nwl10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 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 August 5, 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
   
3
June 30, 2009 (Unaudited) and December 31, 2008
 
   
5
For the Three Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
6
For the Six Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
7
For the Three Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
8
For the Six Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
9
For the Six Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
11
For the Six Months Ended June 30, 2009 and 2008 (Unaudited)
 
   
13
   
46
Financial Condition and Results of Operations
 
   
72
   
72
   
72
   
72
   
72
   
73
   
73
   
73
   
74

2



 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(In thousands)
         
         
         
         
   
(Unaudited)
   
   
June 30,
 
December 31,
ASSETS
 
2009
 
2008
         
Investments:
       
Securities held to maturity, at amortized cost
       
(fair value: $4,015,880 and $3,727,353)
$
3,986,365 
 
3,831,417 
Securities available for sale, at fair value
       
(cost: $1,897,918 and $1,904,053)
 
1,855,738 
 
1,745,266 
Mortgage loans, net of allowance for possible losses
       
($3,577 and $4,587)
 
93,016 
 
90,733 
Policy loans
 
77,928 
 
79,277 
Derivatives, index options
 
27,018 
 
11,920 
Other long-term investments
 
29,651 
 
14,168 
         
Total investments
 
6,069,716 
 
5,772,781 
         
Cash and short-term investments
 
54,850 
 
67,796 
Deferred policy acquisition costs
 
658,921 
 
701,984 
Deferred sales inducements
 
121,202 
 
120,955 
Accrued investment income
 
67,200 
 
64,872 
Federal income tax receivable
 
-   
 
1,820 
Other assets
 
64,862 
 
56,272 
         
 
$
7,036,751 
 
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)
       
   
June 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2009
   
2008
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 136,470       137,530  
Universal life and annuity contracts
    5,567,547       5,424,968  
Other policyholder liabilities
    134,875       131,963  
Federal income tax liability:
               
Current
    8,131       -  
Deferred
    45,365       26,506  
Other liabilities
    81,214       79,300  
                 
Total liabilities
    5,973,602       5,800,267  
                 
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
               
                 
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
    (22,799 )     (65,358 )
Retained earnings
    1,045,642       1,011,265  
                 
Total stockholders’ equity
    1,063,149       986,213  
                 
    $ 7,036,751       6,786,480  

See accompanying notes to condensed consolidated financial statements.


4



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2009
   
2008
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $ 4,389       4,624  
Universal life and annuity contract charges
    38,862       33,593  
Net investment income
    93,743       72,278  
Other revenues
    3,507       3,153  
Net realized investment gains (losses):
               
    Total other-than-temporary impairment (“OTTI”) losses
    (1,849 )     (1,425 )
    Portion of OTTI losses recognized in other comprehensive income
    1,823       -  
    Net OTTI losses recognized in earnings
    (26 )     (1,425 )
    Other net investment gains
    192       1,158  
    Total net realized investment gains (losses)
    166       (267 )
                 
Total revenues
    140,667       113,381  
                 
Benefits and expenses:
               
Life and other policy benefits
    10,248       7,655  
Amortization of deferred policy acquisition costs and
               
    deferred sales inducements
    28,549       30,263  
Universal life and annuity contract interest
    57,651       33,555  
Other operating expenses
    16,631       14,627  
                 
Total benefits and expenses
    113,079       86,100  
                 
Earnings before Federal income taxes
    27,588       27,281  
                 
Provision (benefit) for Federal income taxes:
               
Current
    15,141       7,928  
Deferred
    (6,395 )     1,211  
                 
Total Federal income taxes
    8,746       9,139  
                 
Net earnings
  $ 18,842       18,142  
                 
Basic Earnings Per Share:
               
Class A
  $ 5.34       5.15  
Class B
  $ 2.67       2.57  
                 
Diluted Earnings Per Share:
               
Class A
  $ 5.34       5.10  
Class B
  $ 2.67       2.57  

See accompanying notes to condensed consolidated financial statements.


5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2009
   
2008
 
             
Premiums and other revenues:
           
Traditional life and annuity premiums
  $ 8,520       8,518  
Universal life and annuity contract charges
    77,433       65,811  
Net investment income
    164,349       131,708  
Other revenues
    7,101       6,292  
Net realized investment gains (losses):
               
    Total other-than-temporary impairment (“OTTI”) losses
    (7,130 )     (1,450 )
    Portion of OTTI losses recognized in other comprehensive income
    1,823       -  
    Net OTTI losses recognized in earnings
    (5,307 )     (1,450 )
    Other net investment gains
    128       1,139  
    Total net realized investment losses
    (5,179 )     (311 )
                 
