Securities registered pursuant to Section 12 (b) of the Act:

		Name of each exchange on which
Title of each class to be so registered:		each class is to be registered:
Class A Common Stock, $1.00 par value		The NASDAQ Stock Market LLC

RESULTS OF OPERATIONS

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate derivative and realized investment gains and losses from operating revenues. Similar measures are commonly used in the insurance industry in order to assess profitability and results from ongoing operations. The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company’s results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company’s business. The Company excludes or segregates derivative and realized investment gains and losses because such items are often the result of events which may or may not be at the Company’s discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company’s business. Therefore, in the following sections discussing consolidated operations and segment operations, appropriate reconciliations have been included to report information management considers useful in enhancing an understanding of the Company’s operations to reportable GAAP balances reflected in the consolidated financial statements.

 

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Consolidated Operations

Revenues.   The following details Company revenues:

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Universal life and annuity contract charges		$	145,651				133,424				119,677
Traditional life and annuity premiums			17,043				17,752				19,513
Net investment income (excluding derivatives)			348,186				339,038				334,799
Other revenues			17,348				12,769				13,683
Operating revenues			528,228				502,983				487,672
Derivative income (loss)			45,345				(65,676	)			(16,662	)
Net realized investment (losses) gains			(5,167	)			(26,228	)			3,497
Total revenues		$	568,406				411,079				474,507

Universal life and annuity contract revenues - Revenues for universal life and annuity contract revenues increased 9.2% in 2009 compared to 2008.  Revenues for these products consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed against policyholder account balances, less reinsurance premiums.  Cost of insurance charges were $83.6 million in 2009 compared to $82.9 million in 2008 and $74.3 million in 2007.  Administrative charges were $25.4 million, $25.0 million and $20.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.  Surrender charges assessed against policyholder account balances upon withdrawal were $50.0 million in 2009 compared to $39.1 million in 2008 and $33.4 million in 2007.

Traditional life and annuity premiums - Traditional life and annuity premiums decreased 4.0% in 2009 compared to 2008.  Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period.  The Company’s life insurance sales focus has been primarily centered around universal life products.  Universal life products, especially the Company’s equity indexed universal life products, offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index such as the S&P 500 Index ® .

Net investment income (with and without derivatives) - A detail of net investment income is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Gross investment income:
Debt securities		$	332,207				321,234				315,271
Mortgage loans			6,346				7,223				8,513
Policy loans			5,901				6,096				6,302
Short-term investments			116				956				1,496
Other investments			6,982				5,934				6,087
Total investment income			351,552				341,443				337,669
Less:  investment expenses			3,366				2,405				2,870
Net investment income
(excluding derivatives)			348,186				339,038				334,799
Derivative income (loss)			45,345				(65,676	)			(16,662	)
Net investment income		$	393,531				273,362				318,137

 

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Investment grade debt securities generated approximately 95.4% of net investment income, excluding derivatives, in 2009.  The decrease in short-term investment income in 2009 is attributable to the very low interest rates available on money market funds during all of 2009.  Interest income earned on other investments increased due to new investments in collateralized loans made during the second half of 2009.

Net investment income performance is analyzed excluding derivative income (loss), which is a common practice in the insurance industry, in order to assess underlying profitability and results from ongoing operations.  Net investment income performance is summarized as follows:

		Years Ended December 31,
		2009				2008				2007
		(In thousands except percentages)
Excluding derivatives:
Net investment income		$	348,186				339,038				334,799
Average invested assets, at amortized cost		$	6,056,042				5,762,688				5,732,212
Yield on average invested assets			5.75	%			5.88	%			5.84	%
Including derivatives:
Net investment income		$	393,531				273,362				318,137
Average invested assets, at amortized cost		$	6,083,722				5,814,439				5,789,502
Yield on average invested assets			6.47	%			4.70	%			5.50	%

The average invested asset yield, excluding derivatives, decreased in 2009 due to the Company obtaining lower yields on newly invested cash inflows.  The Company invests substantially most of its net cash flows in debt securities whose yields fell during 2009 with the decline in U.S. Treasury yields.  Although the Company’s average credit spread on debt securities purchased for insurance operations widened to approximately 270 basis points during 2009 from 240 basis points in 2008, the overall drop in interest rate levels more than offset the incremental spread on new investments.  The average invested asset yield, including derivatives, increased due to the recovery in the equity markets during 2009.  Refer to the derivatives discussion following this section for a more detailed explanation.

Other revenues - Other revenues consists primarily of gross income associated with nursing home operations of $15.7 million, $12.5 million and $12.6 million in 2009, 2008 and 2007, respectively.  In addition, the Company received $0.5 million related to lawsuit settlements during 2007.

Derivative income (loss) - Index options are derivative financial instruments used to fully hedge the equity return component of the Company’s fixed-indexed products, which were first introduced for sale in 1997.  In 2002, the Company began selling a fixed-indexed universal life product in addition to its fixed-indexed annuities.  Any income or loss from the sale or expiration of the options, as well as period-to-period changes in fair values, are reflected as a component of net investment income.

Income and losses from index options are due to market conditions.  Index options are intended to act as hedges to match the returns on the product’s underlying reference index and the rise or decline in the index causes option values to likewise rise or decline. The Company does not elect hedge accounting relative to these derivative instruments.  While income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the Company’s fixed-indexed products also fluctuates in a similar manner and direction.  In 2009, the reference indices increased and the Company recorded income from index options and likewise increased contract interest expenses.  In 2008 and 2007, the reference indices decreased resulting in index option losses and a reduction in contract interest expenses.

 

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The table below summarized the derivate income (loss) amounts and total contract interest by year.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Derivatives:
Unrealized income (loss)		$	93,085				(17,480	)			(56,204	)
Realized income (loss)			(47,740	)			(48,196	)			39,542
Total income (loss) included in net investment income		$	45,345				(65,676	)			(16,662	)
Total contract interest		$	242,816				138,960				164,391

Net realized investment (losses) gains - Realized losses on investments have primarily resulted from impairment write-downs on investments in debt securities and valuation allowances recorded on mortgage loans. The net losses reported in 2009 of $5.2 million consisted of gross gains of $2.2 million primarily from calls and sales of debt securities, offset by gross losses of $7.4 million, which includes other-than-temporary impairment losses.

The Company records impairment write-downs when a decline in value is considered to be other-than-temporary and full recovery of the investment is not expected.  Impairment write-downs are summarized in the following table.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Impairment or valuation write-downs:
Bonds		$	5,105				21,803				67
Equities			416				5,412				-
Mortgage loans			1,461				1,020				1,467
		$	6,982				28,235				1,534

Due to events providing evidence of a significant deterioration in the issuers’ credit worthiness, one security was transferred from the held to maturity to the available for sale classification, and was ultimately sold.

The equity impairments represent mark-to-market write-downs on various equity holdings.  In addition, the 2008 amount includes Fannie Mae and Freddie Mac preferred stock impairments of $4.6 million.

The mortgage loan valuation writedown in 2009 relates to a property located in Steubenville, Ohio.  The writedown in 2008 principally involves a property located in Ft. Smith, Arkansas.  The 2007 mortgage loan valuation writedown involves a New Orleans, Louisiana property whose value was negatively impacted by Hurricane Katrina.

Benefits and Expenses. The following details benefits and expenses.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Life and other policy benefits		$	48,997				39,759				41,326
Amortization of deferred policy acquisition costs			115,163				127,161				88,413
Universal life and annuity contract interest			242,816				138,960				164,391
Other operating expenses			92,192				55,630				55,130
Totals		$	499,168				361,510				349,260

Life and other policy benefits - Life and other policy benefits include death claims of $30.2 million, $29.6 million and $28.5 million for 2009, 2008 and 2007, respectively.

 

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The Company is implementing new actuarial reserving systems that will enhance its ability to provide estimates used in establishing future policy liabilities, monitor the deferred acquisition cost asset and the deferred sales inducement asset as well as support other actuarial processes within the Company. The Company is installing a vendor software product for use in calculating the GAAP reserve liability for future policy benefits of its products. The vendor system provides actuarial formula calculations producing refined estimates of reserves in accordance with GAAP. The previous reserving system produced estimated liabilities on state regulated actuarial formulas which were supplemented with adjustments in order to produce GAAP reserve estimates. The Company elected to purchase and install the new reserving system as growth in its lines of businesses created a need for more refined and controlled actuarial reserve computations in accordance with GAAP. 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 2010.  As the Company applies these new systems to a line of business, current reserving assumptions are reviewed and updated as appropriate. During the year ended December 31, 2009, loss recognition testing was performed on certain products that were converted to the new reserving system. As a result of the loss recognition testing, unlocking of historical assumptions resulted in an increase of $11.6 million in reserves and policy benefit expenses. Specifically, the Company unlocked assumptions for discount interest rates which accounted for $7.8 million of the increase as well as mortality assumptions which accounted for the remaining $3.8 million.

Amortization of deferred policy acquisition costs - Life insurance companies are required to defer certain expenses associated with acquiring new business.  The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses and sales inducements. The Company defers sales inducements in the form of first year interest bonuses on annuity and universal life products that are directly related to the production of new business.  These charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest.  Recognition of these deferred policy acquisition costs in the consolidated financial statements occurs over future periods in relation to the expected emergence of profits priced into the products sold.  This emergence of profits is based upon assumptions regarding premium payment patterns, mortality, persistency, investment performance, and expense patterns. Companies are required to review universal life and annuity contract assumptions periodically to ascertain whether actual experience has deviated significantly from that assumed. If it is determined that a significant deviation has occurred, the emergence of profit patterns is to be "unlocked" and reset based upon the actual experience.

An unlocking adjustment was recorded in 2009 which resulted in an increase of amortization of $5.2 million.  This unlocking adjustment was based upon changes to future mortality assumptions reflecting current experience studies and assumption changes regarding the level of future policy maintenance expenses. Mortality experience is monitored regularly and future mortality assumptions are unlocked when a continued trend in actual mortality experience deviates from current assumptions and is expected to continue. Although not a prediction of future impact, prior period mortality assumption unlocking has resulted in changes of the DPAC balance between $2 million and $(7.5) million in the period of the unlocking. Policy maintenance expenses are also reviewed regularly and future assumptions are unlocked when a continued trend in the actual policy maintenance expense deviates from the current assumptions. Although not a prediction of the impact of future changes the policy maintenance expense assumptions, similar unlocking of maintenance expense assumptions could result in DPAC balance changes between $1.5 million and $4.5 million .

An unlocking adjustment was also recorded in 2008 which resulted in an increase of amortization by $8.1 million.  This unlocking adjustment was based upon assumption changes to future annuitizations and full surrenders reflecting current experience studies.  An unlocking adjustment was recorded in 2007 which resulted in a decrease in amortization of $10.4 million.  This unlocking adjustment was based upon changes to future mortality assumptions reflecting current experience studies and assumption changes to future cost of insurance rates.  While the Company is required to evaluate its emergence of profits continually, management believes that the current amortization patterns of deferred policy acquisition costs are reflective of actual experience.

In accordance with GAAP guidance the Company writes off deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets upon internal replacement of certain contracts as well as annuitizations of deferred annuities.

The Company is required to periodically adjust for actual experience that varies from that assumed.  True-up adjustments were recorded in 2009, 2008 and 2007 relative to partial surrender rates, mortality rates, credited interest rates and earned rates for the current year’s experience resulting in $8.4 million, $16.2 million, and $1.0 million increases in amortization, respectively.

 

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Universal life and annuity contract interest - The Company closely monitors credited interest rates on interest sensitive policies, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions.  As long-term interest rates change, the Company's credited interest rates are often adjusted accordingly, taking into consideration the factors described above. The difference between yields earned on investments over policy credited rates is often referred to as the "interest spread". Raising policy credited rates can typically have an impact sooner than higher market rates on the Company's investment portfolio yield, making it more difficult to maintain the current interest spread.

The Company's approximated average credited rates were as follows:

		December 31,												December 31,
		2009				2008				2007				2009				2008				2007
		(Excluding equity-indexed products)												(Including equity-indexed products)
Annuity			2.83	%			3.01	%			3.41	%			4.11	%			2.42	%			2.84	%
Interest sensitive life			3.80	%			3.92	%			3.23	%			6.83	%			3.39	%			4.28	%

Contract interest includes the performance of the derivative component of the Company's equity-indexed products. As previously noted, the recent market performance of these derivative features increased contract interest expense in 2009 and 2007, and decreased contract interest expense in 2008, with corresponding offsetting effects in the Company's investment income given the hedge nature of the options.  With these credited rates, the Company generally realized its targeted interest spread on its products.

Other operating expenses - Other operating expenses consist of general administrative expenses, legal costs, licenses and fees, commissions not subject to deferral, and expenses of nursing home operations.  As discussed previously in Item 3. Legal Proceedings, and in reports on Form 8-K which the Company issued on February 9, 2010 and February 22, 2010, the Company is currently involved in various legal actions in the normal course of its business.  In accordance with generally accepted accounting principles, the Company accrued $23.0 million during the year ended December 31, 2009 for potential future costs pertaining to these various matters.

During 2009, the Company started or accelerated major information system initiatives to enhance actuarial, accounting, policy acquisition, and policy administration processes.  Non-capitalizable expenses associated with these various system development efforts were approximately $1.5 million higher than amounts incurred in 2008.  Deprecation expense increased $0.9 million in association with new system implementations.

