nwl10.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 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 November 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
September 30, 2009 (Unaudited) and December 31, 2008
 
   
5
For the Three Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
6
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
7
For the Three Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
8
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
9
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
11
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)
 
   
13
   
46
Financial Condition and Results of Operations
 
   
72
   
73
   
73
   
73
   
73
   
73
   
73
   
74

2



 
   
 
   
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
(In thousands)
 
             
             
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
ASSETS
 
2009
   
2008
 
             
Investments:
           
Securities held to maturity, at amortized cost
           
(fair value: $4,259,696 and $3,727,353)
  $ 4,082,605       3,831,417  
Securities available for sale, at fair value
               
(cost: $1,963,559 and $1,904,053)
    2,033,249       1,745,266  
Mortgage loans, net of allowance for possible losses
               
($3,577 and $4,587)
    88,986       90,733  
Policy loans
    75,916       79,277  
Derivatives, index options
    66,987       11,920  
Other long-term investments
    33,809       14,168  
                 
Total investments
    6,381,552       5,772,781  
                 
Cash and short-term investments
    35,669       67,796  
Deferred policy acquisition costs
    624,377       701,984  
Deferred sales inducements
    116,883       120,955  
Accrued investment income
    72,005       64,872  
Federal income tax receivable
    -       1,820  
Other assets
    63,280       56,272  
                 
    $ 7,293,766       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)
       
   
September 30,
   
December 31,
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
2009
   
2008
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 135,186       137,530  
Universal life and annuity contracts
    5,764,603       5,424,968  
Other policyholder liabilities
    129,771       131,963  
Federal income tax liability:
               
Current
    14,162       -  
Deferred
    46,236       26,506  
Other liabilities
    105,284       79,300  
                 
Total liabilities
    6,195,242       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 3,425,966 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 income (loss)
    14,959       (65,358 )
Retained earnings
    1,043,259       1,011,265  
                 
Total stockholders’ equity
    1,098,524       986,213  
                 
    $ 7,293,766       6,786,480  

See accompanying notes to condensed consolidated financial statements.


4



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Three Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2009
   
2008
 
             
Premiums and other revenue:
           
Traditional life and annuity premiums
  $ 3,707       4,057  
Universal life and annuity contract charges
    37,683       32,885  
Net investment income
    116,276       69,582  
Other revenues
    5,086       3,056  
Net realized investment gains (losses):
               
Total other-than-temporary impairment (“OTTI”) losses
    (4,666 )     (21,635 )
Portion of OTTI losses recognized in other comprehensive income
    4,572       -  
Net OTTI losses recognized in earnings
    (94 )     (21,635 )
Other net investment gains
    151       15  
Total net realized investment gains (losses)
    57       (21,620 )
                 
Total revenues
    162,809       87,960  
                 
Benefits and expenses:
               
Life and other policy benefits
    19,965       10,794  
Amortization of deferred policy acquisition costs and
               
deferred sales inducements
    28,436       37,188  
Universal life and annuity contract interest
    80,608       38,339  
Other operating expenses
    36,426       17,905  
                 
Total benefits and expenses
    165,435       104,226  
                 
Loss before Federal income taxes
    (2,626 )     (16,266 )
                 
Provision (benefit) for Federal income taxes:
               
Current
    18,036       3,488  
Deferred
    (19,548 )     (9,954 )
                 
Total Federal income taxes
    (1,512 )     (6,466 )
                 
Net loss
  $ (1,114 )     (9,800 )
                 
Basic Loss Per Share:
               
Class A
  $ (0.32 )     (2.78 )
Class B
  $ (0.16 )     (1.39 )
                 
Diluted Loss Per Share:
               
Class A
  $ (0.32 )     (2.78 )
Class B
  $ (0.16 )     (1.39 )

See accompanying notes to condensed consolidated financial statements.


