,487 )     (2,641 )
Depreciation and amortization
    495       707  
Decrease (increase) in value of derivatives
    21,289       (78 )
Decrease (increase) in deferred policy acquisition and
               
sales inducement costs
    3,306       (4,601 )
Decrease (increase) in accrued investment income
    172       (59 )
(Increase) decrease in other assets
    (5,273 )     1,157  
(Decrease) increase in liabilities for future policy benefits
    (601 )     727  
Increase in other policyholder liabilities
    3,421       11,068  
Decrease (increase) in Federal income tax liability
    8,401       (2,365 )
Decrease in other liabilities
    (4,115     (10,946 )
Other
    359       1,802  
                 
Net cash provided by operating activities
    98,371       118,076  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
    -       5,175  
Securities available for sale
    999       11,562  
Other investments
    443       12,766  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    355,100       73,694  
Securities available for sale
    140,458       186,519  
Derivatives
    22,143       8,570  
Purchases of:
               
Securities held to maturity
    (379,575 )     (182,115 )
Securities available for sale
    (167,134 )     (174,781 )
Other investments
    (26,292 )     (24,947 )
Principal payments on mortgage loans
    10,200       15,275  
Cost of mortgage loans acquired
    (1,962 )     (15,932 )
Decrease in policy loans
    (1,895 )     (1,446 )
Other
    (3,899 )     (1,872 )
                 
Net cash used in investing activities
    (47,624 )     (87,532 )

(Continued on next page)


10



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Six Months Ended June 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 238,296       247,944  
Return of account balances on universal life
               
and annuity contracts
    (300,961 )     (299,755 )
Issuance of common stock under stock option plan
    448       127  
                 
Net cash used in financing activities
    (62,217 )     (51,684 )
                 
Effect of foreign exchange
    (351 )     (195 )
                 
Net decrease in cash and short-term investments
    (11,821 )     (21,335 )
Cash and short-term investments at beginning of period
    45,206       49,901  
                 
Cash and short-term investments at end of period
  $ 33,385       28,566  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the period for:
           
Interest
  $ 20       20  
Income taxes
    8,178       19,097  

See accompanying notes to condensed consolidated financial statements.


11


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 June 30, 2008, and the results of its operations and its cash flows for the three months and six months ended June 30, 2008 and 2007.  The results of operations for the three months and six months ended June 30, 2008 and 2007 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, 2007 accessible free of charge through the Company's internet site at www.nationalwesternlife.com or the Securities and Exchange Commission (“SEC”) 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., NWL Financial, Inc., NWL Mortgage I Corp, NWL Mortgage, Ltd. and Regent Care San Marcos Holdings, LLC.  All significant intercorporate transactions and accounts have been eliminated in consolidation.


(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 was 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 had an impact related to the adoption of SOP 05-1 for contracts which annuitized and for reinstatements of contracts.  The unamortized deferred acquisition costs and deferred sales inducement assets have to be written-off at the time of annuitization and can not be continued related to reinstatements.  SOP 05-1 resulted in changes in assumptions relative to estimated gross profits which affected unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement balances as of the beginning of 2007.  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  


12


In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements.  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  The Company adopted SFAS 157 effective January 1, 2008, and the adoption did not have an impact on the Company’s consolidated financial statements.  See Note 10 for additional disclosures concerning fair value measurement.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years and interim periods beginning after November 15, 2008.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. The Company adopted SFAS 159 effective January 1, 2008, and the adoption did not have an impact on the consolidated financial statements as no items were elected for measurement at fair value upon initial adoption.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Specifically, SFAS 160 states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of SFAS 160 are effective beginning January 1, 2009.  The Company is currently evaluating the impact that the adoption of this statement will have on the consolidated financial position, results of operations and disclosures.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations.  SFAS 141(R) establishes how an entity accounts for the identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and what disclosures are required as part of a business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS 141(R) is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This statement requires enhanced disclosures regarding an entity’s derivative and hedging activity to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’s consolidated financial statements.


(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 six months ended June 30, 2008 and 2007.