Guaranty fund assessment expenses increased to $0.5 million in 2009 from $0.3 million and $(0.2) million in 2008 and 2007, respectively.

Nursing home expenses amounted to $14.9 million, $11.4 million and $11.0 million in 2009, 2008 and 2007, respectively.  The higher level of expenses during 2009 is primarily related to the start-up of operations of the Company’s second nursing home during 2009.

Compensation costs related to stock options totaled $1.6 million in 2009, $(1.4) million in 2008 and $(1.1) million in 2007 as a result of marking the options to fair value under the liability method of accounting.

Federal income taxes   - Federal income taxes on earnings from continuing operations for 2009, 2008 and 2007 reflect effective tax rates of 34.3%, 32.1% and 31.8%, respectively, which are lower than the expected Federal rate of 35% primarily due to tax-exempt investment income related to investments in municipal securities and dividends-received deductions on income from stock investments.

During 2008, the Company was notified that its 2005 tax return amendment, which was filed September 2007, was being audited by the IRS.  The audit is currently in progress.  Adjustments to the amended return, if any, are not expected to have a material effect on the financial condition or operating results of the Company.

During the second quarter of 2007, upon the completion of a detailed review of deferred tax items, the Company identified a $2.3 million error in the net deferred tax liability. The error, which occurred during various periods prior to 2005, was corrected in the second quarter of 2007 and resulted in a decrease in the net deferred tax liability and deferred tax expense.  The adjustment was not material to 2007 or any prior period financial statements.

 

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Segment Operations

Summary of Segment Earnings

A summary of segment earnings from continuing operations for the years ended December 31, 2009, 2008 and 2007 is provided below.  The segment earnings exclude realized gains and losses on investments, net of taxes.

		Domestic				International
		Life				Life								All
		Insurance				Insurance				Annuities				Others				Totals
		(In thousands)
Segment earnings:
2009		$	426				14,663				25,460				8,294				48,843
2008			717				15,350				27,842				6,781				50,690
2007			342				20,179				56,299				6,278				83,098

Domestic Life Insurance Operations

A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Premiums and other revenue:
Premiums and contract charges		$	34,414				27,919				25,879
Net investment income			19,498				20,254				18,863
Other revenues			25				20				41
Total premiums and other revenue			53,937				48,193				44,783
Benefits and expenses:
Life and other policy benefits			13,884				14,478				14,922
Amortization of deferred policy acquisition costs and deferred sales inducements			16,423				12,416				7,998
Universal life insurance contract interest			9,014				9,171				9,463
Other operating expenses			13,968				11,057				11,898
Total benefits and expenses			53,289				47,122				44,281
Segment earnings before Federal income taxes			648				1,071				502
Federal income taxes			222				354				160
Segment earnings		$	426				717				342

 

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Revenues from domestic life insurance operations include life insurance premiums on traditional type products and contract revenues from universal life insurance.  Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period.  A comparative detail of premiums and contract revenues is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Universal life insurance revenues		$	32,993				26,978				23,028
Traditional life insurance premiums			6,378				5,849				6,629
Reinsurance premiums			(4,957	)			(4,908	)			(3,778	)
Totals		$	34,414				27,919				25,879

The Company’s premiums and contract revenues increased 23% from 2008 coinciding with sales growth in recent years of domestic life products.  It is the Company's marketing plan to increase domestic life product sales through increased recruiting, new distribution and the development of new life insurance products.  The Company had approximately 7,300 contracted agents as of December 31, 2009, an increase of 3,000 contracted agents from December 31, 2008.

In accordance with generally accepted accounting principles, premiums collected on universal life products are not reflected as revenues in the Company's consolidated statements of earnings.  Actual domestic universal life premiums are detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Universal life insurance:
First year and single premiums		$	13,640				15,272				15,592
Renewal premiums			21,978				19,948				16,639
Totals		$	35,618				35,220				32,231

Net investment income decreased slightly to $19.5 million in 2009 as compared to $20.3 million in 2008 and $18.9 million in 2007, due to lower investment yields from debt security investment purchases backing the obligations of the line of business.

Policy benefits in 2009, 2008 and 2007 were consistent with Company expectations.  Other operating expenses were $2.9 million higher in 2009 reflecting the factors discussed in the other operating expense section of consolidated operations above.

During the current year, unlocking of the projected universal life per policy maintenance expense and projected mortality assumptions decreased the DPAC asset balance and increased life DPAC amortization by $2.7 million.  Current year true-up adjustments increased amortization expense by $1.9 million.  No unlocking adjustments were recorded in 2008.  True-up adjustments increased DPAC amortization $1.4 million for the year.  During 2007, the Company recorded an unlocking adjustment for changes in mortality assumptions which reduced the DPAC asset and increased DPAC amortization expense by $2.2 million.  True-up adjustments increased DPAC amortization expense by $0.6 million.

 

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International Life Insurance Operations

A comparative analysis of results of operations for the Company's international life insurance segment is detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Premiums and other revenue:
Premiums and contract charges		$	104,016				97,661				88,782
Net investment income			44,540				17,350				24,690
Other revenues			68				62				126
Total premiums and other revenue			148,624				115,073				113,598
Benefits and expenses:
Life and other policy benefits			19,522				21,292				22,810
Amortization of deferred policy acquisition costs and deferred sales inducements			41,849				37,525				24,959
Universal life insurance contract interest			45,868				16,803				20,993
Other operating expenses			19,048				16,502				15,271
Total benefits and expenses			126,287				92,122				84,033
Segment earnings before Federal income taxes			22,337				22,951				29,565
Federal income taxes			7,674				7,601				9,386
Segment earnings		$	14,663				15,350				20,179

In general, as the amount of international life insurance in force grows, the Company anticipates operating earnings to increase as well. The amount of international life insurance in force grew from $14.8 billion at December 31, 2007 to $15.9 billion at December 31, 2008.  However, international life insurance in force declined slightly to $15.7 billion at December 31, 2009, in reaction to the U.S. financial market crisis.

As with domestic operations, revenues from the international life insurance segment include both premiums on traditional type products and revenues from universal life insurance.  A comparative detail of premiums and contract revenues is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Universal life insurance revenues		$	106,601				98,458				85,633
Traditional life insurance premiums			13,113				14,727				15,692
Reinsurance premiums			(15,698	)			(15,524	)			(12,543	)
Totals		$	104,016				97,661				88,782

 

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International operations have emphasized universal life policies over traditional life insurance products.  In accordance with generally accepted accounting principles, premiums collected on universal life products are not reflected as revenues in the Company's consolidated statements of earnings.  Actual international universal life premiums collected are detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Universal life insurance
First year and single premiums		$	35,147				39,257				44,426
Renewal premiums			102,403				96,456				91,621
Totals		$	137,550				135,713				136,047

The Company's international life operations historically have been a significant factor in the Company's overall earnings performance and represent a market niche where the Company believes it has a competitive advantage.  A productive agency force has been developed given the Company's longstanding reputation for supporting its international life products coupled with the instability of competing companies in international markets.  In particular, the Company has experienced growth with its fixed-indexed universal life products and has collected related premiums of $81.9 million, $78.5 million and $76.8 million for the years ended 2009, 2008 and 2007, respectively.

The appealing feature to a consumer purchasing a fixed-indexed universal life policy is the interest crediting component linked in part to an equity index. With the growth in this block of business, the period-to-period changes in fair values of the underlying options used to hedge this interest crediting feature have had an increasingly greater impact on net investment and contract interest. A detail of net investment income for international life insurance operations is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Net investment income
(excluding derivatives)		$	34,130				28,687				26,519
Derivative income (loss)			10,410				(11,337	)			(1,829	)
Net investment income		$	44,540				17,350				24,690

In 2009, the Company recorded an unlocking adjustment of $2.5 million relative to changes in projected universal life per policy maintenance expenses, and projected mortality assumptions, that reduced the DPAC asset and increased amortization expense.  True-up adjustments of $1.5 million were also recorded that increased amortization expense. Amortization of deferred policy acquisition costs in 2008, were impacted as the Company recorded true-up adjustments that reduced the DPAC asset and increased amortization by $3.7 million.  The Company recorded an unlocking adjustment benefit in 2007 totaling $9.0 million relative to improved mortality assumptions that resulted in an increase to the DPAC asset balance and a decrease in amortization expense.  In addition, a true-up adjustment of $1.7 million was also recorded in 2007 resulting in a decrease to amortization.  Offsetting the decrease to 2007 amortization for the unlocking and true-up adjustments was an increase in amortization due primarily to the application of new GAAP guidance in 2007 which required the write-off of deferred balances on contracts considered substantially changed.  These balances were previously carried and amortized over the projected life of the contract.

Contract interest expense includes fluctuations that are the result of underlying equity indices performance relative to the equity-indexed universal life products.  The associated stock market gains (losses) increase (decrease) the amounts the Company credits to policyholders.  With the recovery in the equity markets during 2009, the segment reported significant increases in net investment income and contract interest expense.  For more details about the Company’s use of index options to hedge equity indices performance refer to the derivative income (loss) discussion in the Consolidated Operations section of Item 7.

Other operating expenses reported in 2009 were 15.4% higher compared to 2008, reflecting the factors discussed in the other operating expense section of Consolidated Operations previously.

 

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Annuity Operations

The Company's annuity operations are almost exclusively in the United States.  Although some of the Company's investment contracts are available to international residents, current sales are small relative to total annuity sales.  A comparative analysis of results of operations for the Company's annuity segment is detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Premiums and other revenue:
Premiums and contract charges		$	24,264				25,596				24,529
Net investment income			317,703				226,683				266,953
Other revenues			1,535				232				920
Total premiums and other revenue			343,502				252,511				292,402
Benefits and expenses:
Life and other policy benefits			15,666				3,990				3,594
Amortization of deferred policy acquisition costs and deferred sales inducements			56,891				77,219				55,456
Annuity contract interest			187,934				112,986				133,935
Other operating expenses			44,227				16,685				16,931
Total benefits and expenses			304,718				210,880				209,916
Segment earnings before Federal income taxes			38,784				41,631				82,486
Federal income taxes			13,324				13,789				26,187
Segment earnings		$	25,460				27,842				56,299

Revenues from annuity operations primarily include surrender charges and recognition of deferred revenues relating to immediate or payout annuities.  A comparative detail of the components of premiums and annuity contract revenues is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Surrender charges		$	21,302				20,502				20,238
Payout annuity and other revenues			2,941				5,071				4,263
Traditional annuity premiums			21				23				28
Totals		$	24,264				25,596				24,529

In accordance with generally accepted accounting principles, deposits collected on annuity contracts are not reflected as revenues in the Company's consolidated statements of earnings.  Actual annuity deposits collected are detailed below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Fixed-indexed annuities		$	488,352				281,649				316,848
Other deferred annuities			325,959				121,319				116,280
Immediate annuities			23,266				7,165				4,637
Totals		$	837,577				410,133				437,765

 

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Fixed-indexed products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns.  Fixed-indexed annuity deposits as a percentage of total annuity deposits recorded were 58.4%, 68.7% and 72.4% for the years ended December 31, 2009, 2008 and 2007, respectively, with the equity market turmoil accounting for the declining percentage during this period.  Since the Company does not offer variable products or mutual funds, fixed-indexed products provide an important alternative to the Company's existing fixed interest rate annuity products. Although fixed-indexed sales declined as a percent of overall annuity sales, the recovery of the equity markets during 2009 was a contributing factor to the 73.4% increase in fixed index annuity sales.  The 225% increase in immediate annuities sales is reflective of consumers shift in risk tolerance to guaranteed performance and payouts offered by these types of annuities.  Other factors contributing to the increase in both fixed-indexed and other deferred annuities sales include the increase in contracted agents during the year and competitors having to slow down their acceptance of new business in order to maintain solvency ratios.  Due to the Company’s strong capital and high solvency ratios, the Company was able to continue to accept new business without any constraints.

Other deferred annuity deposits increased 169% in 2009 compared to 2008.  These product sales had been trending lower over the past few years due to low interest rates and investor preferences.  As a selling inducement, many annuity products include a first year premium or interest rate bonus in addition to the base first year deposit interest rate.  These bonuses are credited to the policyholder account but are deferred by the Company and amortized over future periods. The amount deferred was approximately $36.8 million, $19.4 million and $20.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.

A detail of net investment income for annuity operations is provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Net investment income
(excluding derivatives)		$	284,149				279,925				281,553
Derivative income (loss)			33,554				(53,242	)			(14,600	)
Net investment income		$	317,703				226,683				266,953

As previously described, derivatives are used to hedge the equity return component of the Company's fixed-indexed annuity products with any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, reflected in net investment income.  Derivative income and losses fluctuate from period to period based on the performance of the indices underlying fixed-indexed products.

The Company is implementing new actuarial reserving systems that will enhance its ability to provide estimates used in establishing future policy liabilities, monitor the deferred acquisition cost asset and the deferred sales inducement 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 2010.  As the Company applies these new systems to a line of business, current reserving assumptions are reviewed and updated as appropriate. During the year ended December 31, 2009, loss recognition testing was performed on certain products that were converted to the new reserving system. As a result of the loss recognition testing, unlocking of historical assumptions resulted in an increase of $11.6 million in reserves and policy benefit expenses.