5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
 
For the Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2009
   
2008
 
             
Premiums and other revenues:
           
Traditional life and annuity premiums
  $ 12,227       12,575  
Universal life and annuity contract charges
    115,116       98,696  
Net investment income
    280,625       201,290  
Other revenues
    12,187       9,348  
Net realized investment gains (losses):
               
Total other-than-temporary impairment (“OTTI”) losses
    (11,796 )     (23,085 )
Portion of OTTI losses recognized in other comprehensive income
    6,395       -  
Net OTTI losses recognized in earnings
    (5,401 )     (23,085 )
Other net investment gains
    279       1,154  
Total net realized investment losses
    (5,122 )     (21,931 )
                 
Total revenues
    415,033       299,978  
                 
Benefits and expenses:
               
Life and other policy benefits
    43,241       28,905  
Amortization of deferred policy acquisition costs and
               
deferred sales inducements
    84,933       93,699  
Universal life and annuity contract interest
    173,525       98,511  
Other operating expenses
    65,770       45,962  
                 
Total benefits and expenses
    367,469       267,077  
                 
Earnings before Federal income taxes
    47,564       32,901  
                 
Provision (benefit) for Federal income taxes:
               
Current
    39,041       15,307  
Deferred
    (24,233 )     (5,194 )
                 
Total Federal income taxes
    14,808       10,113  
                 
Net earnings
  $ 32,756       22,788  
                 
Basic Earnings Per Share:
               
Class A
  $ 9.29       6.47  
Class B
  $ 4.65       3.23  
                 
Diluted Earnings Per Share:
               
Class A
  $ 9.28       6.42  
Class B
  $ 4.65       3.23  

See accompanying notes to condensed consolidated financial statements.


6



 
 
For the Three Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Net loss
  $ (1,114 )     (9,800 )
                 
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
    37,279       (34,258 )
Reclassification adjustment for net amounts
               
included in net earnings
    (17 )     11,707  
Amortization of net unrealized gains related to
               
transferred securities
    6       11  
                 
Net unrealized gains (losses) on securities
    37,268       (22,540 )
                 
Foreign currency translation adjustments
    79       (8 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    411       342  
                 
Other comprehensive income (loss)
    37,758       (22,206 )
                 
Comprehensive income (loss)
  $ 36,644       (32,006 )

See accompanying notes to condensed consolidated financial statements.


7



 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
For the Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Net earnings
  $ 32,756       22,788  
                 
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
    76,792       (49,353 )
Reclassification adjustment for net amounts
               
included in net earnings
    2,855       11,097  
Amortization of net unrealized losses related to
               
transferred securities
    (38 )     (3 )
                 
Net unrealized gains (losses) on securities
    79,609       (38,259 )
                 
Foreign currency translation adjustments
    (19 )     (150 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    1,234       1,026  
                 
Other comprehensive income (loss)
    80,824       (37,383 )
                 
Comprehensive income (loss)
  $ 113,580       (14,595 )

See accompanying notes to condensed consolidated financial statements.


8



 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Nine Months Ended September 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
    81,514       (38,259 )
                 
Balance at end of period
    27,744       (37,075 )
                 
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
    29       -  
Other-than-temporary impairments
    (1,446 )     -  
                 
Balance at end of period
    (1,924 )     -  
                 
Unrealized losses on impaired available for sale securities:
               
Balance at beginning of period
    -       -  
Other-than-temporary impairments
    (570 )     -  
Recoveries
    82       -  
                 
Balance at end of period
    (488 )     -  
                 
Foreign currency translation adjustments:
               
Balance at beginning of period
    2,966       3,078  
Change in translation adjustments during period
    (19 )     (150 )
                 
Balance at end of period
    2,947       2,928  
                 
Benefit plan liability adjustment:
               
Balance at beginning of period
    (14,554 )     (11,327 )
Amortization of net prior service cost and net gain
    1,234       1,026  
                 
Balance at end of period
    (13,320 )     (10,301 )
                 
Accumulated other comprehensive income (loss) at end of period
    14,959       (44,448 )

Continued on next page


9



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
 
For the Nine Months Ended September 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
    32,756       22,788  
Stockholder dividends
    (1,269 )     (1,269 )
                 
Balance at end of period
    1,043,259       1,000,411  
                 
Total stockholders' equity
  $ 1,098,524       996,269  

See accompanying notes to condensed consolidated financial statements.


