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 March 31, 2009
 
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 May 7, 2009, the number of shares of Registrant's common stock outstanding was:   Class A – 3,425,966 and Class B - 200,000.


 
 

 



   
 
Page
   
3
   
3
   
 
March 31, 2009 (Unaudited) and December 31, 2008
3
   
 
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)
5
   
 
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)
6
   
 
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)
7
   
 
For the Three Months Ended March 31, 2009 and 2008 (Unaudited)
8
   
10
   
 
Financial Condition and Results of Operations
33
   
59
   
59
   
60
   
60
   
60
   
60
   
60
   
61


2


 
             
 
             
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
             
             
   
(Unaudited)
       
   
March 31,
   
December 31,
 
ASSETS
 
2009
   
2008
 
             
Investments:
           
Securities held to maturity, at amortized cost
           
(fair value: $3,860,173 and $3,727,353)
  $ 3,920,491       3,831,417  
Securities available for sale, at fair value
               
(cost: $1,899,594 and $1,904,053)
    1,762,988       1,745,266  
Mortgage loans, net of allowance for possible losses
               
($4,593 and $4,587)
    91,430       90,733  
Policy loans
    77,299       79,277  
Derivatives, index options
    9,116       11,920  
Other long-term investments
    13,648       14,168  
                 
Total Investments
    5,874,972       5,772,781  
                 
Cash and short-term investments
    28,089       67,796  
Deferred policy acquisition costs
    696,564       701,984  
Deferred sales inducements
    124,579       120,955  
Accrued investment income
    66,572       64,872  
Federal income tax receivable
    -       1,820  
Other assets
    62,208       56,272  
                 
    $ 6,852,984       6,786,480  

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)
       
   
March 31,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2009
   
2008
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 137,362       137,530  
Universal life and annuity contracts
    5,470,463       5,424,968  
Other policyholder liabilities
    134,679       131,963  
Federal income tax liability:
               
Current
    3,462       -  
Deferred
    33,988       26,506  
Other liabilities
    61,068       79,300  
                 
Total liabilities
    5,841,022       5,800,267  
                 
COMMITMENTS AND CONTINGENCIES (Note 9)
               
                 
STOCKHOLDERS’ EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,425,966 and
               
3,425,454 issued and outstanding in 2009 and 2008
    3,426       3,426  
Class B - $1 par value; 200,000 shares authorized, issued,
               
and outstanding in 2009 and 2008
    200       200  
Additional paid-in capital
    36,680       36,680  
Accumulated other comprehensive loss
    (54,637 )     (65,358 )
Retained earnings
    1,026,293       1,011,265  
                 
Total stockholders’ equity
    1,011,962       986,213  
                 
    $ 6,852,984       6,786,480  

Note:  The condensed consolidated balance sheet at December 31, 2008, 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 March 31, 2009 and 2008
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2009
   
2008
 
             
Premiums and other revenue:
           
Life and annuity premiums
  $ 4,131       3,894  
Universal life and annuity contract revenues
    38,571       32,218  
Net investment income
    70,606       59,430  
Other income
    3,594       3,139  
Realized losses on investments
    (5,345 )     (44 )
                 
Total premiums and other revenue
    111,557       98,637  
                 
Benefits and expenses:
               
Life and other policy benefits
    13,028       10,455  
Amortization of deferred policy acquisition costs
    27,948       26,249  
Universal life and annuity contract interest
    35,266       26,617  
Other operating expenses
    12,713       13,430  
                 
Total benefits and expenses
    88,955       76,751  
                 
Earnings before Federal income taxes
    22,602       21,886  
                 
Provision for Federal income taxes:
               
Current
    5,864       3,890  
Deferred
    1,710       3,550  
                 
Total Federal income taxes
    7,574       7,440  
                 
Net earnings
  $ 15,028       14,446  
                 
Basic Earnings Per Share:
               
Class A
  $ 4.26       4.10  
Class B
  $ 2.13       2.05  
                 
Diluted Earnings Per Share:
               
Class A
  $ 4.26       4.07  
Class B
  $ 2.13       2.05  

See accompanying notes to condensed consolidated financial statements.