With respect to deferred policy acquisition costs, the Company is required to periodically adjust for actual experience that varies from that assumed.  A true-up of assumptions in 2009 resulted in increased amortization of deferred policy acquisition costs of $5.1 million.  During 2008, the Company recorded an unlocking adjustment of $8.1 million and a true-up adjustment of $11.1 million that together increased amortization by $19.2 million.  During 2007 the Company recorded an unlocking adjustment of $1.8 million and true-up adjustments of $3.3 million resulting in decreased amortization of deferred acquisition costs.  While management does not currently anticipate any impact from unlocking in 2010, facts and circumstances may arise in the future which require that the factors be reexamined.

 

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Annuity contract interest includes the equity component return associated with the Company's fixed-indexed annuities. The detail of fixed-indexed annuity contract interest as compared to contract interest for all other annuities is as follows:

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Fixed-indexed annuities		$	150,062				42,224				50,743
All other annuities			60,891				74,596				94,632
Gross contract interest			210,953				116,820				145,375
Bonus interest deferred and capitalized			(36,747	)			(19,442	)			(20,796	)
Bonus interest amortization			13,728				15,608				9,356
Total contract interest		$	187,934				112,986				133,935

In comparison by year, the fluctuation in reported contract interest amounts for fixed-indexed annuities is due to sales levels and the positive or negative performance of equity markets on option values.  In 2008, the Company increased its amortization of bonus interest (deferred sales inducements) by approximately $3.5 million for updates in future expected gross profit assumptions.

Other operating expenses in 2009 were $27.5 million higher compared to 2008 primarily due to various legal actions that arose in the normal course of business over the past several years.  In accordance with generally accepted accounting principles, the Company accrued $23.0 million during 2009 pertaining to these various matters and for potential future costs.  The balance of the increase in operating expenses reflects the other factors previously discussed in the Other Operating Expenses section of consolidated operations.

Other Operations

National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations.  However, the Company also has small real estate, nursing home, and other investment operations through its wholly-owned subsidiaries.  Most of the income from the Company's subsidiaries is from a life interest in a trust.  Gross income distributions from the trust totaled $3.9 million in 2009 and $4.1 million in both 2008 and 2007.

The Company owns two nursing home facilities which are operated by affiliated entities, whose financial operating results are consolidated with those of the Company. Daily operations and management of the nursing homes are performed by an experienced management company through a contract with the limited partnership. Nursing home operations generated $0.8 million, $1.1 million and $1.6 million of operating earnings in 2009, 2008 and 2007, respectively.  The lower level of earnings in 2009 is primarily related to start-up costs associated with the opening of the Company’s second nursing home during the year.

 

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INVESTMENTS

General

The Company's investment philosophy emphasizes the careful handling of policyowners' and stockholders' funds to achieve security of principal, to obtain the maximum possible yield while maintaining security of principal, and to maintain liquidity in a measure consistent with current and long-term requirements of the Company.

The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2009 and 2008.  The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.

		2009								2008
		Carrying								Carrying
		Value				%				Value				%
		(In thousands)								(In thousands)
Debt securities		$	6,212,726				95.2			$	5,563,000				96.3
Mortgage loans			98,200				1.5				90,733				1.6
Policy loans			78,336				1.2				79,277				1.4
Derivatives, index options			89,915				1.4				11,920				0.2
Equity securities			14,014				0.2				13,683				0.2
Real estate			20,056				0.3				10,828				0.2
Other			12,773				0.2				3,340				0.1
Totals		$	6,526,020				100.0			$	5,772,781				100.0

Debt and Equity Securities

The Company maintains a diversified portfolio which consists mostly of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities primarily include U.S. government agency pass-through securities and collateralized mortgage obligations ("CMO"). The Company's investment guidelines prescribe limitations by type of security as a percent of the total investment portfolio and all holdings were within these threshold limits.  As of December 31, the Company's debt securities portfolio consisted of the following:

		2009								2008
		Carrying								Carrying
		Value				%				Value				%
		(In thousands)								(In thousands)
Corporate		$	2,921,425				47.0			$	2,453,404				44.0
Mortgage-backed securities			1,967,303				31.7				2,001,060				36.0
Public utilities			964,390				15.5				790,419				14.2
U.S. Agencies			103,176				1.7				119,674				2.2
U.S. Treasury			1,916				0.0				1,923				-
Home equity			37,661				0.6				46,959				0.9
Manufactured housing			36,211				0.6				41,319				0.7
States & political subdivisions			159,364				2.6				86,962				1.6
Foreign governments			21,280				0.3				21,280				0.4
Totals		$	6,212,726				100.0			$	5,563,000				100.0

 

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Because the Company's holdings of mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing in collateralized mortgage obligations, which have more predictable cash flow patterns than pass-through securities.  These securities, known as planned amortization class I ("PAC I"), very accurately defined maturity ("VADM") and sequential tranches are designed to amortize in a more predictable manner than other CMO classes or pass-throughs.  The Company does not purchase tranches, such as PAC II and support tranches, that subject the portfolio to greater than average prepayment risk.  Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.

The Company holds approximately $73.9 million in asset-backed securities as of December 31, 2009.  This portfolio includes $36.2 million of manufactured housing bonds and $37.7 million of home equity loans (also referred to as subprime securities). The Company does not have any holdings in collaterized bond obligations (“CBO”s), collateralized debt obligations (“CDO”s), or collateralized loan obligations (“CLO”s). Principal risks in holding asset-backed securities are structural, credit, and capital market risks. Structural risks include the securities’ priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from collateral and the potential for prepayments. Credit risks include corporate credit risks or consumer credit risks for financing such as subprime mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace.

The mortgage-backed portfolio includes one Alt-A security with a carrying value of $3.6 million.  The Alt-A sector is a sub-sector of the jumbo prime MBS sector. The average FICO for an Alt-A borrower is approximately 715 compared to a score of 730 for a jumbo prime borrower.  The Company’s exposure to the Alt-A and subprime sectors is limited to investments in the senior tranches of structured securities collateralized by Alt-A or subprime residential mortgage loans.  The subprime sector is generally categorized under the asset-backed sector. This sector lends to borrowers who do not qualify for prime interest rates due to poor or insufficient credit history. Subprime borrowers generally have FICO scores of 660 or below. The slowing housing market, rising interest rates, and relaxed underwriting standards for loans originated after 2005 resulted in higher delinquency rates and losses beginning in 2007. These events caused illiquidity in the market and volatility in the market prices of subprime securities during 2008 and 2009.  With the government intervention initiatives in 2009, the housing market began to show signs of stabilizing at the end of the year.  There was an improvement in the prices of subprime securities as the bond market also became more liquid.  All of the loans classified as Alt-A or subprime in the Company’s portfolio as of December 31, 2009 were underwritten prior to 2005 as noted in the table below.

Investment		December 31, 2009								December 31, 2008
Origination Year		Carrying Value				Fair Value				Carrying Value				Fair Value
		(In thousands)
Subprime:
1998		$	10,776				8,467				12,125				11,157
2002			469				469				1,123				556
2003			4,608				3,664				6,894				3,779
2004			21,808				19,404				26,817				21,970
Subtotal subprime		$	37,661				32,004				46,959				37,462
Alt A:
2004		$	3,626				3,626				3,821				3,821

As of December 31, 2009, 9 of the subprime securities were rated AAA, 1 was rated AA, 1 was rated A, 1 was rated BB and 1 was rated CC.

 

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In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investments in debt securities.  Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks.  This emphasis is reflected in the high average credit rating of the Company's debt securities portfolio with 97.5% held in investment grade securities.  In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's ("S&P ® "), or other nationally recognized statistical rating organizations if securities were not rated by S&P ® .

		2009								2008
		Carrying								Carrying
		Value				%				Value				%
		(In thousands)								(In thousands)
AAA and U.S. government		$	2,183,561				35.2			$	2,306,694				41.5
AA			360,634				5.8				205,729				3.7
A			1,461,055				23.5				1,431,703				25.7
BBB			2,052,193				33.0				1,546,720				27.8
BB and other below investment grade			155,283				2.5				72,154				1.3
Totals		$	6,212,726				100.0			$	5,563,000				100.0

National Western does not purchase below investment grade securities. Investments held in debt securities below investment grade are the result of subsequent downgrades of the securities.  These holdings are summarized below.

		Below Investment Grade Debt Securities
														% of
		Amortized				Carrying				Fair				Invested
		Cost				Value				Value				Assets
		(In thousands except percentages)
December 31, 2009		$	155,110				155,283				141,895				2.4	%
December 31, 2008		$	84,229				72,154				67,375				1.2	%

The Company's percentage of below investment grade securities compared to total invested assets increased from 2008 due to issues being downgraded during the year as the economic environment prompted rating agencies to revise their credit outlooks.  Despite the increases, the Company's holdings of below investment grade securities is relatively small as a percentage of total invested assets and is low compared to industry averages.

 

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Holdings in below investment grade securities by category as of December 31, 2009 are summarized below, including 2009 and 2008 fair values for comparison. The Company is continually monitoring developments in these industries that may affect security valuation issues.

		Below Investment Grade Debt Securities
		Amortized				Carrying				Fair				Fair
		Cost				Value				Value				Value
Industry Category		2009				2009				2009				2008
		(In thousands)
Retail		$	18,958				20,478				20,478				8,184
Telecommunications			6,320				10,600				10,600				3,806
Home equity			5,625				5,625				3,815				4,609
Manufactured housing			7,434				8,152				7,637				4,705
Mortgage-backed			9,888				6,740				6,740				7,457
Transportation			1,635				1,739				1,739				1,144
Manufacturing			32,056				31,786				31,306				23,213
Utilities			1,999				2,137				2,137				1,839
Banking/finance			58,987				57,804				47,268				40,305
Other			12,208				10,222				10,175				8,554
Totals		$	155,110				155,283				141,895				103,816

The Company closely monitors its below investment grade holdings by reviewing investment performance indicators, including information such as issuer operating performance, debt ratings, analyst reports and other economic factors that may affect these specific investments.  While additional losses are not currently anticipated, based on the existing status and condition of these securities, continued credit deterioration of some securities or the markets in general is possible, which may result in further write-downs.

Generally accepted accounting principles require that investments in debt securities be written down to fair value when declines in value are judged to be other-than-temporary.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Refer to Note 14, Fair Values of Financial Instruments, of the accompanying consolidated financial statements.

The Company is required to classify its investments in debt and equity securities into one of three categories: (a) trading securities; (b) securities available for sale; or (c) securities held to maturity. The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities. Of the remaining two categories, available for sale and held to maturity, the Company makes a determination on categorization based on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. As shown in the table below, at December 31, 2009, approximately 32% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs.

		December 31 ,2009
		Fair				Amortized				Unrealized
		Value				Cost				Gains
		(In thousands)
Securities held to maturity:
Debt securities		$	4,331,077				4,176,661				154,416
Securities available for sale:
Debt securities			2,036,065				1,961,412				74,653
Equity securities			14,014				5,953				8,061
Totals		$	6,381,156				6,144,026				237,130

 

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During the twelve months ended December 31, 2009 the Company recorded other-than-temporary impairment credit related write-downs on debt securities totaling $5.1 million and $0.4 million on equity securities. See Note 3, Investments Debt and Equity Securities, of the accompanying consolidated financial statements.

As of April 1, 2009, the Company adopted the GAAP guidance on the recognition and accounting for other-than-temporary impairments. See Note 1, Summary of Significant Accounting Policies, and Note 3, Investments, in the accompanying consolidated financial statements.  Since adoption of this new guidance, the Company recognized $8.7 million of other-than-temporary impairments; of which $0.3 million was deemed credit related and recognized as realized investment losses in earnings, and $8.4 million was deemed a non credit related impairment and recognized in other comprehensive income.

Mortgage Loans and Real Estate

In general, the Company originates loans on high quality, income-producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities.  The location of these properties is typically in major metropolitan areas that offer a potential for property value appreciation. Credit and default risk is minimized through strict underwriting guidelines and diversification of underlying property types and geographic locations.  In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lessee.  This approach has proven to result in quality mortgage loans with few defaults.

The Company requires a minimum specified yield on mortgage loan investments.  Until recently the low interest rate environment resulted in fewer loan opportunities being available which met the Company's required rate of return.  This environment has recently started to change and the Company again made new mortgage loans which resulted in an increase in total loans at year-end.

The Company's direct investments in real estate are not a significant portion of its total investment portfolio as many of these investments were acquired through mortgage loan foreclosures.  Due to the bankruptcy filing by Circuit City in 2009, the Company foreclosed on one mortgage loan during 2009, and has started foreclosure proceedings on a second mortgage loan which should be completed in the first half of 2010.  The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties.  These investments have enhanced the Company's overall investment portfolio returns.

