nwl10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2010
 
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, 2010, the number of shares of Registrant's common stock outstanding was: Class A – 3,428,941 and  Class B - 200,000.


 
 

 



   
 
Page
   
3
   
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3
September 30, 2010 (Unaudited) and December 31, 2009
 
   
5
For the Three Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
6
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
7
For the Three Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
8
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
9
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
11
For the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
 
   
13
   
51
Financial Condition and Results of Operations
 
   
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80
   
81
   
81
   
81
   
81
   
82
   
82
   
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2




PART I. FINANCIAL INFORMATION
 
             
ITEM 1. FINANCIAL STATEMENTS
 
             
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
             
             
   
(Unaudited)
       
   
September 30,
   
December 31,
 
ASSETS
 
2010
   
2009
 
             
Investments:
           
Securities held to maturity, at amortized cost (fair value: $5,204,033 and $4,331,077)
  $ 4,780,604       4,176,661  
Securities available for sale, at fair value (cost: $2,179,419 and $1,967,365)
    2,409,030       2,050,079  
Mortgage loans, net of allowance for possible losses ($5,420 and $5,033)
    133,286       98,200  
    Policy loans     78,591       78,336  
    Derivatives, index options     35,987       89,915  
    Other long-term investments     29,082       32,829  
                 
Total investments
    7,466,580       6,526,020  
                 
Cash and short-term investments
    29,197       108,866  
Deferred policy acquisition costs
    628,227       626,440  
Deferred sales inducements
    125,177       122,232  
Accrued investment income
    80,855       71,572  
Federal income tax receivable
    867       -  
Other assets
    74,998       63,605  
                 
    $ 8,405,901       7,518,735  


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
 
2010
   
2009
 
             
LIABILITIES:
           
             
Future policy benefits:
           
Traditional life and annuity contracts
  $ 138,414       133,169  
Universal life and annuity contracts
    6,746,153       5,988,665  
Other policyholder liabilities
    137,035       128,931  
Deferred Federal income tax liability
    62,903       32,818  
Federal income tax payable
    -       13,197  
Other liabilities
    106,281       107,902  
                 
Total liabilities
    7,190,786       6,404,682  
                 
COMMITMENTS AND CONTINGENCIES (Note 8)
               
                 
STOCKHOLDERS’ EQUITY:
               
                 
Common stock:
               
Class A - $1 par value; 7,500,000 shares authorized; 3,428,941 and 3,425,966 issued and outstanding in 2010 and 2009, respectively
    3,429       3,426  
Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2010 and 2009
    200       200  
Additional paid-in capital
    36,954       36,680  
Accumulated other comprehensive income
    67,157       17,760  
Retained earnings
    1,107,375       1,055,987  
                 
Total stockholders’ equity
    1,215,115       1,114,053  
                 
    $ 8,405,901       7,518,735  

Note:  The condensed consolidated balance sheet at December 31, 2009, has been derived from the audited consolidated financial statements as of that date.

See accompanying notes to condensed consolidated financial statements.


 
4



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
For the Three Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2010
   
2009
 
             
Premiums and other revenues:
           
Traditional life and annuity premiums
  $ 3,961       3,707  
Universal life and annuity contract charges
    32,898       37,683  
Net investment income
    106,605       116,276  
Other revenues
    6,075       5,086  
Net realized investment gains (losses):
               
Total other-than-temporary impairment (“OTTI”) losses
    (538 )     (4,666 )
Portion of OTTI losses recognized in other comprehensive income
    123       4,572  
Net OTTI losses recognized in earnings
    (415 )     (94 )
Other net investment gains
    2,087       151  
Total net realized investment gains
    1,672       57  
                 
Total revenues
    151,211       162,809  
                 
Benefits and expenses:
               
Life and other policy benefits
    13,335       19,965  
    Amortization of deferred policy acquisition costs and deferred sales inducements
    32,608       28,436  
Universal life and annuity contract interest
    86,792       80,608  
Other operating expenses
    (2,181 )     36,426  
                 
Total benefits and expenses
    130,554       165,435  
                 
Earnings (loss) before Federal income taxes
    20,657       (2,626 )
                 
Provision (benefit) for Federal income taxes
    7,218       (1,512 )
                 
Net earnings (loss)
  $ 13,439       (1,114 )
                 
Basic Earnings (Loss) Per Share:
               
Class A
  $ 3.81       (0.32 )
Class B
  $ 1.90       (0.16 )
                 
Diluted Earnings (Loss) Per Share:
               
Class A
  $ 3.81       (0.32 )
Class B
  $ 1.90       (0.16 )

See accompanying notes to condensed consolidated financial statements.