5


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended March 31, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Net earnings
  $ 15,028       14,446  
                 
Other comprehensive income, net of effects of
               
deferred costs and taxes:
               
Unrealized gains on securities:
               
Net unrealized holding gains arising during period
    7,645       408  
Reclassification adjustment for net losses (gains)
               
included in net earnings
    2,701       (36 )
Amortization of net unrealized losses (gains) related
               
to transferred securities
    (32 )     16  
                 
Net unrealized gains on securities
    10,314       388  
                 
Foreign currency translation adjustments
    (5 )     (181 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    412       309  
                 
Other comprehensive gain
    10,721       516  
                 
Comprehensive income
  $ 25,749       14,962  

See accompanying notes to condensed consolidated financial statements.


6


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended March 31, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
Common stock:
           
Balance at beginning of year
  $ 3,626       3,622  
Shares exercised under stock option plan
    -       3  
                 
Balance at end of period
    3,626       3,625  
                 
Additional paid-in capital:
               
Balance at beginning of year
    36,680       36,236  
Shares exercised under the stock option plan
    -       327  
                 
Balance at end of period
    36,680       36,563  
                 
Accumulated other comprehensive (loss):
               
Unrealized (losses) gains on securities:
               
Balance at beginning of year
    (53,770 )     1,184  
Change in unrealized gains during period
    10,314       388  
                 
Balance at end of period
    (43,456 )     1,572  
                 
Foreign currency translation adjustments:
               
Balance at beginning of year
    2,966       3,078  
Change in translation adjustments during period
    (5 )     (181 )
                 
Balance at end of period
    2,961       2,897  
                 
Benefit plan liability adjustment:
               
Balance at beginning of year
    (14,554 )     (11,327 )
Amortization of net prior service cost and net gain
    412       309  
                 
Balance at end of period
    (14,142 )     (11,018 )
                 
Accumulated other comprehensive loss at end of period
    (54,637 )     (6,549 )
                 
Retained earnings:
               
Balance at beginning of year
    1,011,265       978,892  
Net earnings
    15,028       14,446  
                 
Balance at end of period
    1,026,293       993,338  
                 
Total stockholders' equity
  $ 1,011,962       1,026,977  

See accompanying notes to condensed consolidated financial statements.


7


 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Three Months Ended March 31, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net earnings
  $ 15,028       14,446  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    40,230       26,617  
Surrender charges and other policy revenues
    (15,598 )     (9,568 )
Realized losses on investments
    5,345       44  
Accrual and amortization of investment income
    (1,427 )     (1,300 )
Depreciation and amortization
    (2,062 )     272  
Decrease in value of derivatives
    1,365       20,480  
Increase in deferred policy acquisition and sales inducement costs
    (4,516 )     (1,535 )
Decrease (increase) in accrued investment income
    (1,700 )     812  
Increase in other assets
    (6,930 )     (2,773 )
Increase (decrease) in liabilities for future policy benefits
    (170 )     52  
Increase in other policyholder liabilities
    2,715       10,285  
Increase in Federal income tax liability
    7,211       8,100  
(Decrease) increase in other liabilities
    589       (814 )
Other
    29       1,810  
                 
Net cash provided by operating activities
    40,109       66,928  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities available for sale
    11,595       124  
Other investments
    1,820       197  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    310,381       248,009  
Securities available for sale
    38,830       78,696  
Derivatives
    11,605       8,964  
Purchases of:
               
Securities held to maturity
    (416,297 )     (234,856 )
Securities available for sale
    (49,420 )     (67,636 )
Other investments
    (10,120 )     (11,810 )
Principal payments on mortgage loans
    1,493       1,308  
Cost of mortgage loans acquired
    (2,513 )     (777 )
Decrease (increase) in policy loans
    1,978       (1,546 )
Other
    -       (1,893 )
                 
Net cash provided by (used in) investing activities
    (100,648 )     18,780  

(Continued on next page)


8


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Three Months Ended March 31, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 166,815       115,410  
Return of account balances on universal life
               
and annuity contracts
    (145,978 )     (152,553 )
Issuance of common stock under stock option plan
    -       330  
                 
Net cash provided by (used in) financing activities
    20,837       (36,813 )
                 
Effect of foreign exchange
    (5 )     (104 )
                 
Net increase (decrease) in cash and short-term investments
    (39,707 )     48,791  
Cash and short-term investments at beginning of period
    67,796       45,206  
                 
Cash and short-term investments at end of period
  $ 28,089       93,997  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the year for:
           
Interest
  $ 10       10  
Income taxes
    582       -  
                 
Noncash operating activities:
               
Deferral of sales inducements
    4,965       1,678  
                 

See accompanying notes to condensed consolidated financial statements.