Total revenues
    252,224       212,018  
                 
Benefits and expenses:
               
Life and other policy benefits
    23,276       18,111  
Amortization of deferred policy acquisition costs and
               
    deferred sales inducements
    56,497       56,511  
Universal life and annuity contract interest
    92,917       60,172  
Other operating expenses
    29,344       28,057  
                 
Total benefits and expenses
    202,034       162,851  
                 
Earnings before Federal income taxes
    50,190       49,167  
                 
Provision (benefit) for Federal income taxes:
               
Current
    21,005       11,819  
Deferred
    (4,685 )     4,760  
                 
Total Federal income taxes
    16,320       16,579  
                 
Net earnings
  $ 33,870       32,588  
                 
Basic Earnings Per Share:
               
Class A
  $ 9.61       9.25  
Class B
  $ 4.80       4.62  
                 
Diluted Earnings Per Share:
               
Class A
  $ 9.60       9.18  
Class B
  $ 4.80       4.62  

See accompanying notes to condensed consolidated financial statements.


6



 
 
For the Three Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Net earnings
  $ 18,842       18,142  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized gains (losses) on securities:
               
Net unrealized holding gains (losses) arising during period
    31,868       (15,503 )
       Reclassification adjustment for net amounts                
           included in net earnings     171       (574
Amortization of net unrealized gains related to
               
transferred securities
    (12 )     (30 )
                 
       Net unrealized gains (losses) on securities     32,027       (16,107 )
                 
Foreign currency translation adjustments
    (93 )     39  
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    411       375  
                 
Other comprehensive income (loss)
    32,345       (15,693 )
                 
Comprehensive income
  $ 51,187       2,449  

See accompanying notes to condensed consolidated financial statements.


7



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Net earnings
  $ 33,870       32,588  
                 
Other comprehensive income (loss), net of effects of
               
deferred costs and taxes:
               
Unrealized gains (losses) on securities:
               
Net unrealized holding gains (losses) arising during period
    39,513       (15,095 )
       Reclassification adjustment for net amounts                
           included in net earnings     2,872        (610 )
Amortization of net unrealized gains related to
               
transferred securities
    (44 )     (14 )
                 
       Net unrelaized gains (losses) on securities     42,341       (15,719 )
                 
Foreign currency translation adjustments
    (98 )     (142 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    823       684  
                 
Other comprehensive income (loss)
    43,066       (15,177 )
                 
Comprehensive income
  $ 76,936       17,411  

See accompanying notes to condensed consolidated financial statements.


8



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
Common stock:
           
Balance at beginning of period
  $ 3,626       3,622  
Shares exercised under stock option plan
    -       4  
                 
Balance at end of period
    3,626       3,626  
                 
Additional paid-in capital:
               
Balance at beginning of period
    36,680       36,236  
Shares exercised under the stock option plan
    -       444  
                 
Balance at end of period
    36,680       36,680  
                 
Accumulated other comprehensive income (loss):
               
Unrealized gains (losses) on non-impaired securities:
               
Balance at beginning of period
    (53,770 )     1,184  
Change in unrealized gains (losses) during period
    42,902       (15,719 )
                 
Balance at end of period
    (10,868 )     (14,535 )
                 
Unrealized losses on impaired held to maturity securities:
               
Balance at beginning of period
    -       -  
Cumulative effect of change in accounting principle (See Note 3)
    (507 )     -  
Amortization
    15       -  
                 
Balance at end of period
    (492 )     -  
                 
Unrealized losses on impaired available for sale securities:
               
Balance at beginning of period
    -       -  
Other-than-temporary impairments
    (576 )     -  
                 
Balance at end of period
    (576 )     -  
                 
Foreign currency translation adjustments:
               
Balance at beginning of period
    2,966       3,078  
Change in translation adjustments during period
    (98 )     (142 )
                 
Balance at end of period
    2,868       2,936  
                 
Benefit plan liability adjustment:
               
Balance at beginning of period
    (14,554 )     (11,327 )
Amortization of net prior service cost and net gain
    823       684  
                 
Balance at end of period
    (13,731 )     (10,643 )
                 
Accumulated other comprehensive loss at end of period
    (22,799 )     (22,242 )

Continued on next page


9



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
Retained earnings:
           
Balance at beginning of period
    1,011,265       978,892  
Cumulative effect of change in accounting principle,
               
net of tax (See Note 3)
    507       -  
Net earnings
    33,870       32,588  
                 
Balance at end of period
    1,045,642       1,011,480  
                 
Total stockholders' equity
  $ 1,063,149       1,029,544  

See accompanying notes to condensed consolidated financial statements.