The Company held net investments in mortgage loans totaling $98.2 million and $90.7 million at December 31, 2009 and 2008, respectively.  The diversification of the portfolio by geographic region and by property type was as follows:

		2009								2008
Geographic Region:		Amount				%				Amount				%
		(In thousands)								(In thousands)
West South Central		$	57,238				58.3			$	62,123				68.5
Mountain			22,007				22.4				7,919				8.7
East North Central			10,686				10.9				12,030				13.3
South Atlantic			3,570				3.6				3,666				4.0
Pacific			2,340				2.4				2,562				2.8
Middle Atlantic			2,359				2.4				2,433				2.7
Totals		$	98,200				100.0			$	90,733				100.0

 

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		2009								2008
Property Type:		Amount				%				Amount				%
		(In thousands)								(In thousands)
Retail		$	63,928				65.1			$	70,954				78.2
Hotel/Motel			19,996				20.4				6,320				7.0
Apartments			6,167				6.3				3,600				3.9
Office			5,634				5.7				5,971				6.6
Land/Lots			2,473				2.5				3,885				4.3
All other			2				-				3				-
Totals		$	98,200				100.0			$	90,733				100.0

The Company does not recognize interest income on loans past due ninety days or more.  The Company had two mortgage loans past due six months or more with the principal balance totaling $7.0 million at December 31, 2009, 2008 and 2007.  Interest income not recognized for past due loans totaled approximately $0.4 million in both 2008 and 2007.  There was no interest income not recognized in 2009.

The Company recognized valuation losses of $1.4 million, $1.0 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively, based on information which indicated that the Company may not collect all amounts in accordance with the mortgage agreement. While the Company closely monitors its mortgage loan portfolio, future changes in economic conditions can result in impairments beyond those currently identified.

The contractual maturities of mortgage loan principal balances at December 31, 2009 are as follows:

		Principal
		Due
		(In thousands)
Due in one year or less		$	15,407
Due after one year through five years			22,678
Due after five years through ten years			64,032
Due after ten years through fifteen years			1,650
Due after fifteen years			-
Total		$	103,767

The Company's real estate investments totaled approximately $20.1 million and $10.8 million at December 31, 2009 and 2008, respectively, and consist primarily of income-producing properties which are being operated by a wholly-owned subsidiary of the Company.  The Company recognized operating income on these properties of approximately $1.2 million, $0.9 million and $1.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.  The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded net realized investment losses of $0.1 million in 2008 and gains of $0.2 million in 2007, respectively, associated with these properties.  There was no recorded net realized gain or loss in 2009.

 

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Market Risk

Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices.  The most significant market risk exposure for National Western is interest rate risk. The fair values of fixed income debt securities correlate to external market interest rate conditions.  Because interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise.  However, market values may fluctuate for other reasons, such as changing economic conditions, market dislocations or increasing event-risk concerns.

The correlation between fair values and interest rates for debt securities is reflected in the tables below.

		December 31,
		2009				2008
		(In thousands except percentages)
Debt securities - fair value		$	6,367,142				5,458,936
Debt securities - amortized cost		$	6,138,073				5,728,363
Fair value as a percentage of amortized cost			103.73	%			95.30	%
Unrealized gains (losses) at year-end		$	229,069				(269,427	)
Ten-year U.S. Treasury bond – increase (decrease)
in yield for the year			1.093	%			(1.81	) %

		Unrealized Gains (Losses) Balance
		Net Balance at				Net Balance at
		December 31,				December 31,				Change in
		2009				2008				Net Balance
		(In thousands)
Debt securities held to maturity		$	154,416				(104,064	)			258,480
Debt securities available for sale			74,653				(165,363	)			240,016
Totals		$	229,069				(269,427	)			498,496

Changes in interest rates typically have a significant impact on the fair values of the Company's debt securities.  During 2009, market interest rates of the ten-year U.S. Treasury bond increased 109 basis points from year end 2008.  However, with the improved liquidity in the corporate bond market, the spread between corporate bonds and treasuries’ narrowed causing the prices of the Company’s corporate bonds to rise.  The decrease in spread contributed to the increase in the unrealized gain balance of $498.5 million on a portfolio of approximately $6.4 billion.  This amount is reasonable based upon the current market factors and the current investment portfolio characteristics.  The Company would expect similar results in the future from a significant upward or downward movement in market rates.  However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have relatively small effects on the Company's financial results.

The Company manages interest rate risk through ongoing cash flow testing required for insurance regulatory purposes. Business models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows.  Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities.  The Company seeks to minimize the impact of interest rate risk through surrender charges that are imposed to discourage policy surrenders and to offset unamortized acquisition costs.  Interest rate changes can be anticipated in the computer models and the corresponding risk addressed by management actions affecting asset and liability instruments.  However, potential changes in the values of financial instruments indicated by hypothetical interest rate changes will likely be different from actual changes experienced, and the differences could be significant.

 

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The following table illustrates the market risk sensitivity of the Company's interest rate-sensitive assets.  The table shows the effect of a change in interest rates on the fair value of the portfolio using models that measure the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.

		Fair Values of Assets
		Changes in Interest Rates in Basis Points
			-100				0				+ 100				+ 200				+ 300
		(In thousands)
Debt and equity securities		$	6,670,470				6,381,156				6,063,767				5,746,319				5,444,656
Mortgage loans			100,976				97,763				94,726				91,854				89,137
Other loans			13,685				13,304				12,938				12,587				12,251
Derivatives			88,817				89,915				91,040				92,173				93,310

Expected maturities of debt securities may differ from contractual maturities due to call or prepayment provisions.  The models assume that prepayments on mortgage-backed securities are influenced by agency and pool types, the level of interest rates, loan age, refinancing incentive, month of the year, and underlying coupon.  During periods of declining interest rates, principal payments on mortgage-backed securities and collateralized mortgage obligations tend to increase as the underlying mortgages are prepaid.  Conversely, during periods of rising interest rates, the rate of prepayment slows.  Both of these situations can expose the Company to the possibility of asset-liability cash flow and yield mismatch. The model uses a proprietary method of sampling interest rate paths along with a mortgage prepayment model to derive future cash flows. The initial interest rates used are based on the current U.S. Treasury yield curve as well as current mortgage rates for the various types of collateral in the portfolio.

Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings.  Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as the base rates at December 31, 2009. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts and incorporate both Company experience and mortality assumptions associated with such contracts.

In addition to the securities analyzed above, the Company invests in index options which are derivative financial instruments used to hedge the equity return component of the Company's indexed annuity and life products.  The values of these options are primarily impacted by equity price risk, as the options' fair values are dependent on the performance of the underlying reference index.  However, increases or decreases in investment returns from these options are substantially offset by corresponding increases or decreases in amounts paid to indexed policyholders, subject to minimum guaranteed policy interest rates.

The Company's market risk liabilities, which include policy liabilities for annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described.  As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of a 100 basis point decrease and increases in increments of 100 basis points in the U.S. Treasury yield curve as of December 31, 2009.  The potential impact on net earnings from these interest rate changes are summarized below.

		Changes in Interest Rates in Basis Points
			-100				+100				+200				+300
		(In thousands)
Impact on net earnings		$	(2,795	)			1,025				2,478				2,388

These estimated impacts in earnings are net of tax effects and the estimated effects of deferred policy acquisition costs.

The above described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections.  Estimated cash flows in the Company's model assume cash flow reinvestments, which are representative of the Company's current investment strategy.  Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers.  Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies.  The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs.  The model considers only annuity and supplemental contracts in force at December 31, 2009, and does not consider new product sales or the possible impact of interest rate changes on sales.

 

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds.  To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities.  Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company.  The approach of matching asset and liability durations and yields requires an appropriate mix of investments.  Although the Company historically has not been put in the position of liquidating invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.  The Company may also borrow up to $40 million on its bank line of credit for short-term cash needs.

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals.  The Company includes provisions within its annuity and universal life insurance policies, such as surrender and market value adjustment charges, that help limit and discourage early withdrawals.  The following table sets forth withdrawal characteristics of the Company's annuity reserves and deposit liabilities (based on statutory liability values) as of the dates indicated.

		December 31, 2009								December 31, 2008
						% of								% of
		Amount				Total				Amount				Total
		(In thousands except percentages)
Not subject to discretionary withdrawal
provisions		$	425,163				8.7	%		$	369,405				8.3	%
Subject to discretionary withdrawal,
with adjustment:
With market value adjustment			1,434,212				29.4	%			1,305,478				29.3	%
At contract value less current
surrender charge of 5% or more			2,612,171				53.6	%			2,347,156				52.6	%
Subtotal			4,471,546				91.7	%			4,022,039				90.2	%
Subject to discretionary withdrawal at
contract value with no surrender charge
or surrender charge of less than 5%			405,544				8.3	%			440,694				9.8	%
Total annuity reserves and deposit
liabilities		$	4,877,090				100.0	%		$	4,462,733				100.0	%

The actual amounts paid by product line in connection with surrenders and withdrawals for the years ended December 31 are noted in the table below.

		2009				2008				2007
		(In thousands)
Product Line:
Traditional Life		$	5,327				5,763				6,408
Universal Life			55,861				41,430				34,356
Annuities			359,903				391,879				435,800
Total		$	421,091				439,072				476,564

 

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The above contractual withdrawals, as well as the level of surrenders experienced, were generally consistent with the Company's assumptions in asset-liability management, and the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and tests under various market interest rate scenarios are also performed to assist in evaluating liquidity needs and adequacy.  The Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.

In the past, cash flows from the Company's insurance operations have been sufficient to meet current needs.  Cash flows from operating activities were $138 million, $195 million and $260 million in 2009, 2008 and 2007, respectively.  The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $1,050 million, $727 million and $477 million in 2009, 2008 and 2007, respectively. Cash flows from security maturities, redemptions, and prepayments were relatively higher over the last three years due to the decline in interest rates.  These cash flow items could be reduced if interest rates rise in 2010. Net cash flows from the Company's universal life and annuity deposit product operations totaled $337 million, $(118) million and $(93) million in 2009, 2008 and 2007, respectively.

Capital Resources

The Company relies on stockholders' equity for its capital resources as there is no long-term debt outstanding and the Company does not anticipate the need for any long-term debt in the near future.  As of December 31, 2009, the Company had no commitments beyond its normal operating and investment activities.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is Company practice not to enter into off-balance sheet arrangements or to issue guarantees to third parties, other than in the normal course of issuing insurance contracts.  Commitments related to insurance products sold are reflected as liabilities for future policy benefits.  Insurance contracts guarantee certain performances by the Company.

Insurance reserves are the means by which life insurance companies determine the liabilities that must be established to assure that future policy benefits are provided for and can be paid.  These reserves are required by law and based upon standard actuarial methodologies to ensure fulfillment of commitments guaranteed to policyholders and their beneficiaries, even though the obligations may not be due for many years. Refer to Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements for a discussion of reserving methods.

The table below summarizes future estimated cash payments under existing contractual obligations.

		Payment Due by Period
						Less Than					1 – 3				3 – 5			More Than
		Total				1 Year				Years				Years				5 Years
		(In thousands)
Operating lease obligations (1)		$	390				213				177				-				-
Life claims payable (2)			49,383				49,383				-				-				-
Other long-term reserve liabilities
reflected on the balance sheet
under GAAP (3)			7,043,349				683,241				1,516,943				1,837,839				3,005,326
Total		$	7,093,122				732,837				1,517,120				1,837,839				3,005,326

(1)  Refer to Note 9, Commitments and Contingencies, of the accompanying consolidated financial statements relating to Company leases.

(2)  Life claims payable include benefit and claim liabilities for which the Company believes the amount and timing of the payment is essentially fixed and determinable.  Such amounts generally relate to incurred and reported death and critical illness claims including an estimate of claims incurred but not reported.

 

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(3)  Other long-term liabilities include estimated life and annuity obligations related to death claims, policy surrenders, policy withdrawals, maturities and annuity payments based on mortality, lapse, annuitization, and withdrawal assumptions consistent with the Company’s historical experience. These estimated life and annuity obligations are undiscounted projected cash outflows that assume interest crediting and market growth consistent with assumptions used in amortizing deferred acquisition costs. They do not include any offsets for future premiums or deposits. Other long-term liabilities also include determinable payout patterns related to immediate annuities. In contrast to this table, the majority of the Company’s liabilities for future obligations recorded on the consolidated balance sheet do not incorporate future credited interest and market growth. Therefore, the estimated life and annuity obligations presented in this table significantly exceed the life and annuity liabilities recorded in the reserves for future life and annuity obligations. Due to the significance of the assumptions used, the actual cash outflows will differ both in amount and timing, possibly materially, from these estimates.

ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING

Recently Issued Accounting Standards

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 this 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 and it 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.  Please see Note 14, Fair Values of Financial Instruments, of the accompanying consolidated financial statements 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.

 

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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 15, Derivative Investments, of the accompanying consolidated financial statements 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 14, Fair Values of Financial Instruments, of the accompanying consolidated financial statements, 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 14, Fair Values of Financial Instruments, of the accompanying consolidated financial statements 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, Investments, of the accompanying consolidated financial statements.

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 18, Subsequent Events, of the accompanying consolidated financial statements 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.

Change in Accounting

During the second quarter of 2009, the Company reviewed all previously recorded other-than-temporary impairments of securities, in compliance with newly issued FASB GAAP guidance, and estimated the credit versus the non-credit component of prior impairments 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.

 

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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 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements for further discussion.