10



 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net earnings
  $ 32,756       22,788  
Adjustments to reconcile net earnings to net cash
               
from operating activities:
               
Universal life and annuity contract interest
    173,525       98,511  
Surrender charges and other policy revenues
    (45,205 )     (30,324 )
Realized losses on investments
    5,122       21,931  
Accrual and amortization of investment income
    (3,385 )     (3,715 )
Depreciation and amortization
    (335 )     786  
(Increase) decrease in value of derivatives
    (61,896 )     52,824  
(Increase) decrease in deferred policy acquisition and
               
sales inducement costs
    (20,511 )     14,508  
Increase in accrued investment income
    (7,133 )     (2,496 )
(Increase) decrease in other assets
    (8,457 )     991  
Decrease in liabilities for future policy benefits
    (2,344 )     (694 )
Increase in other policyholder liabilities
    28,201       8,678  
Increase in Federal income tax liability
    (7,159 )     (368 )
Increase in other liabilities
    37,213       11,116  
Other
    5       844  
                 
Net cash provided by operating activities
    120,397       195,380  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities held to maturity
    -       -  
Securities available for sale
    15,612       1,522  
Other investments
    1,118       5,382  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    757,842       417,933  
Securities available for sale
    75,592       190,284  
Derivatives, index options
    38,131       -  
Purchases of:
               
Securities held to maturity
    (953,502 )     (493,363 )
Securities available for sale
    (220,912 )     (190,039 )
Other investments
    (51,299 )     (47,195 )
Principal payments on mortgage loans
    6,676       12,308  
Cost of mortgage loans acquired
    (6,049 )     (6,046 )
Decrease in policy loans
    3,361       2,835  
Other
    -       (4,316 )
                 
Net cash used in investing activities
    (333,430 )     (110,695 )

(Continued on next page)


11



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
 
For the Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
(In thousands)
 
             
             
   
2009
   
2008
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life
           
and annuity contracts
  $ 611,163       346,119  
Return of account balances on universal life
               
and annuity contracts
    (430,243 )     (441,195 )
Issuance of common stock under stock option plan
    -       448  
                 
Net cash provided by (used in) financing activities
    180,920       (94,628 )
                 
Effect of foreign exchange
    (14 )     (412 )
                 
Net decrease in cash and short-term investments
    (32,127 )     (10,355 )
Cash and short-term investments at beginning of period
    67,796       45,206  
                 
Cash and short-term investments at end of period
  $ 35,669       34,851  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the period for:
           
Interest
  $ 30       30  
Income taxes
    22,757       10,504  
                 
Noncash operating activities:
               
Net change in deferral of sales inducements
    15,984       13,148  

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 September 30, 2009, and the results of its operations and its cash flows for the three and nine months ended September 30, 2009 and 2008. The results of operations for the nine months ended September 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 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) commitments and contingencies, (5) valuation allowances for deferred tax assets, (6) other-than-temporary impairment losses on debt securities, and (7) valuation allowances for mortgage loans and real estate.


(2)  NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board (“FASB”) issued new guidance to provide a single definition of fair value, a framework for measuring fair value, and required additional disclosure about the use of fair value to measure assets and liabilities.  The Company adopted it for its reporting of financial assets and financial liabilities on January 1, 2008.  The effective date for implementation to non financial assets and non financial liabilities was delayed by the FASB until the first reporting period after November 15, 2008.  The Company adopted this portion of the guidance effective January 1, 2009.  The adoption of fair value measurements did not have a material impact on the Company’s consolidated financial statements and results of operations.

In December 2007, the FASB issued new guidance establishing accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. More specifically, the guidance addresses 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 Company adopted it effective January 1, 2009 and it did not have a material impact on the Company’s consolidated financial condition and results of operations.