9

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 (“Company”) as of March 31, 2009, and the results of its operations and its cash flows for the three months ended March 31, 2009 and 2008.  The results of operations for the three months ended March 31, 2009 and 2008 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, 2008 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: The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., NWL Financial, Inc., and Regent Care San Marcos Holdings, LLC.  All significant intercorporate transactions and accounts have been eliminated in consolidation.
 
The preparation of financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods.   Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, and (6) valuation allowances for mortgage loans and real estate.
 
Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.


(2)  NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the 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 in generally accepted accounting principles, and requires additional disclosures about fair value measurements. The Company adopted this guidance effective January 1, 2008 and the adoption did not have an impact on the Company’s consolidated financial statements.  See related disclosures in Note 10 to Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This Statement permits entities to choose upon adoption or at specified election dates, to measure at fair value many financial instruments and certain other items at fair value.  The Company adopted SFAS 159 effective January 1, 2008, with no impact to the Company’s consolidated financial statements as no eligible financial assets or liabilities were elected to be measured at fair value upon initial adoption.  Management will continue to evaluate eligible financial assets and liabilities on their election dates, and will disclose any future elections in accordance with provisions outlined in the Statement.

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 were effective beginning January 1, 2009.  The adoption of SFAS 160 did not have a material impact on the Company’s consolidated financial condition and results of operations.


 
Continued on Next Page
10

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

 
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 determines 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, early adoption is prohibited.  The adoption of this statement did not have any impact on the Company’s consolidated financial condition and results of operations.

In February 2008, the FASB issued FASB Staff Position (“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.  The adoption of FSP FAS 157-2 did not have a material impact on the Company’s consolidated financial condition and results of operations.

On April 9, 2009 the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The Company is currently evaluating the impact the adoption of this FSP will have on its consolidated financial position, results of operations and disclosures.

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 the 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 Company adopted SFAS No. 161 as of January 1, 2009.  See Note 11 for disclosures regarding derivative instruments and hedging activities.

In September 2008, the FASB issued FSP 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 No. 133 Accounting for Derivative Instruments and Hedging Activities, 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 adopted FSP FAS 133-1 and FIN 45-4 effective January 1, 2009.  The adoption did not have a material effect on the Company’s consolidated financial condition and results of operations.
 
In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP requires that information about plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of SFAS No. 157. The Company would be required to separate plan assets into the three fair value hierarchy levels and provide a rollforward of the changes in fair value of plan assets classified as Level 3. The disclosures about plan assets required by this FSP are effective for fiscal years ending after December 15, 2009, but would have no effect on the Company’s consolidated financial condition and results of operations.
 


 
Continued on Next Page
11

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

 
In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20.  The FSP amends EITF 99-20’s impairment model more consistent with SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities, removing its exclusive reliance on “market participant” estimate of future cash flows used in determining fair value.  Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows management to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred.  The new FSP was effective for the Company as of December 31, 2008 and did not have a significant impact on the consolidated financial statements of the Company.

On April 9, 2009 the FASB issued FSP FAS 107-1 and APB 28-1,  Interim Disclosures about Fair Value of Financial Instruments.  This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The Company is currently evaluating the impact that the adoption of this statement will have on its consolidated financial position, results of operations and disclosures.

On April 9, 2009 the FASB issued FSP FAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments.  This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. The company is currently evaluating the impact that the adoption of this FSP will have on its consolidated financial position, results of operations and disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company's present or future 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 did not pay cash dividends on common stock during the three months ended March 31, 2009 and 2008.