In September 2005, the FASB issued new GAAP guidance regarding internal replacements occurring in fiscal years beginning after December 15, 2006 .   An internal replacement is a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract.  The adoption of this new guidance impacted the accounting for contracts which have annuitized and reinstatements of contracts.  Under the new guidance the unamortized deferred acquisition costs and deferred sales inducement assets must now be written-off at the time of annuitization and may not be continued for reinstatements.  The new guidance resulted in changes in assumptions relative to estimated gross profits which affect unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement balances as of the beginning of the year.  The effect of this new guidance was as $2.2 million decrease (net of tax) on beginning retained earnings as of January 1, 2007.

		Amounts
		(In thousands)
Write-off of deferred acquisition costs		$	3,321
Adjustment to deferred annuity revenue			56
			3,377
Federal income tax			(1,182	)
Cumulative effect of change in accounting for
internal replacements and investment contracts		$	2,195

PART III

The information required by Part III is incorporated by reference from our definitive proxy statement on Schedule 14A filed with the SEC on April 30, 2010 for our annual meeting of shareholders held June 29, 2010. The discussion that follows reflects the changes made in response to the comment letter received from the Staff of the SEC.

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

Purpose

The Compensation Committee is appointed by and serves at the discretion of the Company’s Board of Directors.  The Compensation Committee consists of no fewer than three members who meet the independence requirements of the listing standards of NASDAQ.  The purpose of the Compensation Committee is to discharge the Board of Directors’ responsibilities for reviewing and establishing the compensation not just for the Chief Executive Officer, Chief Financial Officer, and the other three most highly paid executive officers, but for all of the Company’s officers. These compensation elements include base salary, annual incentive bonuses, discretionary bonuses and awards, stock option and stock appreciation right grants, and any other officer compensation arrangements.

 

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To assist the Compensation Committee with its responsibilities, it is supported by the Company’s Human Resource, Legal, and Financial departments. The Compensation Committee may retain, and has retained, independent compensation consultants who report directly to the members of the Compensation Committee.  Meetings of the Compensation Committee are scheduled during the year with additional meetings on an as-necessary interim basis and include sessions without members of management present.  The Compensation Committee reports to the Board of Directors on its actions and recommendations.

Compensation Philosophy and Objectives

The Company’s overall philosophy in setting compensation policies is to align pay with performance while at the same time providing a competitive compensation that allows the Company to retain and attract talented individuals. Within this overall philosophy, the Compensation Committee has adopted several key principles to help guide compensation decisions for executive officers:

·	Provide a competitive total compensation package so the Company can attract, retain, and motivate talented individuals;

·	Tie compensation in part to overall Company financial performance so that executives are held accountable through their compensation for the performance of the business;

·	Tie compensation in part to the Company’s stock performance through stock options and stock appreciation rights to align executives’ interests with those of the Company’s stockholders; and

·	Maintain a committee of the Board of Directors independent of senior management that may engage independent compensation consultants as needed to review and establish compensation for executive officers.

Elements of Executive Compensation

Officer compensation arrangements, including executive officers, are reviewed and approved annually by the Compensation Committee. The Compensation Committee focuses primarily on the following components in forming the total compensation package for each Company executive officer:

·	Base salary;

·	Annual cash incentive bonus based on Company performance versus predetermined targets;

·	Discretionary cash bonus based upon individual performance; and

·	Long-term incentive compensation in the form of stock options and stock appreciation rights.

The mix of executive compensation elements is based upon a philosophy of correlating a portion of executive compensation with the Company’s financial results and stock performance thus putting a segment of executive officer annual and long-term compensation at-risk. This structure provides upside potential and downside risk for senior executive positions in recognition that these roles have greater influence on the Company’s performance.  The Compensation Committee believes that these factors, together with a balance of cash and equity awards, and short-term and long-term incentives, help ensure that our compensation program does not create risks that are reasonably likely to have a material adverse effect on the Company.

Base Salaries

To ensure that compensation levels are reasonably competitive with market rates, the Compensation Committee engages independent compensation consultants from time-to-time to conduct a survey of executive compensation in a defined group of companies comparable to the Company.  The surveyed companies are selected based on similar products and product lines, comparable financial size in terms of assets and revenues, and other known competitive factors.  This process was most recently completed during 2008 and is expected to be performed again to some degree in 2010 with respect to compensation policies for 2011.  While the primary focus of the survey was upon base salaries, the independent consultants were also asked to provide total compensation data for the various officer positions and levels in order to target current and future appropriate compensation levels.  The Compensation Committee’s past practice has been to generally target base salaries between the 25 th and 75 th percentile range of the identified peer group.

For the most recent survey, the Company engaged independent compensation consultants (Towers Perrin) to update the work previously performed in 2005 following the same criteria and scope as was done at the time of a previous study. Companies to be considered in the benchmarking process include American Equity Investment Life, American Fidelity Life, AVIVA, Best Meridian Insurance, Citizens Insurance Company, Lincoln National Life, Old Mutual Financial Network, Pan-American Life, and Sammons Financial Group.

 

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In addition to market information, the Compensation Committee also subjectively reviews and evaluates the level of performance of the Company and of each officer.  In approving salary and incentive compensation for individuals other than the Chief Executive Officer and the President and Chief Operating Officer, the Compensation Committee considers recommendations from these two individuals concerning the other Company officers incorporating such factors as individual performance, the scope and complexity of their current responsibilities, length of time in their current positions, value of the executive’s position to the market, and difficulty of replacement of the officer.  This evaluation focuses most heavily on the base salary levels for each officer.

 

Annual Incentive Compensation

 

For executive officer positions, the Compensation Committee has determined that annual incentive bonuses are an integral part of the executive’s compensation package as the cash bonuses create a direct link between executive compensation and individual and business performance.  Consequently, there are four bonus programs in effect which are reviewed and approved annually by the Compensation Committee.  The Compensation Committee has approved similar incentive bonus programs for 2010, but changed the Senior Vice President Bonus Program into the Officer Bonus Program, and it covers all Company officers not included in any of the other bonus programs.  The 2009 Bonus Programs are as follows:

·	Executive Officer Bonus Program

·	Domestic Marketing Officer Bonus Program

·	International Marketing Officer Bonus Program

·	Senior Vice President Bonus Program

Executive Officer Bonus Program .   Currently, the participants in the Executive Officer Bonus Program (“Executive Bonus”) are the Chairman and Chief Executive Officer (Mr. Robert L. Moody) and the President and Chief Operating Officer (Mr. Ross R. Moody).  In order to tie the compensation under the program with the Company’s financial performance, the Executive Bonus includes metrics associated with the Company’s annual sales performance, expense management and profitability. In accordance with the program, the Compensation Committee set performance targets for each metric at various levels equating to various bonus level percentages as follows:

Financial Performance Metric		Bonus % Range*
Sales		0% to 21%
Expense Management		0% to 20%
Profitability		0% to 30%

*Max aggregate bonus is 50%.

The sum of the achieved bonus percentages for each metric, subject to a maximum aggregate percentage of 50%, is applied to the base salary approved by the Compensation Committee for each participant to determine the earned bonus amount.  The profitability metric is based upon the Company’s audited financial statements for the year. Bonus awards are generally paid in the year following the annual financial performance concurrent with the completion of the Company’s audit of the year-end financial statements and approval of the award amounts by the Compensation Committee. Accordingly, the Executive Bonus payments paid in 2009 were primarily based upon the results achieved for 2008 financial performance metrics established by the Compensation Committee and the Executive Bonus payments earned based on 2009 financial performance were paid on February 18, 2010. The bonus percentage achieved under the program was 33% and 18% in 2009 and 2008, respectively.  The 2009 bonus percentage achieved is comprised of 13% for Sales, 20% for Expense Management, and 0% for Profitability as shown in the following table .

 

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Financial Performance Metric		Target Level		Achieved Level		Bonus %
Annuity Sales		$382.5 million		$835.3 million		7.00%
International Life Sales		$27.0 million		$29.6 million		6.00%
Domestic Life Sales		$7.7 million		$3.6 million		0.00%
Total Sales Metric						13.00%
Expense Management		74% ratio		54% ratio		20.00%
Profitability		9.5% ROE		4.9% ROE		0.00%
Total Bonus Percentage						33.00%

 

For information regarding awards made in 2009 to our Named Executive Officers, see the Summary Compensation Table on page 41 .

Domestic Marketing Officer Bonus Program .   Participants in the Domestic Marketing Officer Bonus Program (“Domestic Bonus”) are all domestic marketing officers including assistant vice presidents, vice presidents, and the senior vice president (Mr. S. Christopher Johnson).  As these individuals are most able to influence the outcome of the Company’s financial performance in terms of sales, the program is heavily weighted toward this metric.  The measures associated with this program include the Company’s annual sales performance, persistency of policies sold, and expense management.  These measures were incorporated into the program to award not only the amount of sales but the quality of sales and the management of the costs incurred to acquire the business sold.  Unlike the Executive Bonus, the Domestic Bonus metrics assume a targeted level of performance or “par” level to which the Compensation Committee assigned a targeted bonus percentage in order to reflect a disproportionate weighting of the potential bonus award toward the sales metric.  If the targeted par level for each metric is attained, the sum of the metrics is equal to a bonus percentage of 100% which is applied to the average weighted base salary of each vice president and senior vice president participant while one-half, or 50%, is applied to the average weighted base salary of each assistant vice president participant as approved by the Compensation Committee.  The performance metrics set by the Compensation Committee equating to various bonus level percentages under the program are as follows:

Financial Performance Metric		Par Bonus Level		Bonus % Range
Sales		75%		0% to no limit
Persistency		15%		0% to 30%
Expense Management		10%		0% to 22.5%

The Domestic Bonus also differs from the Executive Bonus in that the composite bonus percentage is not subject to a cap and bonus amounts may be advanced quarterly based upon the year-to-date results achieved.  Life insurance sales metric amounts under the program above the par level increase incrementally with an additional bonus percentage added for every increment of additional life insurance sales established by the Compensation Committee (annuity sales are subject to a cap).  However, if the aggregate sum of the three performance metrics exceeds 100%, the bonus award paid at the end of the calendar year is limited to 100% for each participant.  The bonus percentage above 100% is applied to the weighted average base salaries of all participants to create a pool which is paid out to participants in the subsequent calendar year based upon the recommendation of the Domestic Marketing senior vice president and subject to approval by the President and Chief Operating Officer.  The Domestic Bonus percentage achieved under the program was 73.5% and 32.5% in 2009 and 2008, respectively.

International Marketing Officer Bonus Program .   Participants in the International Marketing Officer Bonus Program (“International Bonus”) are all international marketing officers including assistant vice presidents, vice presidents, and the senior vice president (Mr. Scott Arendale).  The International Bonus is identical in format to the Domestic Bonus with the exception that the metric targets established by the Compensation Committee are customized for the differences between the domestic and international lines of business.  The performance metrics set by the Compensation Committee equating to various bonus level percentages under the program are as follows:

Financial Performance Metric		Par Bonus Level		Bonus % Range
Sales		70%		0% to no limit
Persistency		15%		0% to 30%
Expense Management		15%		0% to 30%

 

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All other features are similarly administrated. The International Bonus percentage achieved under the program was 83.0% and 44.0% in 2009 and 2008, respectively.  The 2009 bonus percentage achieved is comprised of 50% for Sales, 3% for Persistency, and 30% for Expense Management as shown in the following table.

 

Financial Performance Metric		Target Level		Achieved Level		Bonus %
International Life Sales		$30.0 million		$29.0 million		50.00%
Expense Management		5.50% ratio		4.83% ratio		30.00%
Persistency		100.0%		89.8%		3.00%
Total Bonus Percentage						83.00%

For information regarding awards made in 2009 to our Named Executive Officers, see the Summary Compensation Table on page 41 .

Senior Vice President Bonus Program.   Participants in the Senior Vice President Bonus Program (“Senior VP Bonus”) are all Senior Vice Presidents not otherwise included in any of the other three officer bonus programs.  Currently, these individuals include Senior Vice President, Chief Financial Officer and Treasurer (Mr. Brian Pribyl), Senior Vice President, Chief Administrative Officer (Mr. Michael Hydanus), Senior Vice President, Chief Actuary (Mr. Paul Facey), Senior Vice President, Mortgage Loans and Real Estate (Mr. Charles Milos), Senior Vice President, Secretary (Mr. James Payne) and Senior Vice President, Chief Investment Officer (Ms. Patricia Scheuer).  The Plan is essentially comparable to the Executive Bonus, except for the bonus award percentages, incorporating three measurable performance metrics associated with the Company’s annual sales performance, expense management, and profitability. In accordance with the program, the Compensation Committee set performance targets for each metric at various levels equating to various bonus level percentages as follows:

Financial Performance Metric		Bonus % Range
Sales		0% to 9.0%
Expense Management		0% to 9.5%
Profitability		0% to 19.0%

The sum of the achieved bonus percentages for each metric, subject to a maximum aggregate percentage of 30%, is applied to the base salary for each participant approved by the Compensation Committee to determine the earned bonus amount.  Like the Executive Bonus, the profitability metric is based upon the Company’s audited financial statements for the year.  Bonus awards are generally paid in the year following the annual financial performance concurrent with the completion of the Company’s audit of the year-end financial statements and approval of the award amounts by the Compensation Committee.  Accordingly, the Senior Vice President Bonus payments in 2009 were primarily based upon the results achieved for 2008 financial performance metrics established by the Compensation Committee.  The bonus percentage achieved under the program was 15.25% and 0% in 2009 and 2008, respectively.  The 2009 bonus percentage achieved is comprised of 5.75% for Sales, 9.5% for Expense Management, and 0% for Profitability as shown in the following table .