In December 2007, the FASB issued new guidance establishing 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, and it 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 Company adopted it effective January 1, 2009 and it did not have an impact on the Company’s consolidated financial condition or results of operations.

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



In March 2008, the FASB issued new guidance to require companies with derivative instruments to disclose information about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This guidance became effective for financial statements issued for fiscal years beginning after November 15, 2008.  The Company adopted it on January 1, 2009 with no material impact on the consolidated financial statements.  Please see Note 10 – Fair Value Measurements for additional information pertaining to this guidance.

In September 2008, the FASB issued new guidance establishing disclosure requirements 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, and requires additional disclosure about the current status of the payment/performance risk of a guarantee. The Company adopted the guidance effective January 1, 2009 and it did not have a material effect on the Company’s consolidated financial condition and results of operations.

In December 2008, the FASB issued new guidance which requires information to be disclosed on an annual basis pertaining to postretirement benefit plan assets. 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 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 new guidance to enhance guidance on impairments to remove the exclusive reliance on a “market participant” estimate of future cash flows to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows. This allows management to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. It was effective for the Company as of December 31, 2008 and its adoption did not have a significant impact on the consolidated financial statements of the Company.

In March 2009, the FASB issued new guidance establishing 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 the guidance as of January 1, 2009. See Note 12 – Derivative Investments for disclosures regarding derivative instruments and hedging activities.

On April 9, 2009 the FASB issued new guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate a transaction is not orderly.  This guidance 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 guidance is effective for interim and annual reporting periods ending after June 15, 2009.  As further discussed in Note 10 – Fair Value Measurements, the adoption of this guidance did not have a material impact on the Company’s consolidated financial condition and results of operations.

On April 9, 2009 the FASB issued new guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. It was effective for the Company as of June 30, 2009 and did not have a significant impact on the consolidated financial position or results of operations.  See Note 10 for additional disclosures.

On April 9, 2009 the FASB issued new guidance which amended 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. It did not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This guidance was effective for the Company as of June 30, 2009. The impact of its adoption is discussed in Note 3, Stockholders’ Equity.


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



On May 28, 2009 the FASB issued new guidance establishing 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.  It was effective for the Company as of June 30, 2009 and did not have a significant impact on the consolidated financial position or results of operations. See Note 13 for additional disclosures.

On June 12, 2009 the FASB issued new guidance that changes the way entities account for securitizations and special purpose entities. The guidance is effective as of the beginning of the Company’s first annual reporting period beginning after November 15, 2009 and is not expected to have a significant impact on the consolidated financial position, results of operations or 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 the amount of dividends which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The Company paid no cash dividends on common stock during the nine months ended September 30, 2009 and 2008.  The Company did declare a cash dividend on August 28, 2009 payable November 30, 2009 to stockholders on record as of October 30, 2009.  The dividends declared were $0.36 per common share to Class A stockholders and $0.18 per common share to Class B stockholders.  A dividend in the same amounts per share on Class A and Class B shares was declared in August and paid in November of 2008.

Change in Accounting Principles

During the second quarter of 2009, the Company reviewed all previously recorded other-than-temporary impairments of securities in compliance with FASB ASC 320 10 10 guidance 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. The Company also determined whether management 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.

As a result of the implementation, during the second quarter of 2009, 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.


 
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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 September 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 loss
  $ (1,114 )             (9,800 )        
Dividends – Class A shares
    (1,233 )             (1,233 )        
Dividends – Class B shares
    (36 )             (36 )        
                                 
Undistributed loss
  $ (2,383 )             (11,069 )        
                                 
Allocation of net loss:
                               
Dividends
  $ 1,233       36       1,233       36  
Allocation of undistributed loss
    (2,315 )     (68 )     (10,755 )     (314 )
                                 
Net loss
  $ (1,082 )     (32 )     (9,522 )     (278 )
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,426       200  
Effect of dilutive
                               
stock options
    -       -       -       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,426       200       3,426       200  
                                 
Basic Loss Per Share
  $ (0.32 )     (0.16 )     (2.78 )     (1.39 )
                                 
