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, 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 November 6, 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
September 30, 2008 (Unaudited) and December 31, 2007
 
   
5
For the Three Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
6
For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
7
For the Three Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
8
For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
9
For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
10
For the Nine Months Ended September 30, 2008 and 2007 (Unaudited)
 
   
12
   
33
Financial Condition and Results of Operations
 
   
58
   
58
   
58
   
58
   
59
   
59
   
59
   
60

2



 
   
 
   
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
(In thousands)
 
             
             
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
ASSETS
 
2008
   
2007
 
             
Investments:
           
Securities held to maturity, at amortized cost
  $ 3,850,139       3,778,603  
Securities available for sale, at fair value
    1,793,722       1,900,714  
Mortgage loans, net of allowance for possible losses
               
($3,571 and $3,567)
    87,789       99,033  
Policy loans
    80,937       83,772  
Derivatives, index options
    6,095       25,907  
Other long-term investments
    23,523       16,562  
                 
Total investments
    5,842,205       5,904,591  
                 
Cash and short-term investments
    34,851       45,206  
Deferred policy acquisition costs
    688,973       664,805  
Deferred sales inducements
    117,177       104,029  
Accrued investment income
    67,503       65,034  
Federal income tax receivable
    5,184       10,010  
Other assets
    44,975       41,651  
                 
    $ 6,800,868       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)
       
   
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2008
   
2007
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 137,978       138,672  
Universal life and annuity contracts
    5,419,282       5,441,871  
Other policyholder liabilities
    129,078       120,400  
Federal income tax liability:
               
Current
    -       -  
Deferred
    36,428       61,720  
Other liabilities
    81,833       60,978  
                 
Total liabilities
    5,804,599       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
    (44,448 )     (7,065 )
Retained earnings
    1,000,411       978,892  
                 
Total stockholders’ equity
    996,269       1,011,685  
                 
    $ 6,800,868       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 September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2008
   
2007
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 4,057       4,755  
Universal life and annuity contract revenues
    32,885       30,025  
Net investment income
    69,582       75,075  
Other income
    3,056       3,786  
Net investment losses
    (21,620 )     (1,505 )
                 
Total premiums and other revenue
    87,960       112,136  
                 
Benefits and expenses:
               
Life and other policy benefits
    10,794       11,337  
Amortization of deferred policy acquisition costs
    37,188       25,238  
Universal life and annuity contract interest
    38,339       38,219  
Other operating expenses
    17,905       12,871  
                 
Total benefits and expenses
    104,226       87,665  
                 
Earnings (loss) before Federal income taxes
    (16,266 )     24,471  
                 
Provision (benefit) for Federal income taxes:
               
Current
    3,488       (2,836 )
Deferred
    (9,954 )     11,685  
                 
Total Federal income taxes
    (6,466 )     8,849  
                 
Net earnings (loss)
  $ (9,800 )     15,622  
                 
Basic Earnings (Loss)  Per Share:
               
Class A
  $ (2.78 )     4.44  
Class B
  $ (1.39 )     2.22  
                 
Diluted Earnings (Loss) Per Share:
               
Class A
  $ (2.78 )     4.38  
Class B
  $ (1.39 )     2.22  

See accompanying notes to condensed consolidated financial statements.


5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Nine Months Ended September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2008
   
2007
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 12,575       14,074  
Universal life and annuity contract revenues
    98,696       87,474  
Net investment income
    201,290       260,033  
Other income
    9,348       10,461  
Net investment gains (losses)
    (21,931 )     2,901  
                 
Total premiums and other revenue
    299,978       374,943  
                 
Benefits and expenses:
               
Life and other policy benefits
    28,905       32,748  
Amortization of deferred policy acquisition costs
    93,699       74,660  
Universal life and annuity contract interest
    98,511       143,037  
Other operating expenses
    45,962       43,354  
                 
Total benefits and expenses
    267,077       293,799  
                 
Earnings before Federal income taxes
    32,901       81,144  
                 
Provision (benefit) for Federal income taxes:
               
Current
    15,307       6,551  
Deferred
    (5,194 )     18,448  
                 
Total Federal income taxes
    10,113       24,999  
                 
Net earnings
  $ 22,788       56,145  
                 
Basic Earnings Per Share:
               
Class A
  $ 6.47       15.94  
Class B
  $ 3.23       7.97  
                 
Diluted Earnings Per Share:
               
Class A
  $ 6.42       15.74  
Class B
  $ 3.23       7.97  

See accompanying notes to condensed consolidated financial statements.