 
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12

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

 
(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 March 31,
 
   
2009
   
2008
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings Per Share:
                       
Net income
  $ 15,028             14,446        
Dividends – Class A shares
    -             -        
Dividends – Class B shares
    -             -        
                             
Undistributed income
  $ 15,028             14,446        
                             
Allocation of net income:
                           
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    14,602       426       14,036       410  
                                 
Net income
  $ 14,602       426       14,036       410  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,423       200  
Effect of dilutive
                               
stock options
    3       -       24       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,429       200       3,447       200  
                                 
Basic Earnings Per Share
  $ 4.26       2.13       4.10       2.05  
                                 
Diluted Earnings Per Share
  $ 4.26       2.13       4.07       2.05  


 
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13

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

 
(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.  Going forward future pension expense is projected to be minimal.  Fair values of plan assets and liabilities are measured as of the prior December 31 for each respective year.  The following summarizes the components of net periodic benefit cost.

   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
             
Service cost
  $ -       180  
Interest cost
    262       272  
Expected return on plan assets
    (222 )     (275 )
Amortization of prior service cost
    1       1  
Amortization of net loss
    148       80  
                 
Net periodic benefit cost
  $ 189       258  

The Company expects to contribute $1.8 million to the plan in 2009.  During the three months ended March 31, 2009, the Company contributed $126,000 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.


 
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14

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

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

   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
             
Service cost
  $ 37       193  
Interest cost
    308       241  
Amortization of prior service cost
    260       260  
Amortization of net loss
    198       101  
                 
Net periodic benefit cost
  $ 803       795  

The Company expects to contribute $2.0 million to these plans in 2009.  During the three months ended March 31, 2009, the Company did not contribute 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 March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
             
Interest cost
  $ 32       35  
Amortization of net loss
    -       7  
Amortization of prior service cost
    26       26  
                 
Net periodic benefit cost
  $ 58       68  

As previously disclosed in its financial statements for the year ended December 31, 2008, the Company expects to contribute minimal amounts to the plan in 2009.


 
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15

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

 
(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 March 31, 2009 and 2008 is provided below.

Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Total
 
   
(In thousands)
 
                               
March 31, 2009:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 64,022       218,487       538,634       -       821,143  
Total segment assets
    389,812       983,113       5,298,071       134,691       6,805,687  
Future policy benefits
    317,526       599,477       4,690,822       -       5,607,825  
Other policyholder liabilities
    13,125       19,768       101,786       -       134,679  
                                         
Three Months Ended
                                       
March 31, 2009:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 9,539       26,249       6,914       -       42,702  
Net investment income
    5,098       4,058       60,021       1,429       70,606  
Other income
    14       27       135       3,418       3,594  
                                         
Total revenues
    14,651       30,334       67,070       4,847       116,902  
                                         
Policy benefits
    3,821       7,724       1,483       -       13,028  
Amortization of deferred
                                       
acquisition costs
    2,355       13,162       12,431       -       27,948  
Universal life and investment
                                       
annuity contract interest
    2,272       3,720       29,274       -       35,266  
Other operating expenses
    2,730       3,506       3,194       3,283       12,713  
Federal income taxes
    1,173       746       6,988       538       9,445  
                                         
Total expenses
    12,351       28,858       53,370       3,821       98,400  
                                         
Segment earnings
  $ 2,300       1,476       13,700       1,026       18,502  


 
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16

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

 
Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Total
 
   
(In thousands)
 
                               
March 31, 2008:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 61,709       206,193       500,152       -       768,054  
Total segment assets
    403,186       812,575       5,489,342       123,456       6,828,559  
Future policy benefits
    320,225       565,910       4,675,936       -       5,562,071  
Other policyholder liabilities
    11,502       18,608       100,575       -       130,685  
                                         
Three Months Ended
                                       
March 31, 2008:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,619       23,485       6,008       -       36,112  
Net investment income
    5,161       3,039       50,297       933       59,430  
Other income
    6       12       38       3,083       3,139  
                                         
Total revenues
    11,786       26,536       56,343       4,016       98,681  
                                         
Policy benefits
    4,205       5,313       937       -       10,455  
Amortization of deferred
                                       
acquisition costs
    2,287       8,791       15,171       -       26,249  
Universal life and investment
                                       
annuity contract interest
    2,355       2,694       21,568       -       26,617  
Other operating expenses
    2,974       3,872       3,806       2,778       13,430  
Federal income taxes
    (12 )     1,994       5,052       421       7,455  
                                         
Total expenses
    11,809       22,664       46,534       3,199       84,206  
                                         
Segment earnings (losses)
  $ (23 )     3,872       9,809       817       14,475  

Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.