 
5



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
 
For the Nine Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands, except per share amounts)
 
             
             
   
2010
   
2009
 
             
Premiums and other revenues:
           
Traditional life and annuity premiums
  $ 12,475       12,227  
Universal life and annuity contract charges
    96,433       115,116  
Net investment income
    261,740       280,625  
Other revenues
    20,394       12,187  
Net realized investment gains (losses):
               
Total other-than-temporary impairment (“OTTI”) losses
    (846 )     (11,796 )
Portion of OTTI losses recognized in other comprehensive income
    123       6,395  
Net OTTI losses recognized in earnings
    (723 )     (5,401 )
Other net investment gains
    2,017       279  
Total net realized investment gains (losses)
    1,294       (5,122 )
                 
Total revenues
    392,336       415,033  
                 
Benefits and expenses:
               
Life and other policy benefits
    40,141       43,241  
    Amortization of deferred policy acquisition costs and deferred sales inducements
    74,614       84,933  
Universal life and annuity contract interest
    167,423       173,525  
Other operating expenses
    32,223       65,770  
                 
Total benefits and expenses
    314,401       367,469  
                 
Earnings before Federal income taxes
    77,935       47,564  
                 
Federal income taxes
    25,276       14,808  
                 
Net earnings
  $ 52,659       32,756  
                 
Basic Earnings Per Share:
               
Class A
  $ 14.93       9.29  
Class B
  $ 7.46       4.65  
                 
Diluted Earnings Per Share:
               
Class A
  $ 14.89       9.28  
Class B
  $ 7.46       4.65  

See accompanying notes to condensed consolidated financial statements.


 
6



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Three Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
             
   
2010
   
2009
 
             
Net earnings (loss)
  $ 13,439       (1,114 )
                 
Other comprehensive income, net of effects of deferred costs and taxes:
               
Unrealized gains on securities:
               
Net unrealized holding gains arising during period
    20,421       38,623  
Net unrealized noncredit gains (losses)
    (123     (1,344 )
Reclassification adjustment for net amounts included in net loss
    (326 )     (17 )
Amortization of net unrealized losses related to transferred securities
    20       6  
                 
Net unrealized gains on securities
    19,992       37,268  
                 
Foreign currency translation adjustments
    (43 )     79  
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    289       411  
                 
Other comprehensive income
    20,238       37,758  
                 
Comprehensive income
  $ 33,677       36,644  

See accompanying notes to condensed consolidated financial statements.


 
7



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Nine Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
             
   
2010
   
2009
 
             
Net earnings
  $ 52,659       32,756  
                 
Other comprehensive income, net of effects of deferred costs and taxes:
               
Unrealized gains on securities:
               
Net unrealized holding gains arising during period
    49,093       78,697  
           Net unrealized noncredit losses     (123     (1,905
Reclassification adjustment for net amounts included in net earnings (loss)
    (326 )     2,855  
Amortization of net unrealized (gains) losses related to transferred securities
    24       (38 )
                 
Net unrealized gains on securities
    48,668       79,609  
                 
Foreign currency translation adjustments
    (139 )     (19 )
                 
Benefit plans:
               
Amortization of net prior service cost and net gain
    868       1,234  
                 
Other comprehensive income
    49,397       80,824  
                 
Comprehensive income
  $ 102,056       113,580  

See accompanying notes to condensed consolidated financial statements.


 
8



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
For the Nine Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
   
2010
   
2009
 
Common stock:
           
Balance at beginning of period
  $ 3,626       3,626  
Shares exercised under stock option plan
    3       -  
                 
Balance at end of period
    3,629       3,626  
                 
Additional paid-in capital:
               
Balance at beginning of period
    36,680       36,680  
Shares exercised under stock option plan
    274       -  
                 
Balance at end of period
    36,954       36,680  
                 
Accumulated other comprehensive income (loss):
               
Unrealized gains (losses) on non-impaired securities:
               
Balance at beginning of period
    31,639       (53,770 )
Change in unrealized gains during period, net of tax
    48,435       81,514  
                 
Balance at end of period
    80,074       27,744  
                 
Unrealized losses on impaired held to maturity securities:
               
Balance at beginning of period
    (2,751 )     -  
Cumulative effect of change in accounting principal (See Note 3)
    -       (507 )
Amortization
    30       29  
Other-than-temporary impairments, non-credit, net of tax
    (123 )     (1,446 )
                 
Balance at end of period
    (2,844 )     (1,924 )
                 
Unrealized losses on impaired available for sale securities:
               