6



 
 
For the Three Months Ended September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Net earnings (loss)
  $ (9,800 )     15,622  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized losses on securities:
               
Net unrealized holding gains (losses) arising during period
    (34,258 )     4,860  
Reclassification adjustment for net losses
               
included in net earnings
    11,707       16  
Amortization of net unrealized gains related to
               
transferred securities
    11       25  
                 
Net unrealized gains (losses) on securities
    (22,540 )     4,901  
                 
Foreign currency translation adjustments
    (8 )     47  
                 
Benefit plans:
               
Amortization of net prior service cost and net loss
    342       308  
                 
Other comprehensive income (loss)
    (22,206 )     5,256  
                 
Comprehensive income (loss)
  $ (32,006 )     20,878  

See accompanying notes to condensed consolidated financial statements.


7



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Nine Months Ended September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Net earnings
  $ 22,788       56,145  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized losses on securities:
               
Net unrealized holding losses arising during period
    (49,353 )     (3,745 )
Reclassification adjustment for net losses (gains)
               
included in net earnings
    11,097       (2,848 )
Amortization of net unrealized gains (losses) related to
               
transferred securities
    (3 )     79  
                 
Net unrealized losses on securities
    (38,259 )     (6,514 )
                 
Foreign currency translation adjustments
    (150 )     (139 )
                 
Benefit plans:
               
Amortization of net prior service cost and net loss
    1,026       926  
                 
Other comprehensive loss
    (37,383 )     (5,727 )
                 
Comprehensive income (loss)
  $ (14,595 )     50,418  

See accompanying notes to condensed consolidated financial statements.


8



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Nine Months Ended September 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 loss:
               
Unrealized gains (losses) on securities:
               
Balance at beginning of year
    1,184       3,148  
Change in unrealized losses during period
    (38,259 )     (6,514 )
                 
Balance at end of period
    (37,075 )     (3,366 )
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
    3,078       3,122  
Change in translation adjustments during period
    (150 )     (139 )
                 
Balance at end of period
    2,928       2,983  
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (11,327 )     (10,001 )
Amortization of net prior service cost and net gain
    1,026       926  
                 
Balance at end of period
    (10,301 )     (9,075 )
                 
Accumulated other comprehensive loss at end of period
    (44,448 )     (9,458 )
                 
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
    22,788       56,145  
Stockholder dividends
    (1,269 )     (1,268 )
                 
Balance at end of period
    1,000,411       949,666  
                 
Total stockholders' equity
  $ 996,269       980,066  

See accompanying notes to condensed consolidated financial statements.


9



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from operating activities:
           
Net earnings
  $ 22,788       56,145  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    98,511       143,037  
Surrender charges and other policy revenues
    (30,324 )     (26,776 )
Net investment losses (gains)
    21,931       (2,901 )
Accrual and amortization of investment income
    (3,715 )     (3,829 )
Depreciation and amortization
    786       746  
Decrease in value of derivatives
    52,824       26,393  
Decrease (increase) in deferred policy acquisition and
               
sales inducement costs
    14,508       (9,730 )
(Increase) decrease in accrued investment income
    (2,496 )     924  
Decrease in other assets
    991       582  
(Decrease) increase in liabilities for future policy benefits
    (694 )     338  
Increase in other policyholder liabilities
    8,678       4,893  
(Decrease) increase in Federal income tax liability
    (368     6,861  
Increase (decrease) in other liabilities
    11,116       (5,924 )
Other
    844       167  
                 
Net cash provided by operating activities
    195,380       190,926  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
    -       5,175  
Securities available for sale
    1,522       28,418  
Other investments
    5,382       33,255  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    417,933       106,023  
Securities available for sale
    190,284       268,999  
Other investments
    -       -  
Purchases of:
               
Securities held to maturity
    (493,363 )     (256,014 )
Securities available for sale
    (190,039 )     (284,742 )
Other investments
    (47,195 )     (35,619 )
Principal payments on mortgage loans
    12,308       21,623  
Cost of mortgage loans acquired
    (6,046 )     (18,480 )
Decrease in policy loans
    2,835       2,309  
Other
    (4,316)       (6,624 )
                 