 

Financial Performance Metric		Target Level		Achieved Level		Bonus %
Annuity Sales		$382.5 million		$835.3 million		3.00%
International Life Sales		$27.0 million		$29.6 million		2.75%
Domestic Life Sales		$7.7 million		$3.6 million		0.00%
Total Sales Metric						5.75%
Expense Management		74% ratio		54% ratio		9.50%
Profitability		9.5% ROE		4.9% ROE		0.00%
Total Bonus Percentage						15.25%

For information regarding awards made in 2009 to our Named Executive Officers, see the Summary Compensation Table on page 41 .

 

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Discretionary Bonus Awards

For officers who are not participants in any of the four bonus programs above, the Compensation Committee considers from time-to-time circumstances which merit the need to recognize outstanding performance in the form of a discretionary bonus.  Although many of these situations may be deemed within the normal responsibilities of officers, the Compensation Committee on occasion may provide one-time recognition bonuses to identified officers where the demands of the situation and the results of the effort warrant such recognition. There were no discretionary bonuses awarded in 2009 or 2008.

 

Long-Term Incentive Compensation

 

Under the Company’s 1995 Stock and Incentive Plan and 2008 Incentive Plan, the Compensation Committee provides Company officers with long-term incentive awards through grants of stock options or stock appreciation rights (“SARs”) directly aligning the interest of the officers with stockholder interests.  The stock options and SARs have a graded five-year vesting period that begins on the third anniversary date of the grant in order to promote a long-term perspective and to encourage key employees to remain at the Company.  All options and SARs to date have been granted at the fair market value of the Company’s Class A common stock on the date of the grant.  The Compensation Committee believes that stock options and SARs are inherently performance-based and a form of at-risk compensation since the recipient does not benefit unless the Company’s common stock price subsequently rises.

The Compensation Committee is responsible for determining the recipients of the grants, when the grants should be made, and the number of shares to be granted.  The size of the awards generally reflect each officer’s position relative to other officers in the Company with consideration to total compensation targets obtained from the peer group information previously discussed.  In addition, as is the case with base salaries, the Compensation Committee considers the grant recommendations of the Chairman and Chief Executive Officer and the President and Chief Operating Officer for other Company officers.

The Compensation Committee may consider granting stock options at any time but generally coordinates the issuance of grants concurrent with its annual review of officer compensation.  In February 2009 the Compensation Committee approved the issuance of 29,393 SARs to selected officers.  Prior to that the Compensation Committee approved the issuance of 2,750 SARs to new officers during the third quarter of 2008 and 28,268 stock options to selected officers in April 2008. Included in these grant awards were the following option/SARs amounts to named executive officers.

 

 

		Grant		Grant
		2/19/09		4/18/08
Robert L. Moody		7,500		7,500
Ross R. Moody		5,518		5,518
Brian M. Pribyl		1,000		1,000
Scott E. Arendale		1,000		1,000
Charles D. Milos		1,000		1,000

 

As noted above, the Compensation Committee determines the timing of awards, the recipients, and the number of option shares or SARs to be granted to each participant. Prior to the April 18, 2008 grant awards to officers, the previous award determined by the Compensation Committee was made during 2004. The grant made in April 2008 represented the remaining stock options available for award (excluding grant awards to directors) under the 1995 Plan and coincided with the scheduled termination of that plan. The stock options granted at that date were given a strike price equivalent to the market closing value of the Company’s Class A common shares of $255.13.

 

Subsequent to the April 2008 stock option awards, the Company’s Class A common shares dropped approximately 75% as a consequence of the severe recession and financial crisis that enveloped the United States economy. The Compensation Committee recognized the precipitous drop in the Company’s Class A common share value substantially removed the long-term incentive objective of the April 2008 grant awards. Accordingly, the Compensation Committee determined to make substantially the same grant award effective February 19, 2009 with a strike price of $114.64 representing the market closing value of the Company’s Class A common shares that day.

 

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The Compensation Committee has followed a practice of allocating grant awards based upon the level of the officer receiving the award with each officer level receiving an identified proportionate share. Historically, the Chairman of the Board and Chief Executive Officer has been allotted 25% to 35% of the total grant award and the President and Chief Operating Officer 15% to 25% of the total grant. Officers at the senior vice president level receive the same number of grant awards while all officers at the vice president level receive the same number of grant awards although at a lesser amount than that of the senior vice presidents.

Retirement and Other Benefits

The Company’s executive officers are eligible to participate in the health and welfare, 401(k) and defined benefit retirement benefit plans that are offered to other Company employees (the Company’s qualified defined benefit pension plan was frozen as of December 31, 2007).  In addition, if eligible, executive officers may participate in the following plans:

 

Group Excess Benefit Plan

 

Company officers at the senior vice president level and above, including named executive officers, as well as those hired or promoted to the vice president level prior to May 1, 2007, are eligible to participate in a group excess benefit plan which supplements the Company’s core medical insurance plan.  Administered by a third party insurer, the group excess benefit plan provides coverage for co-pays, deductibles, and other out-of-pocket expenses not covered by the core medical insurance plan.  Offering such a plan to the selected Company officer levels is viewed as a key component of the overall compensation strategy for attracting and retaining talented executive officers.  The benefits provided to each named executive officer are reported in the “All Other Compensation Column” of the Summary Compensation Table.

Non-Qualified Defined Benefit Plan

This plan covers those officers of the Company who were in a senior vice president position or above prior to 1991.  The plan provides retirement benefits to those individuals affected by the revisions to the Company’s qualified defined benefit pension plan precipitated by the limitations imposed by Internal Revenue Code Section 401(a)(17) and 415.  As of December 31, 2009 and 2008, the active officers participating in this plan were Mr. Robert L. Moody and Mr. Charles Milos.  Benefits associated with this plan are disclosed in the Pension Benefits table in the Pension Benefits section.

Non-Qualified Deferred Compensation Plan

This plan allows Company senior officers, including named executive officers, to defer payment of a percentage of their compensation and to provide for up to a 2% matching and 2% profit sharing contribution on plan compensation that exceeds certain qualified plan limits, and additional Company discretionary matching contribution of up to 2% of plan compensation.  Company contributions are subject to a vesting schedule based upon each officer’s years of service. Benefit information associated with this plan is disclosed in the Non-Qualified Deferred Compensation table below and Company contributions are included in the “All Other Compensation” column in the Summary Compensation Table.

 

Non-Qualified Defined Benefit Plan for Robert L. Moody

 

 

This plan specifically covers the Company’s Chairman of the Board and Chief Executive Officer, Mr. Robert L. Moody, and is intended to supplement the retirement benefits of the Non-Qualified Defined Benefit Plan, mentioned above, that were limited by the American Jobs Creation Act of 2004.  Mr. Moody’s benefits associated with this plan are disclosed in the Pension Benefits table in the Pension Benefits section.

 

Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company

 

Similar to the immediately preceding plan, this plan specifically covers the Company’s President and Chief Operating Officer, Mr. Ross R. Moody, and is intended to provide the retirement benefits that comply with the American Jobs Creation Act of 2004.  Mr. Moody’s benefits associated with this plan are disclosed in the Pension Benefits table in the Pension Benefits section.

 

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National Western Life Insurance Company Retirement Bonus Program for Robert L. Moody

This program provides an annual payment to Mr. Robert L. Moody equal to 2% of his compensation and is not correlated in any manner to individual or Company performance. For reporting and disclosure purposes , the payment made in 2009 related to 2008 compensation is included in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation table.

Postretirement Benefits

The Company’s basic health plan and group excess benefit plan have a provision for individuals serving in the positions of Chairman of the Board or President for seven years or more subsequent to 1980 to continue to receive lifetime health benefits for themselves and their dependents upon retirement.  Mr. Robert L. Moody and Mr. Ross R. Moody currently meet this eligibility criteria.

Perquisites and Other Personal Benefits

The Compensation Committee periodically reviews executive officer perquisites and other benefits based upon information supplied to it by the Company’s Human Resources, Legal, and Financial departments.  In addition to base salaries and annual and long-term bonus incentives, the Company provides its executive officers with certain and varying perquisites and benefits.

The perquisites and personal benefits provided to each named executive officer are reported in the “All Other Compensation Column” of the Summary Compensation Table included in this Compensation Discussion and Analysis and are described in further detail in the footnotes to that table.

Stock Ownership Guidelines

The Company requires that its directors be shareholders, but the Company does not require its directors or executive officers to own a particular amount of the Company’s common stock and accordingly has not established a set of stock ownership guidelines.  The Compensation Committee is satisfied that the long-term incentive compensation offered to directors and officers in the form of stock options and SARs adequately aligns this group’s interest with those of the Company’s stockholders.

Employment Agreements

The Company does not utilize employment agreements with its executive officers or other employees.  The Company’s practice has been to issue offer letters to executive officer candidates when recruited to their positions.  In addition to outlining the executive officer’s responsibilities, each offer letter specifies the beginning base salary and eligibility for any additional compensation programs overseen by the Compensation Committee.  Accordingly, the Company does not have any contractual obligations to its executive officers for severance payments in connection with any termination or change-in-control.

Financial Restatements

The Compensation Committee has not formally adopted a policy with respect to whether retroactive adjustments to any form of compensation paid under arrangements for executive officers will be made where the prior payment was related to financial results of the Company that are subsequently restated.  As this situation has not previously been experienced, the Compensation Committee believes that such an issue is best addressed at the time it occurs and all facts and circumstances surrounding the restatement are known.

Tax and Accounting Treatment of Compensation

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for non-performance based compensation over $1 million paid in any one year to each of the individuals who were, at the end of the year, the corporation’s chief executive officer and the four other most highly compensated executive officers.  Except for the Chairman and Chief Executive Officer of the Company, the levels of non-performance based salary, bonus, and other compensation paid do not typically exceed this level.

 

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The Compensation Committee reserves the right to award compensation to executive officers that may not qualify under Section 162(m) as deductible compensation, however, it will continue to consider all elements of cost to the Company of providing such compensation, including the potential impact, if any, of Section 162(m).

The Company accounts for long-term incentive compensation in the form of stock options and SARs to executive officers under GAAP guidance which requires the Company to estimate and expense each award of equity compensation over the service period of the award.  Other accounting guidance requires that cash compensation be recorded as an expense at the time the obligation is accrued.

Compensation Committee Report

The Compensation Committee has reviewed each element of executive officer compensation and believes that the compensation philosophy and practices are designed to serve the best interests of the Company and its stockholders. The Compensation Committee also believes that the compensation of the Company’s executive officers is both appropriate and consistent with the objectives set by this committee.

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis set forth with the Company’s management.  Based on its reviews and discussions, the Compensation Committee approved and recommended to the Company’s Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement on Schedule 14A.

	Members of the Compensation Committee
	E. J. Pederson (Chairman)
	Stephen E. Glasgow
	Louis E. Pauls

Summary Compensation Table

The following table sets forth all of the compensation awarded to, earned by, or paid to the Company’s principal executive officer, principal financial officer, and the three other highest paid executive officers for the years ended December 31, 2009, 2008, and 2007.

																Change in
																Pension
											Non-Equity					Value and
											Incentive					Nonqualified
Name and											Plan					Deferred				All Other
Principal							Option/SAR				Compen-					Compensation				Compen-
Position	Year		Salary (a)				Awards (b)				sation					Earnings (e)				sation (f)				Total
Robert L. Moody	2009		$	1,692,703			$	474,707			$	552,393		(c)		$	(367,985	)		$	693,056			$	3,044,874
Chairman of the Board	2008			1,648,582				903,076				263,757					1,100,754				703,007				4,619,176
and Chief Executive	2007			1,588,653				-				495,251					2,733,499				686,181				5,503,584
Officer
Ross R. Moody	2009			605,888				336,039				189,678		(c)			113,121				71,053				1,315,779
President and Chief	2008			588,956				579,765				90,490					123,587				88,626				1,471,424
Operating Officer	2007			565,534				-				160,520					126,568				121,963				974,585
Brian M. Pribyl	2009			269,283				52,240				40,655		(d)			22,190				25,640				410,008
Senior Vice President,	2008			253,165				93,064				41,863					4,580				34,937				427,609
Chief Financial Officer	2007			252,665				-				74,695					15,239				36,405				379,004
and Treasurer
Charles D. Milos	2009			258,728				100,024				34,145		(d)			218,201				56,941				668,039
Senior Vice President,	2008			249,130				159,321				-					88,350				44,980				541,781
Mortgage Loans and	2007			239,569				-				-					81,780				50,598				371,947
Real Estate
Scott E. Arendale	2009			160,102				52,240				137,044		(d)			44,796				14,445				408,627
Senior Vice President,	2008			158,878				93,064				321,700					15,271				20,403				609,316
International Marketing	2007			150,050				-				178,101					33,595				17,570				379,316

 

Note: Columns with no data have been omitted.