Balance at beginning of period
    (562 )     -  
Other-than-temporary impairments, non-credit, net of tax
    (365 )     (570 )
Recoveries, net of tax
    326       82  
                 
Balance at end of period
    (601 )     (488 )
                 
Foreign currency translation adjustments:
               
Balance at beginning of period
    2,893       2,966  
Change in translation adjustments during period
    (139 )     (19 )
                 
Balance at end of period
    2,754       2,947  
                 
Benefit plan liability adjustment:
               
Balance at beginning of period
    (13,459 )     (14,554 )
Amortization of net prior service cost and net gain, net of tax
    868       1,234  
                 
Balance at end of period
    (12,591 )     (13,320 )
                 
Accumulated other comprehensive income at end of period
    67,157       14,959  

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, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
             
Retained earnings:
           
Balance at beginning of period
    1,055,987       1,011,265  
                 
Cumulative effect of change in accounting principle, net of tax (See Note 3)
    -       507  
Net earnings
    52,659       32,756  
Stockholder dividends
    (1,271 )     (1,269 )
                 
Balance at end of period
    1,107,375       1,043,259  
                 
Total stockholders' equity
  $ 1,215,115       1,098,524  

See accompanying notes to condensed consolidated financial statements.


 
10



NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
             
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net earnings
  $ 52,659       32,756  
Adjustments to reconcile net earnings to net cash from operating activities:
               
Universal life and annuity contract interest
    167,423       173,525  
Surrender charges and other policy revenues
    (28,569 )     (45,205 )
Realized gains (losses) on investments
    (1,294 )     5,122  
Accrual and amortization of investment income
    (1,565 )     (3,385 )
Depreciation and amortization
    3,475       (335 )
Decrease (increase) in value of index options
    63,860       (61,896 )
Increase in deferred policy acquisition and sales inducement costs
    (77,107 )     (20,511 )
Increase in accrued investment income
    (9,283 )     (7,133 )
Increase in other assets
    (14,268 )     (8,457 )
Increase (decrease) in liabilities for future policy benefits
    26,109       (2,344
Increase in other policyholder liabilities
    8,104       28,201  
Decrease in Federal income taxes
    (10,184 )     (7,159 )
Increase in other liabilities
    554       37,213  
Other, net
    (522 )     5  
                 
Net cash provided by operating activities
    179,392       120,397  
                 
Cash flows from investing activities:
               
Proceeds from sales of:
               
Securities available for sale
    28,778       15,612  
Other investments
    3,544       1,118  
Proceeds from maturities and redemptions of:
               
Securities held to maturity
    534,123       757,842  
Securities available for sale
    53,767       75,592  
Index options
    31,302       38,131  
Purchases of:
               
Securities held to maturity
    (1,137,958 )     (953,502 )
Securities available for sale
    (292,976 )     (220,912 )
Other investments
    (41,765 )     (51,299 )
Principal payments on mortgage loans
    17,352       6,676  
Cost of mortgage loans acquired
    (52,882 )     (6,049 )
(Increase) decrease in policy loans
    (255 )     3,361  
                 
Net cash used in investing activities
    (856,970 )     (333,430 )

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, 2010 and 2009
 
(Unaudited)
 
(In thousands)
 
             
             
   
2010
   
2009
 
             
Cash flows from financing activities:
           
Deposits to account balances for universal life and annuity contracts
  $ 1,060,960       611,163  
Return of account balances on universal life and annuity contracts
    (463,191 )     (430,243 )
Issuance of common stock under stock option plan
    277       -  
                 
Net cash provided by financing activities
    598,046       180,920  
                 
Effect of foreign exchange
    (137 )     (14 )
                 
Net decrease in cash and short-term investments
    (79,669 )     (32,127 )
Cash and short-term investments at beginning of period
    108,866       67,796  
                 
Cash and short-term investments at end of period
  $ 29,197       35,669  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
           
             
Cash paid during the period for:
           
Interest
  $ 30       30  
Income taxes
    35,600       22,757  

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, 2010, and the results of its operations and its cash flows for the three and nine months ended September 30, 2010 and 2009. The results of operations for the nine months ended September 30, 2010 and 2009 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, 2009 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, 2009, has been derived from the audited consolidated financial statements as of that date.

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., NWLSM, 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, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate.