Net cash used in investing activities
    (110,695 )     (135,677 )

(Continued on next page)


10



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Nine Months Ended September 30, 2008 and 2007
 
(Unaudited)
 
(In thousands)
 
             
             
   
2008
   
2007
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 346,119       380,708  
Return of account balances on universal life
               
and annuity contracts
    (441,195 )     (444,877 )
Issuance of common stock under stock option plan
    448       127  
                 
Net cash used in financing activities
    (94,628 )     (64,042 )
                 
Effect of foreign exchange
    (412 )     (72 )
                 
Net decrease in cash and short-term investments
    (10,355 )     (8,865 )
Cash and short-term investments at beginning of period
    45,206       49,901  
                 
Cash and short-term investments at end of period
  $ 34,851       41,036  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the period for:
           
Interest
  $ 30       30  
Income taxes
    10,481       19,155  

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 National Western Life Insurance Company and its subsidiaries (the Company) as of September 30, 2008, and the results of their operations and their cash flows for the three months and nine months ended September 30, 2008 and 2007.  The results of operations for the three months and nine months ended September 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 11 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.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. The provisions of FSP FAS 142-3 are to be applied prospectively to intangible assets acquired after January 1, 2009 although the disclosure provisions are required for all intangible assets as of or subsequent to January 1, 2009. The adoption of FSP FAS 142-3 is not expected to impact the Company’s consolidated financial condition and results of operations.

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 (“SFAS 163”). The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts issued by enterprises that are included within the scope of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”) and that are not accounted for as derivative instruments. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. The Company does not have financial guarantee insurance products, and, accordingly does not expect the adoption of SFAS 163 to have an effect on the Company’s consolidated financial condition and results of operations.


13


In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends SFAS 133 to require disclosures by entities that assume credit risk through the sale of credit derivatives including credit derivatives embedded in a hybrid instrument to enable users of financial statements to assess the potential effect on its financial position, financial performance, and cash flows from these credit derivatives. This FSP also amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require additional disclosure about the current status of the payment/performance risk of a guarantee. FSP FAS 133-1 and FIN 45-4 are effective for financial statements issued for fiscal years and interim periods ending after November 15, 2008. The Company does not expect the adoption of FSP FAS 133-1 and FIN 45-4 to have an effect on the Company’s consolidated financial condition and results of operations.

In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS 157 in a market that is not active and illustrates key considerations including the use of an entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates, appropriate risk adjustments for nonperformance and liquidity risks, and the reliance that an entity should place on quotes that do not reflect the result of market transactions. This FSP was preceded by a press release that was jointly issued by the Office of the Chief Accountant of the SEC and the FASB staff on September 30, 2008 which provided immediate clarification on fair value accounting based on the measurement guidance of SFAS 157. The FSP was effective upon issuance and did not have a material impact on the Company’s consolidated financial statements.  See Note 11 for disclosures regarding the Company’s fair value measurements.


(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, 2008 and 2007.  However, the Company declared a cash dividend on August 22, 2008 payable November 28, 2008 to stockholders on record as of October 31, 2008.  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 paid in November of 2007.


14


(4)  EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income (loss) 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 September 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 (loss)
  $ (9,800 )             15,622          
Dividends – Class A shares
    (1,233 )             (1,232 )        
Dividends – Class B shares
    (36 )             (36 )        
                                 
Undistributed income (loss)
  $ (11,069 )             14,354          
                                 
Allocation of net income (loss):
                               
Dividends
  $ 1,233       36       1,232       36  
Allocation of undistributed income (loss)
    (10,755 )     (314 )     13,946       408  
                                 
Net income (loss)
  $ (9,522 )     (278 )     15,178       444  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,422       200  
Effect of dilutive
                               
stock options
    -       -       42       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
Conversions
    3,426       200       3,464       200  
                                 
Basic Earnings (Loss) Per Share
  $ (2.78 )     (1.39 )     4.44       2.22  
                                 
Diluted Earnings (Loss) Per Share
  $ (2.78 )     (1.39 )     4.38       2.22  


15



   
Nine Months Ended September 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
  $ 22,788             56,145        
Dividends – Class A shares
    (1,233 )           (1,232 )      
Dividends – Class B shares
    (36 )           (36 )      
                             