   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Premiums and Other Revenue:
           
Premiums and contract revenues
  $ 42,702       36,112  
Net investment income
    70,606       59,430  
Other income
    3,594       3,139  
Realized losses on investments
    (5,345 )     (44 )
                 
Total consolidated premiums and other revenue
  $ 111,557       98,637  


 
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17

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

 
   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Federal Income Taxes:
           
Total segment Federal income taxes
  $ 9,445       7,455  
Taxes on realized losses on investments
    (1,871 )     (15 )
                 
Total consolidated Federal income taxes
  $ 7,574       7,440  


   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Net Earnings:
           
Total segment earnings
  $ 18,502       14,475  
Realized losses on investments, net of taxes
    (3,474 )     (29 )
                 
Total consolidated net earnings
  $ 15,028       14,446  


   
March 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Assets:
           
Total segment assets
  $ 6,805,687       6,828,559  
Other unallocated assets
    47,297       32,515  
                 
Total consolidated assets
  $ 6,852,984       6,861,074  


(7)  SHARE-BASED PAYMENTS

The Company has issued only nonqualified stock options and stock appreciation rights.  The Company has a stock and incentive plan ("1995 Plan") which provides for the grant of any or all of the following types of awards to eligible employees:  (1) stock options, including incentive stock options and nonqualified stock options;  (2) stock appreciation rights, in tandem with stock options or freestanding;  (3) restricted stock; and  (4) performance awards.  The 1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010.  The number of shares of Class A, $1.00 par value, common stock which may be issued under the 1995 Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000.  Effective June 20, 2008, the Company’s shareholders approved a 2008 Incentive Plan (“2008 Plan”).  The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A, $1.00 per value, common stock shares eligible for issue not to exceed 300,000.  These shares may be authorized and unissued shares.

All of the employees of the Company and its subsidiaries are eligible to participate in the two Plans.  In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options.  Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options.  The directors’ grants vest 20% annually following one full year of service to the Company from the date of grant.  The employees’ grants vest 20% annually following three full years of service to the Company from the date of grant.  All grants issued expire after ten years.  On February 19, 2009, the Company awarded 29,393 stock appreciation rights to Company officers and 9,000 stock appreciation rights to Company directors at a market value price of $114.64.  No awards were issued during the first quarter of 2008.


 
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18

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

 
Effective during March 2006, the Company adopted and implemented a limited stock buy-back program which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company.  Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the Plan, however the program necessitated a change in accounting from the equity classification to the liability classification.

In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan.

The Company uses the current fair value method to measure compensation cost.  As of March 31, 2009 and 2008, the liability balance was $1.6 million and $6.4 million, respectively.  A summary of shares available for grant and stock option activity is detailed below.

         
Options Outstanding
 
               
Weighted-
 
   
Shares
         
Average
 
   
Available
         
Exercise
 
   
For Grant
   
Shares
   
Price
 
                   
Stock Options:
    291,400       105,812     $ 174.33  
Balance at January 1, 2009
                       
Exercised
    -       -       -  
Forfeited
    -       -       -  
Stock options granted
    -       -       -  
                         
Balance at March 31, 2009
    291,400       105,812     $ 174.33  


   
Stock Appreciation Rights Outstanding
 
         
Weighted-
 
         
Average
 
         
Exercise
 
   
Awards
   
Price
 
             
Stock Appreciation Rights:
           
Balance at January 1, 2009
    2,750     $ 245.70  
SARs granted February 19, 2009
    38,393       114.64  
                 
Balance at March 31, 2009
    41,143     $ 123.40  

The total intrinsic value of options exercised was $0 and $1.6 million for the three months ended March 31, 2009 and 2008, respectively.  The total share-based liabilities paid were $0 and $1.3 million for the three months ended March 31, 2009 and 2008, respectively.  For the quarters ended March 31, 2009 and 2008, the total cash received from the exercise of options under the Plan was $0 and $0.3 million, respectively.  There were no shares vested during the first quarter of 2009.