13


(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 June 30,
 
   
2008
   
2007
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings Per Share:
                       
Net income
  $ 18,142               21,851          
Dividends – Class A shares
    -               -          
Dividends – Class B shares
    -               -          
                                 
Undistributed income
  $ 18,142               21,851          
                                 
Allocation of net income:
                               
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    17,627       515       21,231       620  
                                 
Net income
  $ 17,627       515       21,231       620  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,422       200  
Effect of dilutive
                               
stock options
    27       -       45       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,453       200       3,467       200  
                                 
Basic Earnings Per Share
  $ 5.15       2.57       6.20       3.10  
                                 
Diluted Earnings Per Share
  $ 5.10       2.57       6.12       3.10  


14



   
Six Months Ended June 30,
 
   
2008
   
2007
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings Per Share:
                       
Net income
  $ 32,588               40,523          
Dividends – Class A shares
    -               -          
Dividends – Class B shares
    -               -          
                                 
Undistributed income
  $ 32,588               40,523          
                                 
Allocation of net income:
                               
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    31,664       924       39,372       1,151  
                                 
Net income
  $ 31,664       924       39,372       1,151  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,424       200       3,422       200  
Effect of dilutive
                               
stock options
    26       -       46       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,450       200       3,468       200  
                                 
Basic Earnings Per Share
  $ 9.25       4.62       11.51       5.75  
                                 
Diluted Earnings Per Share
  $ 9.18       4.62       11.35       5.75  


(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 comply with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company’s Board of Directors approved an amendment to freeze the Pension Plan as of December 31, 2007.  The freeze ceased future benefit accruals to all participants and closed the Plan to any new participants. In addition, all participants became 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.


15


The following summarizes the components of net periodic benefit cost.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Service cost
  $ (180 )     187       -       360  
Interest cost
    246       288       518       543  
Expected return on plan assets
    (295 )     (313 )     (570 )     (550 )
Amortization of prior service cost
    1       1       2       2  
Amortization of net loss
    42       72       122       160  
                                 
Net periodic benefit cost
  $ (186 )     235       72       515  

The Company expects to contribute $1.1 million to the plan in 2008.  As of June 30, 2008, the Company has contributed $0.3 million to the plan.

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 June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Service cost
  $ 100       (21 )     293       386  
Interest cost
    354       304       595       481  
Amortization of prior service cost
    260       260       520       520  
Amortization of net loss
    252       156       353       202  
                                 
Net periodic benefit cost
  $ 966       699       1,761       1,589  

The Company expects to contribute $1.7 million to these plans in 2008.  As of June 30, 2008, the Company has contributed $0.7 million to the plans.

16


(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 June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Interest cost
  $ 32       41       67       70  
Amortization of prior service cost
    26       26       52       52  
Amortization of net loss
    (4 )     15       3       15  
                                 
Net periodic benefit cost
  $ 54       82       122       137  

As previously disclosed in its financial statements for the year ended December 31, 2007, the Company expects to contribute minimal amounts to the plan in 2008.


17


(6)  SEGMENT AND OTHER OPERATING INFORMATION

Under 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 as of and for the periods ended June 30, 2008 and 2007 is provided below.

Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
June 30, 2008:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 63,709       213,085       512,052       -       788,846  
Total segment assets
    401,193       823,498       5,428,195       131,362       6,784,248  
Future policy benefits
    319,676       579,006       4,659,100       -       5,557,782  
Other policyholder liabilities
    10,838       12,261       100,722       -       123,821  
                                         
Three Months Ended
                                       
June 30, 2008:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,691       24,741       6,785       -       38,217  
Net investment income
    5,030       5,005       59,006       3,237       72,278  
Other income
    4       13       85       3,051       3,153  
                                         
Total revenues
    11,725       29,759       65,876       6,288       113,648  
                                         
Life and other policy benefits
    2,814       4,286       555       -       7,655  
Amortization of deferred
                                       
policy acquisition costs
    2,068       9,610       18,585       -       30,263  
Universal life and annuity
                                       
contract interest
    2,288       4,586       26,681       -       33,555  
Other operating expenses
    3,049       4,254       4,489       2,835       14,627  
Federal income taxes
    508       2,354       5,210       1,161       9,233  
                                         
Total expenses
    10,727       25,090       55,520       3,996       95,333  
                                         
Segment earnings
  $ 998       4,669       10,356       2,292       18,315  
                                         


18



   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Six Months Ended
                             
June 30, 2008:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $ 13,310       48,226       12,793       -       74,329  
Net investment income
    10,191       8,044       109,303       4,170       131,708  
Other income
    10       25       123       6,134       6,292  
                                         
Total revenues
    23,511       56,295       122,219       10,304       212,329  
                                         
Life and other policy benefits
    7,019       9,599       1,493       -       18,111  
Amortization of deferred
                                       
policy acquisition costs
    4,355       18,401       33,755       -       56,511  
Universal life and annuity
                                       
contract interest
    4,643       7,280       48,249       -       60,172  
Other operating expenses
    6,023       8,126       8,295       5,613       28,057  
Federal income taxes
    496       4,348       10,262       1,582       16,688  
                                         
Total expenses
    22,536       47,754       102,054       7,195       179,539  
                                         
Segment earnings
  $ 975       8,541       20,165       3,109       32,790  


19



Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
June 30, 2007:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 54,622       185,507       514,508       -       754,637  
Total segment assets
    387,613