Undistributed income
  $ 21,519             54,877        
                             
Allocation of net income:
                           
Dividends
  $ 1,233       36       1,232       36  
Allocation of undistributed income
    20,909       610       53,319       1,558  
                                 
Net income
  $ 22,142       646       54,551       1,594  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,425       200       3,422       200  
Effect of dilutive
                               
stock options
    26       -       45       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,451       200       3,467       200  
                                 
Basic Earnings Per Share
  $ 6.47       3.23       15.94       7.97  
                                 
Diluted Earnings Per Share
  $ 6.42       3.23       15.74       7.97  


(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.


16


The following summarizes the components of net periodic benefit cost.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Service cost
  $ -       180       -       540  
Interest cost
    259       272       777       815  
Expected return on plan assets
    (285 )     (275 )     (855 )     (825 )
Amortization of prior service cost
    1       1       3       3  
Amortization of net loss
    60       80       182       240  
                                 
Net periodic benefit cost
  $ 35       258       107       773  

The Company has contributed $1.1 million to the plan in 2008.  No further contributions are expected in 2008.

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,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Service cost
  $ 146       194       439       580  
Interest cost
    298       240       893       721  
Amortization of prior service cost
    260       260       780       780  
Amortization of net loss
    177       101       530       303  
                                 
Net periodic benefit cost
  $ 881       795       2,642       2,384  

The Company expects to contribute $1.7 million to these plans in 2008.  As of September 30, 2008, the Company has contributed $1.2 million to the plans.

17


(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,
 
   
2008
   
2007
   
2008
   
2007
 
   
(In thousands)
 
                         
Interest cost
  $ 34       36       101       106  
Amortization of prior service cost
    25       25       77       77  
Amortization of net loss
    1       7       4       22  
                                 
Net periodic benefit cost
  $ 60       68       182       205  

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.


18


(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 September 30, 2008 and 2007 is provided below.

Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2008:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 64,669       219,531       521,950       -       806,150  
Total segment assets
    398,277       837,859       5,385,733       138,787       6,760,656  
Future policy benefits
    318,080       592,887       4,646,293       -       5,557,260  
Other policyholder liabilities
    11,786       12,942       104,350       -       129,078  
                                         
Three Months Ended
                                       
September 30, 2008:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,798       23,890       6,254       -       36,942  
Net investment income
    4,912       4,652       58,902       1,116       69,582  
Other income
    3       13       46       2,994       3,056  
                                         
Total revenues
    11,713       28,555       65,202       4,110       109,580  
                                         
Life and other policy benefits
    3,569       5,765       1,460       -       10,794  
Amortization of deferred
                                       
policy acquisition costs
    3,219       8,877       25,092       -       37,188  
Universal life and annuity
                                       
contract interest
    2,249       4,664       31,426       -       38,339  
Other operating expenses
    3,070       6,597       5,531       2,707       17,905  
Federal income taxes (benefit)
    (147 )     694       158       396       1,101  
                                         
Total expenses
    11,960       26,597       63,667       3,103       105,327  
                                         
Segment earnings (loss)
  $ (247 )     1,958       1,535       1,007       4,253  


19



Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Nine Months Ended
                             
September 30, 2008:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $ 20,108       72,116       19,047       -       111,271  
Net investment income
    15,103       12,696       168,205       5,286       201,290  
Other income
    13       38       169       9,128       9,348  
                                         
Total revenues
    35,224       84,850       187,421       14,414       321,909  
                                         
Life and other policy benefits
    10,588       15,364       2,953       -       28,905  
Amortization of deferred
                                       
policy acquisition costs
    7,574       27,278       58,847       -       93,699  
Universal life and annuity
                                       
contract interest
    6,892       11,944       79,675       -       98,511  
Other operating expenses
    9,093       14,723       13,826       8,320       45,962  
Federal income taxes
    349       5,042       10,420       1,978       17,789  
                                         
Total expenses
    34,496       74,351       165,721       10,298       284,866  
                                         
Segment earnings
  $ 728       10,499       21,700       4,116       37,043  


20



Selected Segment Information.
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2007:
    <