 

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(a)	The 2009 amounts in this column include Company and subsidiary Board of Director fees of $30,700 for Mr. Robert L. Moody, $3,250 for Mr. Pribyl, $33,950 for Mr. Ross R. Moody, and $33,700 for Mr. Milos.
(b)	The amounts in this column represent the fair value on grant date of option awards received during the year.
(c)	The amounts for Mr. Robert L. Moody, Mr. Ross R. Moody represent bonuses earned under the 2009 Executive Officer Bonus Program.  Also included in Mr. Robert L. Moody’s amount is $29,761 representing the bonus earned under the NWLIC Retirement Bonus Program.
(d)	The amount for Mr. Pribyl and Mr. Milos represents the bonus earned under the 2009 Senior Vice President Bonus Program.  The amount for Mr. Arendale represents the bonus earned under the 2009 International Marketing Officer Bonus Program.
(e)	The amounts in this column represent the change in the accumulated pension benefit under the Company’s qualified defined benefit plan for Messrs. Pribyl and Arendale and the change in the accumulated pension benefit under the Company’s qualified and non-qualified defined benefit plans for Messrs. Robert L. Moody and Ross R. Moody. For a discussion of the assumptions made in the calculation of these amounts, refer to the Notes to Consolidated Financial Statements section of this Annual Report on Form 10-K.
(f)	The amounts in this column include the items summarized in the following table:

All Other Compensation

			Company
			Paid				Excess				Company				Company								Total
Name and			Benefit				Benefit				Contributions				Paid								All Other
Principal			Premiums				Claims				To Savings				Taxes/				Other				Compen-
Position	Year		(1)				Paid (2)				Plans (3)				Insurance				Perquisites				Sation
Robert L. Moody	2009		$	3,466			$	37,708			$	2,450			$	617,143	(4)		$	32,289	(5)		$	693,056
Chairman of the	2008			5,264				8,613				2,300				670,684				16,146				703,007
Board and Chief	2007			4,995				2,021				4,500				669,135				5,530				686,181
Executive Officer
Ross R. Moody	2009			2,742				27,315				33,837				-				7,159	(6)			71,053
President and Chief	2008			4,284				7,296				32,557				-				16,493				60,630
Operating Officer	2007			3,884				64,032				34,057				-				19,990				121,963
Brian M. Pribyl	2009			5,656				5,433				13,851				-				700	(7)			25,640
Senior Vice President,	2008			8,540				9,638				13,854				-				2,905				34,937
Chief Financial	2007			8,040				10,499				15,435				-				2,431				36,405
Officer and Treasurer
Charles D. Milos	2009			5,656				27,128				15,561				-				8,596	(8)			56,941
Senior Vice President,	2008			8,670				21,496				13,043				-				1,771				44,980
Mortgage Loans and	2007			8,170				26,116				14,346				-				1,966				50,598
Real Estate
Scott E. Arendale	2009			3,475				-				8,179				-				2,791	(9)			14,445
Senior Vice President,	2008			5,305				3,065				8,286				-				3,747				20,403
International	2007			4,943				-				9,297				-				3,330				17,570
Marketing

(1)	The Company provides its officers additional compensation equivalent to the premiums for health, dental and accidental death and dismemberment coverage offered to all employees.
(2)	The amounts in this column represent claims paid under the Company’s Group Excess Benefit Program.
(3)	The amounts in this column represent Company contributions to the Company’s qualified and non-qualified savings plans. The Company’s 401(k) plan is available to all employees with the same contribution criteria.
(4)	Mr. Robert L. Moody contributed a life interest in a trust estate to the Company as a capital contribution in 1964.  The Company, in turn, issued term policies on the life of Mr. Moody in excess of the amount of the asset contributed which excess was assigned to Mr. Moody.  The value of the excess amount of insurance was $392,194 in 2009 and represents additional compensation to Mr. Moody.  In addition, the Company reimburses Mr. Moody the applicable taxes associated with this benefit which was $224,949 in 2009.

 

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(5)	Mr. Robert L. Moody’s amounts in this column include $30,889 for Office of the Chairman expenses and $1,400 in gifts.
(6)	Mr. Ross R. Moody’s amounts in this column include $3,154 for car expense, $855 in membership dues, $1,750 for personal tax return preparation and $1,400 in officer and director gifts.
(7)	Mr. Pribyl’s amounts in this column include $700 in officer gifts.
(8)	Mr. Milos’s amounts in this column include $6,179 for guest travel on Company business trips, $1,017 for car expense and $1,400 in officer and director gifts.
(9)	Mr. Arendale’s amounts in this column include $2,091 for guest travel on Company business trips and $700 in officer gifts.

 

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Grants of Plan-Based Awards

The following table provides information regarding grants under the Company’s 2009 Executive Officer Bonus Program, Senior Vice President Bonus Program and International Marketing Officer Bonus Program for the executive officers named in the Summary Compensation Table.

		Estimated Future Payouts
		Under Non-Equity Incentive
		Plan Awards (a)
Name		Threshold				Target				Maximum (b)
Robert L. Moody
2009 Executive Officer Bonus Program:
International life sales		$	50,218			$	83,696			$	117,174
Domestic life sales			50,218				83,696				117,174
Annuities sales			50,218				83,696				117,174
Expense management			167,392				251,088				334,784
Company profitability			167,392				334,784				502,175
Ross R. Moody
2009 Executive Officer Bonus Program:
International life sales			17,239				28,732				40,224
Domestic life sales			17,239				28,732				40,224
Annuities sales			17,239				28,732				40,224
Expense management			57,463				86,195				114,926
Company profitability			57,463				114,926				172,389
Brian M. Pribyl
2009 Senior Vice President Bonus Program:
International life sales			5,306				6,632				7,958
Domestic life sales			5,306				6,632				7,958
Annuities sales			5,306				6,632				7,958
Expense management			14,590				19,896				25,202
Company profitability			13,264				33,792				50,403
Scott E. Arendale
2009 International Marketing Officer Bonus Program:
International life sales			33,023				115,579			No limit
International life persistency			4,953				24,767				49,534
Expense management			4,953				24,767				49,534
Charles D. Milos
2009 Senior Vice President Bonus Program:
International life sales			4,478				5,598				6,717
Domestic life sales			4,478				5,598				6,717
Annuities sales			4,478				5,598				6,717
Expense management			12,315				16,793				21,271
Company profitability			11,195				33,585				42,541

Note: Columns with no data have been omitted.

(a)	Amounts that have been or are expected to be paid in 2010 pertaining to the 2009 programs are reflected in the Summary Compensation Table. The 2009 program bonus amounts are based upon the base salary reflected in the applicable program addendums.
(b)	Although the Executive Officer and Senior Vice President Bonus Programs have stated maximums per program component, the aggregate bonus amount cannot exceed 50% and 30%, respectively, of base salaries.

 

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The following table provides information regarding stock appreciation right (SAR) grants awarded during the year ended December 31, 2009 under the Company’s 2008 Incentive Plan for the executive officers named in the Summary Compensation Table.

 

Name	Grant Date		All Other Option Awards: Number of Securities Underlying SARs				Exercise or Base Price of SAR Awards				Grant Date Fair Value of SAR Awards
Robert L. Moody	2/19/2009			7,500			$	114.64			$	356,691
Ross R. Moody	2/19/2009			5,518			$	114.64			$	262,429
Brian M. Pribyl	2/19/2009			1,000			$	114.64			$	47,559
Scott E. Arendale	2/19/2009			1,000			$	114.64			$	47,559
Charles D. Milos	2/19/2009			1,000			$	114.64			$	47,559

Outstanding Equity Awards at December 31, 2009

The following table provides information regarding outstanding stock options and SARs held by the executive officers named in the Summary Compensation Table as of December 31, 2009.

		Option/SAR Awards
						Number of
		Number of				Securities
		Securities				Underlying
		Underlying				Unexercised				Option			Option/SAR
		Options/SARs (#)				Options/SARs (#)				Exercise/SAR			Expiration
Name		Exercisable				Unexercisable				Price			Date
Robert L. Moody Grants:
4/20/2001			2,300	(*)			-			$	92.13		4/20/2011
6/22/2001			1,000	(*)			-				95.00		6/22/2011
4/23/2004			12,000				8,000				150.00		4/23/2014
6/25/2004 (director)			1,000	(*)			-				150.00		6/25/2014
4/18/2008			-				7,500				255.13		4/18/2018
6/20/2008 (director)			200				800				208.05		6/20/2018
2/19/2009 (director)			-				1,000				114.64		2/19/2019
2/19/2009			-				7,500				114.64		2/19/2019
Ross R. Moody Grants:
4/20/2001			5,000	(*)			-				92.13		4/20/2011
6/22/2001			1,000	(*)			-				95.00		6/22/2011
4/23/2004			6,000				4,000				150.00		4/23/2014
6/25/2004 (director)			1,000	(*)			-				150.00		6/25/2014
4/18/2008			-				5,518				255.13		4/18/2018
6/20/2008 (director)			200				800				208.05		6/20/2018
2/19/2009 (director)			-				1,000				114.64		2/19/2019
2/19/2009			-				5,518				114.64		2/19/2019

 

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		Option/SAR Awards
						Number of
		Number of				Securities
		Securities				Underlying
		Underlying				Unexercised				Option			Option/SAR
		Options/SARs (#)				Options/SARs (#)				Exercise/SAR			Expiration
Name		Exercisable				Unexercisable				Price			Date
Brian M. Pribyl Grants:
4/23/2004			400				800				150.00		4/23/2014
4/18/2008			-				1,000				255.13		4/18/2018
2/19/2009			-				1,000				114.64		2/19/2019
Scott E. Arendale Grants:
4/20/2001			140	(*)			-				92.13		4/20/2011
4/23/2004			300				300				150.00		4/23/2014
4/18/2008			-				1,000				255.13		4/18/2018
2/19/2009			-				1,000				114.64		2/19/2019
Charles D. Milos Grants:
4/20/2001			1,300	(*)			-				92.13		4/20/2011
6/22/2001			1,000	(*)			-				95.00		6/22/2011
4/23/2004			1,200				800				150.00		4/23/2014
6/25/2004 (director)			1,000	(*)			-				150.00		6/25/2014
4/18/2008			-				1,000				255.13		4/18/2018
6/20/2008 (director)			200				800				208.05		6/20/2018
2/19/2009 (director)			-				1,000				114.64		2/19/2019
2/19/2009			-				1,000				114.64		2/19/2019

Note: Columns with no data have been omitted.

(*) – Fully vested.

 

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Officer stock options and SARs vest 20% annually following three full years of service to the Company from the date of grant.  Stock options and SARs granted to members of the Board of Directors vest 20% annually following one full year of service to the Company from the date of grant.  Accordingly, the unexercisable options and SARs shown in the previous table are scheduled to vest during the following years:

																		2014				Total
		2010				2011				2012				2013				to 2016				Unexercisable
Robert L. Moody
Grants:
4/23/2004			4,000				4,000				-				-				-				8,000
4/18/2008			-				1,500				1,500				1,500				3,000				7,500
6/20/2008 (director)			200				200				200				200				-				800
2/19/2009 (director)			200				200				200				200				200				1,000
2/19/2009			-				-				1,500				1,500				4,500				7,500
Ross R. Moody
Grants:
4/23/2004			2,000				2,000				-				-				-				4,000
4/18/2008			-				1,103				1,104				1,104				2,207				5,518
6/20/2008 (director)			200				200				200				200				-				800
2/19/2009 (director)			200				200				200				200				200				1,000
2/19/2009			-				-				1,104				1,104				3,310				5,518
Brian M. Pribyl
Grants:
4/23/2004			400				400				-				-				-				800
4/18/2008			-				200				200				200				400				1,000
2/19/2009			-				-				200				200				600				1,000
Scott E. Arendale
Grants:
4/23/2004			150				150				-				-				-				300
4/13/2008			-				200				200				200				400				1,000
2/19/2009			-				-				200				200				600				1,000
Charles D. Milos
Grants:
4/23/2004			400				400				-				-				-				800
4/18/2008			-				200				200				200				400				1,000
6/20/2008 (director)			200				200				200				200				-				800
2/19/2009 (director)			200				200				200				200				200				1,000
2/19/2009			-				-				200				200				600				1,000

Option Exercises and Stock Vested

There were no option exercises by any of the executive officers named in the summary compensation table for the year ended December 31, 2009.  The Company does not have stock award plans with stock awards subject to vesting.

 

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Pension Benefits

The following table provides information regarding benefits under the Company’s Pension Plan, Non-Qualified Defined Benefit Plan, Non-qualified Defined Benefit Plan for Robert L. Moody, and Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company (NWLIC).

			Number of
			Years of				Present Value of				Payments
			Credited				Accumulated				During
Name	Plan Name		Service				Benefit				Last Fiscal Year
Robert L. Moody	NWLIC Pension Plan			44			$	1,247,137			$	153,509
	NWLIC Grandfathered
	Non-Qualified
	Defined Benefit Plan			45				5,257,959				713,258
	NWLIC Non-Qualified
	Defined Benefit Plan for
	Robert L. Moody			45				12,645,711				1,715,423
Ross R. Moody	NWLIC Pension Plan			17				189,750				-
	Non-Qualified Defined
	Benefit Plan for the
	President of NWLIC			19				293,254				-
Brian M. Pribyl	NWLIC Pension Plan			7				98,668				-
Charles D. Milos	NWLIC Pension Plan			25				521,415				-
	NWLIC Grandfathered
	Non-Qualified			27				238,316				-
	Defined Benefit Plan
	NWLIC Non-Qualified
	Defined Benefit Plan			27				203,622				-
Scott E. Arendale	NWLIC Pension Plan			14				264,967				-

Note: Columns with no data have been omitted.