10



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net earnings
  $ 33,870       32,588  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    105,066       69,219  
Surrender charges and other policy revenues
    (30,471 )     (19,667 )
Realized losses on investments
    5,179       311  
Accrual and amortization of investment income
    (2,833 )     (2,487 )
Depreciation and amortization
    1,344       495  
(Increase) decrease in value of derivatives
    (18,344 )     21,289  
Increase in deferred policy acquisition and
               
sales inducement costs
    (9,210 )     (5,741 )
(Increase) decrease in accrued investment income
    (2,328 )     172  
Increase in other assets
    (11,822 )     (5,273 )
Decrease in liabilities for future policy benefits
    (1,060 )     (601 )
Increase in other policyholder liabilities
    2,912       3,421  
Increase in Federal income tax liability
    5,266       8,401  
Increase (decrease) in other liabilities
    13,642       (4,115 )
Other
    1,250       359  
                 
Net cash provided by operating activities
    92,461       98,371  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
    -       -  
Securities available for sale
    14,770       999  
Other investments
    671       443  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    530,236       355,100  
Securities available for sale
    64,563       140,458  
Derivatives, index options
    24,405       22,143  
Purchases of:
               
Securities held to maturity
    (668,004 )     (379,575 )
Securities available for sale
    (101,172 )     (167,134 )
Other investments
    (37,603 )     (26,292 )
Principal payments on mortgage loans
    3,921       10,200  
Cost of mortgage loans acquired
    (6,049 )     (1,962 )
Decrease in policy loans
    1,349       1,895  
Other
    -       (3,899 )
                 
Net cash used in investing activities
    (172,913 )     (47,624 )

(Continued on next page)


11



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 363,145       238,296  
Return of account balances on universal life
               
and annuity contracts
    (295,546 )     (300,961 )
Issuance of common stock under stock option plan
    -       448  
                 
Net cash provided by (used in) financing activities
    67,599       (62,217 )
                 
Effect of foreign exchange
    (93 )     (351 )
                 
Net decrease in cash and short-term investments
    (12,946 )     (11,821 )
Cash and short-term investments at beginning of period
    67,796       45,206  
                 
Cash and short-term investments at end of period
  $ 54,850       33,385  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the period for:
           
Interest
  $ 20       20  
Income taxes
    10,748       8,178  
                 
Noncash operating activities:
               
Net change in deferral of sales inducements
    10,124       9,047  
                 

See accompanying notes to condensed consolidated financial statements.

12

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 June 30, 2009, and the results of its operations and its cash flows for the three and six months ended June 30, 2009 and 2008. The results of operations for the six months ended June 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the full year. It is recommended that these condensed consolidated financial statements be read in conjunction with the audited 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 condensed consolidated balance sheet at December 31, 2008, has been derived from the audited consolidated financial statements as of that date. Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.

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.


(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.


 
Continued on Next Page
13

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



In December 2007, the FASB issued SFAS No. 160,  Noncontrolling  Interests in Consolidated Financial Statements. SFAS No. 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 No. 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 No. 160 were effective beginning January 1, 2009. The adoption of SFAS No. 160 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 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 No. 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 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 No. 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. As discussed in Note 10, the adoption of FSP FAS 157-4 did not have a material impact on the Company’s consolidated financial condition and results of operations.

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. 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. 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.


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



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 will have no effect on the Company’s consolidated financial condition and results of operations.

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 to be 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 FSP was effective for the Company as of December 31, 2008. The adoption of this FSP 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 was effective for the Company as of June 30, 2009. The adoption of this FSP did not have a significant impact on the consolidated financial position or results of operations. See Note 10 for the additional disclosures required by this FSP.

On April 9, 2009 the FASB issued FSP FAS 115-2 and FAS 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 was effective for the Company as of June 30, 2009. The impact of the adoption of this FSP is discussed in Note 3, Stockholders Equity.

On May 28, 2009, the FASB issued SFAS No. 165, Subsequent Events. This statement is intended to establish general standards of accounting for the disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. This statement was effective for the Company as of June 30, 2009. The adoption of this statement did not have a significant impact on the consolidated financial position or results of operations. See Note 12 for the additional disclosure required by this FSP.

On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets and SFAS No. 167 Amendments to FASB Interpretation No. 46(R), which changes the way entities account for securitizations and special purpose entities. Both statements are effective as of the beginning of the Company’s first annual reporting period beginning after November 15, 2009. The adoption of these statements should not have a significant impact on the 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 paid no cash dividends on common stock during the six months ended June 30, 2009 and 2008.