The Company is implementing new actuarial reserving systems that enhance its ability to provide better estimates used in establishing future policy liabilities, monitor the deferred acquisition cost asset and the deferred sales asset as well as support other actuarial processes within the Company. The implementation of these new reserving systems for specific blocks of business began in the second quarter of 2009 and is expected to be completed in 2011.  As the Company applies these new systems to a line of business, current reserving assumptions are reviewed and updated as appropriate. During the three months ended March 31, 2010 a correction was made to a surrender charge assumption for future years on one deferred annuity product line.  This change resulted in an unlocking adjustment that increased the Deferred Policy Acquisition Costs (“DPAC”) amortization expense by $2.7 million in the first quarter.  During the three months ended June 30, 2010, a correction was made to traditional life policy related expense of $1.3 million.  This change was related to reserve calculations on current face amounts of insurance in force but should have been calculated on the ultimate face amounts.  As the amounts of these corrections were determined to have occurred over the course of multiple previously reported periods, it was concluded that the amounts of the corrections were immaterial to the financial results reported in any of these periods, as well as the current period.

Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.


 
13

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


(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 the guidance 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 this guidance effective January 1, 2009. Adoption of this guidance did not have an impact on the Company’s consolidated financial condition or results of operations.

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.  See Note 11, Derivative Investments, 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 adoption of this guidance 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 were effective for fiscal years ending after December 15, 2009.  Adoption of this guidance on January 1, 2010 had no effect on the Company’s consolidated financial condition and results of operations.

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 11, Derivative Investments, for disclosures regarding derivative instruments and hedging activities.


 
14

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


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 Values of Financial Instruments, 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, Fair Values of Financial Instruments, 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 and Note 9, Investments.

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.

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.  The adoption of this guidance did not have a significant impact on the consolidated financial position, results of operations, or disclosures.

During January 2010, FASB issued new guidance that requires more robust fair value disclosures about the different classes of assets and liabilities measured at fair value.  The adoption of this guidance did not have a significant impact on the consolidated financial position or results of operations.

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.

On September 20, 2010 the FASB issued new guidance related to accounting for the deferral of acquisition costs of insurance contracts.  The new guidance modifies the types and amounts of costs incurred by insurance companies for the acquisition and renewal of insurance contracts which may be deferred and capitalized.  The guidance more specifically limits capitalized costs to variable costs directly related to the acquisition or renewal of insurance contracts and will be effective for the Company as of January 1, 2012.  The Company is currently reviewing its capitalization policies and does not believe this guidance will have a material impact on its consolidated financial statements.


 
15

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


(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 restrictions are based on statutory earnings and surplus levels of the Company.  The maximum dividend payment which may be made without prior approval in 2010 is $81.3 million.  The Company did not pay cash dividends on common stock during the nine months ended September 30, 2010 and 2009.  However, the Company did declare a cash dividend on August 20, 2010 payable December 1, 2010 to stockholders on record as of October 29, 2010.  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 2009.

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 newly issued GAAP 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.


 
16

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,
 
   
2010
   
2009
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings (Loss) Per Share:
                       
Net income (loss)
  $ 13,439             (1,114 )      
Dividends - Class A shares
    (1,235 )           (1,233 )      
Dividends - Class B shares
    (36 )           (36 )      
                             
Undistributed income (loss)
  $ 12,168             (2,383 )      
                             
Allocation of net income (loss):
                           
Dividends
  $ 1,235       36       1,233       36  
Allocation of undistributed income (loss)
    11,823       345       (2,315 )     (68 )
                                 
Net income (loss)
  $ 13,058       381       (1,082 )     (32 )
                                 
Denominator:
                               
Basic earnings per share - weighted-average shares
    3,427       200       3,426       200  
Effect of dilutive stock options
    5       -       -       -  
                                 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
    3,432       200       3,426       200  
                                 
Basic Earnings (Loss) Per Share
  $ 3.81       1.90       (0.32 )     (0.16 )
                                 
Diluted Earnings (Loss) Per Share
  $ 3.81       1.90       (0.32 )     (0.16 )


 
17

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



   
Nine Months Ended September 30,
 
   
2010
   
2009
 
   
Class A
   
Class B
   
Class A
   
Class B
 
   
(In thousands except per share amounts)
 
                         
Numerator for Basic and
                       
Diluted Earnings Per Share:
                       
Net income
  $ 52,659             32,756        
Dividends - Class A shares
    (1,235 )           (1,233 )      
Dividends - Class B shares
    (36 )           (36 )      
                             
Undistributed income
  $ 51,388             31,487        
                             
Allocation of net income:
                           
Dividends
  $ 1,235       36       1,233       36  
Allocation of undistributed income
    49,931       1,457       30,594       893  
                                 
Net income
  $ 51,166       1,493       31,827       929  
                                 
Denominator:
                               
Basic earnings per share - weighted-average shares
    3,426       200       3,426       200  
Effect of dilutive stock options
    11       -       4       -  
                                 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
    3,437       200       3,430       200  
                                 