Diluted Loss Per Share
  $ (0.32 )     (0.16 )     (2.78 )     (1.39 )


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



Earnings per Share (continued)

   
Nine Months Ended September 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
  $ 32,756               22,788          
Dividends – Class A shares
    (1,233 )             (1,233 )        
Dividends – Class B shares
    (36 )             (36 )        
                                 
Undistributed income
  $ 31,487               21,519          
                                 
Allocation of net income:
                               
Dividends
  $ 1,233       36       1,233       36  
Allocation of undistributed income
    30,594       893       20,909       610  
                                 
Net income
  $ 31,827       929       22,142       646  
                                 
Denominator:
                               
Basic earnings per share -
                               
weighted-average shares
    3,426       200       3,425       200  
Effect of dilutive
                               
stock options
    4       -       26       -  
                                 
Diluted earnings per share -
                               
adjusted weighted-average
                               
shares for assumed
                               
conversions
    3,430       200       3,451       200  
                                 
Basic Earnings Per Share
  $ 9.29       4.65       6.47       3.23  
                                 
Diluted Earnings Per Share
  $ 9.28       4.65       6.42       3.23  


 
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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. 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 September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Service cost
  $ -       -       -       -  
Interest cost
    243       259       767       777  
Expected return on plan assets
    (222 )     (285 )     (667 )     (855 )
Amortization of prior service cost
    1       1       3       3  
Amortization of net loss
    148       60       445       182  
                                 
Net periodic benefit cost
  $ 170       35       548       107  

The Company expects to contribute $2.1 million to the plan in 2009.  During the nine months ended September 30, 2009, the Company contributed $2.0 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 for 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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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 September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Service cost
  $ 38       146       112       439  
Interest cost
    308       298       925       893  
Amortization of prior service cost
    260       260       780       780  
Amortization of net loss
    197       177       593       530  
                                 
Net periodic benefit cost
  $ 803       881       2,410       2,642  

The Company expects to contribute $2.0 million to these plans in 2009.  During the nine months ended September 30, 2009, the Company contributed $1.3 million to the plans.

(B)  Defined Contribution Pension Plans

The Company sponsors a qualified 401(k) plan for substantially all employees and a non-qualified deferred compensation plan primarily for senior officers.  The Company makes annual contributions to the 401(k) plan of one percent of each employee's compensation in 2009 and 2008.  Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service.

(C)  Defined Benefit Postretirement Plans

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
                         
Interest cost
  $ 33       34       98       101  
Amortization of prior service cost
    25       25       77       77  
Amortization of net loss
    -       1       -       4  
                                 
Net periodic benefit cost
  $ 58       60       175       182  

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

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information as of and for the periods ended September 30, 2009 and 2008 is provided below.

Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2009:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 59,722       202,510       479,028       -       741,260  
Total segment assets
    397,154       1,019,901       5,698,414       157,769       7,273,238  
Future policy benefits
    321,157       626,283       4,952,349       -       5,899,789  
Other policyholder liabilities
    12,128       20,424       97,219       -       129,771  
                                         
Three Months Ended
                                       
September 30, 2009:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 8,166       25,706       7,518       -       41,390  
Net investment income (loss)
    (364 )     18,362       91,072       7,206       116,276  
Other income
    2       17       1,647       3,420       5,086  
                                         
Total revenues
    7,804       44,085       100,237       10,626       162,752  
                                         
Life and other policy benefits
    8,233       (1,141 )     12,873       -       19,965  
Amortization of deferred
                                       
policy acquisition costs
    1,136       10,495       16,805       -       28,436  
Universal life and annuity
                                       
contract interest
    2,244       17,646       60,718       -       80,608  
Other operating expenses
    4,071       5,935       22,391       4,029       36,426  
Federal income taxes (benefit)
    (2,555 )     3,424       (4,411 )     2,010       (1,532 )
                                         
Total expenses
    13,129       36,359       108,376       6,039       163,903  
                                         
Segment earnings (loss)
  $ (5,325 )     7,726       (8,139 )     4,587