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



Change in Accounting Principles

With the adoption of the new FSP FAS 115-2 and FAS 124-2, the Company reviewed all previously-recorded other-than-temporary impairments of securities and estimated the credit versus the non-credit component consistent with the methodology used in the current period to analyze and bifurcate impairments into credit and non-credit components. As a result, the Company determined that $0.8 million in previously recorded other-than-temporary impairments had been due to non-credit impairments.

For each security, the Company developed its best estimate of the net present value of the cash flows expected to be received. The credit component of the impairment for these securities was determined to be the difference between the amortized cost of the security and the projected net cash flows. The non-credit component was determined to be the difference between projected net cash flows and fair value. It also determined whether it had the intent to sell the security, or if it was more likely than not that it will be required to sell the security, prior to the recovery of the non-credit component.

With the implementation of this FSP, the Company recorded a net of tax opening balance adjustment that increased retained earnings in the amount of $0.5 million and increased accumulated other comprehensive loss in the amount of $0.5 million. See Note 9 for further discussion of the adoption of the new FSP.


 
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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 June 30,
 
   
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
  $ 18,842               18,142          
Dividends – Class A shares
    -               -          
Dividends – Class B shares
    -               -          
                                 
Undistributed income
  $ 18,842               18,142          
                                 
Allocation of net income:
                               
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    18,307       535       17,627       515  
                                 
Net income
  $ 18,307       535       17,627       515  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,426       200  
Effect of dilutive
                               
stock options
    4       -       27       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,430       200       3,453       200  
                                 
Basic Earnings Per Share
  $ 5.34       2.67       5.15       2.57  
                                 
Diluted Earnings Per Share
  $ 5.34       2.67       5.10       2.57  


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




   
Six Months Ended June 30,
 
   
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
  $ 33,870               32,588          
Dividends – Class A shares
    -               -          
Dividends – Class B shares
    -               -          
                                 
Undistributed income
  $ 33,870               32,588          
                                 
Allocation of net income:
                               
Dividends
  $ -       -       -       -  
Allocation of undistributed income
    32,909       961       31,664       924  
                                 
Net income
  $ 32,909       961       31,664       924  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,424       200  
Effect of dilutive
                               
stock options
    4       -       26       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,430       200       3,450       200  
                                 
Basic Earnings Per Share
  $ 9.61       4.80       9.25       4.62  
                                 
Diluted Earnings Per Share
  $ 9.60       4.80       9.18       4.62  


 
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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 June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Service cost
  $ -       (180 )     -       -  
Interest cost
    262       246       524       518  
Expected return on plan assets
    (223 )     (295 )     (445 )     (570 )
Amortization of prior service cost
    1       1       2       2  
Amortization of net loss
    149       42       297       122  
                                 
Net periodic benefit cost
  $ 189       (186 )     378       72  

The Company expects to contribute $1.8 million to the plan in 2009.  As of June 30, 2009, the Company has contributed $0.1 million to the plan.

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

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

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


 
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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 June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Service cost
  $ 37       100       74       293  
Interest cost
    309       354       617       595  
Amortization of prior service cost
    260       260       520       520  
Amortization of net loss
    198       252       396       353  
                                 
Net periodic benefit cost
  $ 804       966       1,607       1,761  

The Company expects to contribute $2.0 million to these plans in 2009.  As of June 30, 2009, the Company has contributed $0.7 million to the plans.

(B)  Defined Benefit Postretirement Plans

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Interest cost
  $ 33       32       65       67  
Amortization of prior service cost
    26       26       52       52  
Amortization of net loss (gain)
    -       (4 )     -       3  
                                 
Net periodic benefit cost
  $ 59       54       117       122  

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



(6)  SEGMENT AND OTHER OPERATING INFORMATION

Under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information as of and for the periods ended June 30, 2009 and 2008 is provided below.

Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
June 30, 2009:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 61,850       209,021       509,252       -       780,123  
Total segment assets
    393,864       1,000,007       5,448,684       146,332       6,988,887  
Future policy benefits
    319,259       608,331       4,776,427       -       5,704,017  
Other policyholder liabilities
    11,748       24,726       98,401       -       134,875  
                                         
Three Months Ended
                                       
June 30, 2009:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 9,418       26,585       7,248       -       43,251  
Net investment income
    4,962       9,822       75,096       3,863       93,743  
Other income
    6       12       78       3,411       3,507  
                                         
Total revenues
    14,386       36,419       82,422       7,274       140,501  
                                         
Life and other policy benefits
    4,334       4,374       1,540       -       10,248  
Amortization of deferred
                                       
policy acquisition costs
    1,979       11,600       14,970       -       28,549  
Universal life and annuity
                                       
contract interest
    2,226       10,480       44,945       -       57,651  
Other operating expenses