Basic Earnings Per Share
  $ 14.93       7.46       9.29       4.65  
                                 
Diluted Earnings Per Share
  $ 14.89       7.46       9.28       4.65  


 
18

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 table summarizes the components of net periodic benefit cost.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
                         
Service cost
  $ -       -       -       -  
Interest cost
    259       243       776       767  
Expected return on plan assets
    (259 )     (222 )     (777 )     (667 )
Amortization of prior service cost
    1       1       3       3  
Amortization of net loss
    125       148       374       445  
                                 
Net periodic benefit cost
  $ 126       170       376       548  

The Company expects to contribute $776,000 to the plan in 2010.  As of September 30, 2010, the Company has contributed $480,000 to the plan.

The Company also sponsors a non-qualified defined benefit plan for certain 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 defined benefit 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 defined benefit plan as previously discussed, while complying with the requirements of the Act.


 
19

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


The following table summarizes the components of net periodic benefit costs for the Chairman and President non-qualified defined benefit plans.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
                         
Service cost
  $ 13       38       39       112  
Interest cost
    266       308       798       925  
Amortization of prior service cost
    129       260       387       780  
Amortization of net loss
    164       197       493       593  
                                 
Net periodic benefit cost
  $ 572       803       1,717       2,410  

The Company expects to contribute $2.0 million to these plans in 2010.  As of September 30, 2010, the Company has contributed $1.3 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 September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
                         
Interest cost
  $ 34       33       103       98  
Amortization of prior service cost
    26       25       77       77  
                                 
Net periodic benefit cost
  $ 60       58       180       175  

The Company expects to contribute minimal amounts to the plan in 2010.


 
20

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 for the quarters ended September 30, 2010 and 2009 is provided below.

Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
September 30, 2010:
                             
Selected Balance Sheet Items:
                         
Deferred policy acquisition
                             
costs and sales inducements
  $ 41,811       206,620       504,973       -       753,404  
Total segment assets
    393,549       971,496       6,802,612       217,028       8,384,685  
Future policy benefits
    325,915       689,807       5,868,845       -       6,884,567  
Other policyholder liabilities
    11,816       18,064       107,155       -       137,035  
                                         
Three Months Ended
                                       
September 30, 2010:
                                       
Condensed Income Statements:
                                       
Premiums and contract
                                       
revenues
  $ 6,547       25,070       5,242       -       36,859  
Net investment income
    2,296       12,431       86,329       5,549       106,605  
Other income (loss)
    (9 )     57       494       5,533       6,075  
                                         
Total revenues
    8,834       37,558       92,065       11,082       149,539  
                                         
Life and other policy benefits
    3,719       2,151       7,465       -       13,335  
Amortization of deferred
                                       
acquisition costs
    2,881       9,702       20,025       -       32,608  
Universal life and annuity
                                       
contract interest
    2,965       9,440       74,387       -       86,792  
Other operating expenses
    1,937       2,745       (10,961 )     4,098       (2,181 )
Federal income taxes (benefit)
    (1,030 )     5,258       1,648       756       6,632  
                                         
Total expenses
    10,472       29,296       92,564       4,854       137,186  
                                         
Segment earnings (loss)
  $ (1,638 )     8,262       (499 )     6,228       12,353  
                                         


 
21

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



   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
Totals
 
   
(In thousands)
 
                               
Nine Months Ended
                             
September 30, 2010:
                             
Condensed Income Statements:
                             
Premiums and contract
                             
revenues
  $ 20,596       73,862       14,450       -       108,908  
Net investment income
    11,798       25,550       212,737       11,655       261,740  
Other income
    206       350       2,953       16,885       20,394  
                                         
Total revenues
    32,600       99,762       230,140       28,540       391,042  
                                         
Life and other policy benefits
    12,014       17,385       10,742       -       40,141  
Amortization of deferred
                                       
acquisition costs
    8,649       18,694       47,271       -       74,614  
Universal life and annuity
                                       
contract interest
    8,299       21,789       137,335       -       167,423  
Other operating expenses
    8,268       13,966       (2,512 )     12,501       32,223  
Federal income taxes (benefit)
    (1,621 )     9,775       13,056       3,613       24,823  
                                         
Total expenses
    35,609       81,609       205,892       16,114       339,224  
                                         
Segment earnings (loss)
  $ (3,009 )     18,153       24,248       12,426       51,818  


 
22

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



Selected Segment Information:
                             
   
Domestic
   
International
                   
   
Life
   
Life
         
All
       
   
Insurance
   
Insurance
   
Annuities
   
Others
   
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
                                       
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