 
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19

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

 
The following table summarizes information about stock options and SARs outstanding at March 31, 2009.

   
Options Outstanding
       
         
Weighted-
       
         
Average
       
   
Number
   
Remaining
   
Options
 
   
Outstanding
   
Contractual Life
   
Exercisable
 
Exercise prices:
                 
$    92.13
    10,194       2.1 years       10,194  
      95.00
    6,000       2.2 years       6,000  
    150.00
    52,350       5.0 years       21,450  
    255.13
    28,268       9.0 years       -  
    208.05
    9,000       9.2 years       -  
    236.00
    1,250       9.4 years       -  
    251.49
    1,000       9.4 years       -  
    256.00
    500       9.5 years       -  
    114.64
    38,393       9.9 years       -  
                         
Totals
    146,955               37,644  
                         
Aggregate intrinsic value
                       
(in thousands)
  $ 321             $ 321  

The aggregate intrinsic value in the table above is based on the closing stock price of $113.00 per share on March 31, 2009.

In estimating the fair value of the options outstanding at March 31, 2009 and December 31, 2008, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.

   
2009
   
2008
 
             
Expected term of options
 
1 to 9 years
   
2 to 10 years
 
Expected volatility:
           
    Range
 
28.41% to 101.39
 
24.70% to 77.55
%
    Weighted-average
    44.03 %     37.10 %
Expected dividend yield
    0.30 %     0.22 %
Risk-free rate:
               
    Range
 
1.58% to 2.89
%
 
1.44% to 2.40
    Weighted-average
    2.27 %     1.94 %

The Company reviewed the contractual term relative to the options as well as perceived future behavior patterns of exercise.  Volatility is based on the Company’s historical volatility over the expected term.

The pre-tax compensation cost recognized in the financial statements related to the Plan was $(2.2) million and $(0.1) million for the three months ended March 31, 2009 and 2008, respectively.  The related tax expense recognized was $0.8 million and $0 for the three months ended March 31, 2009 and 2008, respectively.

As of March 31, 2009, the total compensation cost related to nonvested options not yet recognized was $1.8 million.  This amount is expected to be recognized over a weighted-average period of 2.5 years.  The Company recognizes compensation cost over the graded vesting periods.


 
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20

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

 
(8) COMMITMENTS AND CONTINGENCIES

(A) Legal Proceedings

The Company is a defendant in two class action lawsuits.  In one case, the Court has certified a class consisting of certain California policyholders age 65 and older alleging violations under California Business and Professions Code section 17200.  The Court has additionally certified a subclass of 36 policyholders alleging fraud against their agent, and vicariously, against the Company.  A second class action lawsuit in federal court in California is in discovery and the Company is currently opposing a recently filed motion for class  certification. Management believes that the Company has good and meritorious defenses and intends to continue to vigorously defend itself against these claims. 
 
The Company is involved or may become involved in various other legal actions, in the normal course of business, in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from potential, pending, or threatened legal actions, will have a material adverse effect on the financial condition or operating results of the Company.
 
In January 2009, the SEC published its newly adopted rule 151A, Indexed Annuities and Certain Other Insurance Contracts.  This rule defines “indexed annuities to be securities and thus subject to regulation by the SEC and under federal securities laws”.  Currently indexed annuities sold by life insurance companies are regulated by the States as Insurance products and Section 3(a)(8) of the Securities Act of 1933 provides an exemption for certain “annuity contracts,” “optional annuity contracts,” and other insurance contracts.  The new rule is not effective until January 12, 2011.  The Company and others have filed suit in the U. S. Court of Appeals for the District of Columbia to overturn this rule.  The court heard oral arguments on May 8, 2009, and is expected to issue its ruling before September 2009.  In the event rule 151A is not overturned, it could have a material effect on our business, results of operations and financial condition.


 
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21

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

 
(9) INVESTMENTS

(A) Debt and Equity Securities

The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at March 31, 2009.

   
Securities Held to Maturity
 
         
Gross
   
Gross