 

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Pension Plan. The qualified defined benefit plan covers substantially all employees and officers of the Company and provides benefits based on the participant’s years of service and compensation.  The Company makes annual contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act.  Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are generally calculated as the sum of the following:

(1)  50% of the participant’s final 5-year average annual eligible compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date.  This result is multiplied by a fraction which is the participant’s years of benefit service at December 31, 1990, divided by the participant’s years of benefit service at normal retirement date.

(2)  1.5% of the participant’s eligible compensation earned during each year of benefit service after December 31, 1990 and through December 31, 2007.

Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are generally calculated as 1.5% of their compensation earned during each year of benefit service through December 31, 2007.

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.  Accordingly future pension expense is projected to be minimal.

Non-Qualified Defined Benefit Plan.   This plan covers officers of the Company who were in the position of senior vice president or above prior to 1991.  The plan provides benefits based on the participant’s years of service and compensation.  No minimum funding standards are required.

The benefit to be paid pursuant to this plan to a participant, other than the Chairman of the Company, who retires at his normal retirement date shall be equal to (a) minus (b) minus (c), but the benefit may not exceed (d) minus (b) where:

(a) is the benefit which would have been payable at the participant’s normal retirement date under the terms of the Pension Plan as of December 31, 1990, as if that plan had continued without change and without regard to Internal Revenue Code Section 401(a) (17) and 415 limits, and,

(b) is the benefit which actually becomes payable under the terms of the Pension Plan at the participant’s normal retirement date, and,

(c) is the actuarially equivalent life annuity which may be provided by an accumulation of 2% of the participant’s compensation for each year of service on and after January 1, 1991, accumulated at an assumed interest rate of 8.5% to the participant’s normal retirement date, and,

(d) is the benefit which would have been payable at the participant’s normal retirement date under the terms of the Pension Plan as of December 31, 1990, as if that plan had continued without change and without regard to Internal Revenue Code Section 401(a)(17) and 415 limits, except that the proration over 15 years shall instead be calculated over 30 years.

The Chairman of the Company, Robert L. Moody, is currently receiving in-service benefits from this plan.  The benefit that Mr. Moody began receiving as of his normal retirement date pursuant to the plan was equal to (a) minus (b) minus (c) where:

(a) was his years of service (up to 45), multiplied by 1.66667%, and then multiplied by the excess of his eligible compensation over his primary social security benefit under the terms of the Pension Plan as of December 31, 1990, as if that plan had continued without change and without regard to Internal Revenue Code Section 401(a) (17) and 415 limits, and,

(b) was the benefit payable to him under the terms of the Pension Plan, and,

(c) was the actuarially equivalent life annuity provided by an accumulation of 2% of his compensation for each year of service on and after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date.

 

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This benefit was increased for additional service and changes in eligible compensation through December 31, 2004.  The benefit was frozen as of December 31, 2004 in connection with plan changes required by the American Jobs Creation Act of 2004.

Non-Qualified Defined Benefit Plan for Robert L. Moody.   This plan covers the current Chairman of the Company, Robert L. Moody, and 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 American Jobs Creation Act of 2004.  No minimum funding standards are required.  The annual benefit paid to the Chairman of the Company on an in-service basis effective July 1, 2005 was equal to (a) minus (b) minus (c) where:

(a) was his years of service on his normal retirement date, multiplied by 1.66667%, and then multiplied by the excess of his eligible compensation over his primary social security benefit under the terms of the Pension Plan as of December 31, 1990, as if that plan had continued without change and without regard to Internal Revenue Code Section 401(a) (17) and 415 limits, less the actuarially equivalent life annuity which may be provided by an accumulation of 2% of his compensation for each year of service on and after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date, and, multiplied by the ratio of his years of service on July 1, 2005 to his years of service on his normal retirement date, multiplied by the ratio of his eligible compensation as of July 1, 2005 to his eligible compensation as of his normal retirement date, and,

(b) was the benefit payable to him under the terms of the Pension Plan as of July 1, 2005, and,

(c) was the benefit payable to him under the terms of the Non-Qualified Defined Benefit Plan as of December 31, 2004.

Subsequent to July 1, 2005, the annual benefit was increased monthly for additional service and changes in eligible compensation.

Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company.   This plan covers the President of the Company and is intended to provide benefit accruals that comply with the American Jobs Creation Act of 2004.  No minimum funding standards are required.

The annual benefit to be paid to the President of the Company who retires at his normal retirement date shall be equal to (a) minus (b) minus (c) where:

(a) equals his years of service (up to 45), multiplied by 1.66667%, and then multiplied by the excess of his eligible compensation over his primary social security benefit under the terms of the Pension Plan as of December 31, 1990, as if that plan had continued without change and without regard to Internal Revenue Code Section 401(a) (17) and 415 limits, and,

(b) equals the actuarially equivalent life annuity provided by an accumulation of 2% of his compensation for each year of service on and after his date of hire, accumulated at an assumed interest rate of 8.5% to his normal retirement date, and,

(c) equals the benefit actually payable to him under the terms of the Pension Plan.

The plan provides for a monthly in-service benefit if the President of the Company continues employment after his normal retirement date.

 

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Non-Qualified Deferred Compensation

The following table provides information regarding the Company’s non-qualified deferred compensation plan for the executive officers named in the Summary Compensation Table as of December 31, 2009.

																		Aggregate
		Executive				Registrant				Aggregate								Balance
		Contributions				Contributions				Earnings				Aggregate				at Last
		in Last				in Last				in Last				Withdrawals/				Fiscal
Name		Fiscal Year				Fiscal Year (a)				Fiscal Year (b)				Distributions				Year-End (c)
Robert L. Moody		$	-			$	-			$	2,620			$	40,816			$	-
Ross R. Moody			34,164				26,487				124,022				-				620,533
Brian M. Pribyl			10,885				6,501				13,753				-				191,748
Charles D. Milos			11,520				8,211				93,325				-				407,827
Scott E. Arendale			6,523				3,272				4,409				-				51,240

Note: Columns with no data have been omitted.

(a)	Registrant contributions are reflected in the “All Other Compensation” column in the Summary Compensation Table and are not additional earned compensation.
(b)	The investment options under the plan consist of a selection of mutual funds identical to those available to all employees through the 401(k) plan.
(c)	Balances in the plan are settled in cash upon the termination event selected by the officer and distributed either in a lump sum or in annual installments. Deferred amounts represent unsecured obligations of the Company.

Potential Payments Upon Termination or Change in Control

Other than the Company’s 1995 Stock Option and Incentive Plan and 2008 Incentive Plan, the Company has no contract, agreement, plan, or arrangement, written or unwritten, that provides for payment to any officer at, following, or in connection with any termination, severance, retirement or a constructive termination, or a change in control of the Company or a change in any officer’s responsibilities.

 

The 1995 Stock Option and Incentive Plan governs certain of the stock option grants held by our executive officers.  Our executive officers are not entitled to any benefits under our 1995 Stock Option and Incentive Plan that are not available to other participants.  The 1995 Stock Option and Incentive Plan includes the following change in control provisions, which would result in the accelerated vesting of outstanding option grants:  In the event of a Change of Control, all outstanding Awards shall immediately vest and become exercisable or satisfiable, as applicable.  The Committee, in its discretion, may determine that upon the occurrence of a Change in Control, each Award outstanding hereunder shall terminate within a specified number of days after notice to the Holder, and such Holder shall receive, with respect to each share of Common Stock subject to such Award, cash in an amount equal to the excess of (i) the higher of (x) the Fair Market Value of such share of Common Stock immediately prior to the occurrence of such Change of Control or (y) the value of the consideration to be received in connection with such Change of Control for one share of Common Stock over (ii) the exercise price per share, if applicable, of Common Stock set forth in such Award.  The provisions contained in the preceding sentence shall be inapplicable to an Award granted within six (6) months before the occurrence of a Change of Control if the Holder of such Award is subject to the reporting requirements of Section 16(a) of the 1934 Act.  If the consideration offered to shareholders of the Company in any transaction described in this paragraph consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.  The provisions contained in this paragraph shall not terminate any rights of the Holder to further payments pursuant to any other agreement with the Company following a Change of Control.

 

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The 2008 Incentive Plan governs certain of the stock option grants and/or SARs held by our executive officers and provides for the acceleration of vesting of all awards upon a change in control of the Company. The 2008 Incentive Plan includes the following change in control provisions, which would result in the accelerated vesting of outstanding award grants:  The Committee may provide in an option agreement and/or Stock Appreciation Rights agreement that in the event of a Change in Control of the Company, (i) all or a portion of the stock options and/or any Stock Appreciation Rights awarded under such agreement shall become fully vested and immediately exercisable and/or (ii) the vesting of all performance-based stock options shall be determined as if the performance period or cycle applicable to such stock options had ended immediately upon such Change in Control.

Our executive officers hold option grants under both the 1995 Stock Option and Incentive Plan and the 2008 Incentive Plan.  Option Grants under the 1995 Stock Option and Incentive Plan and the 2008 Incentive Plan will immediately vest upon a change in control.  The following table depicts potential benefits for our executive officers as a result of a change in control.  Such termination is assumed to occur on January 1, 2010. 

		Intrinsic Value of
Named Executive Officer		Accelerated Equity (1)($)
Robert L. Moody	$	690,290.00
Ross R. Moody		478,911.64
Brian M. Pribyl		77,876.00
Charles D. Milos		136,856.00
Scott E. Arendale		66,066.00

(1) Value is based upon the closing selling price per share of our Class A common stock on the NASDAQ Global Select Market on December 31, 2009, which was $173.62.

 

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Director Compensation

The following table sets forth the compensation for 2009 for those individuals who served as members of the Company’s Board of Directors during 2009 (excluding named executive officers whose director compensation is included in the Summary Compensation Table).

		Fees Earned or				Option				All Other
Name		Paid in Cash				Awards (a)				Compensation					Total
Stephen E. Glasgow		$	36,900			$	47,784			$	45,812		(b)		$	130,496
E. Douglas McLeod			26,400				47,784				952		(c)			75,136
Russell S. Moody			26,400				47,784				20,499		(d)			94,683
Frances A. Moody-Dahlberg			26,400				47,784				29,687		(e)			103,871
Louis E. Pauls Jr.			32,500				47,784				8,860		(f)			89,144
E. J. Pederson			32,000				47,784				952		(c)			80,736

Note: Columns with no data have been omitted.

(a)	The amounts in this column represent the fair value on grant date of option awards received during the year.
(b)	The amount shown for Mr. Glasgow includes $38,461 value of the Company’s Group and Excess Benefit Plans, $252 for the taxable value of supplemental life coverage, $6,399 in guest travel and $700 in gifts.
(c)	The amounts shown for Messrs. McLeod and Pederson represent $252 for the taxable value of supplemental life coverage and $700 in gifts.
(d)	The amount shown for Mr. Moody is $252 for the taxable value of supplemental life coverage, $19,547 in guest travel and $700 in gifts.
(e)	The amount shown for Ms. Moody-Dahlberg is $28,874 value of the Company’s Excess Benefit Plans, $113 in guest travel and $700 in gifts.
(f)	The amount shown for Mr. Pauls includes $6,046 value of the Company’s Group Benefit Plans, $20 for the taxable value of supplemental life coverage, $2,094 in guest travel and $700 in gifts.

All directors of the Company currently receive $24,000 a year and $600 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors.  An additional $600 is paid for each committee meeting attended.  However, a director attending multiple meetings on the same day receives only one meeting fee.  The amounts paid pursuant to these arrangements are included in the Summary Compensation Table of this Item.  The directors and their dependents are also eligible to participate in the Company’s group insurance program.

Directors of the Company are eligible for restricted stock awards, incentive awards, and performance awards under the National Western Life Insurance Company 1995 Stock Option and Incentive Plan and 2008 Incentive Plan.  Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options.

Directors of the Company’s subsidiary, NWL Investments, Inc., receive $250 annually.  Directors of the Company’s subsidiary, NWLSM, Inc., receive $1,000 per board meeting attended.  Nonemployee directors of the Company’s subsidiary, NWL Services, Inc., receive $1,000 per board meeting attended.  Directors of the Company’s downstream subsidiaries, Regent Care General Partner, Inc., and Regent Care Operations General Partner, Inc., receive $250 per board meeting attended.  Directors of the Company’s downstream subsidiary, Regent Care Limited Partner, Inc., receive $500 per board meeting attended.

 

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1.  Listing of Financial Statements

See Attachment A, Index to Financial Statements and Schedules, on page 60 for a list of financial statements included in this report.

(a) 2.  Listing of Financial Statement Schedules

See Attachment A, Index to Financial Statements and Schedules, on page 60 for a list of financial statement schedules included in this report.

All other schedules are omitted because they are not applicable, not required, or because the information required by the schedule is included elsewhere in the financial statements or notes.

(a) 3.  Listing of Exhibits

The exhibits listed below, as part of Form 10-K, are numbered in accordance with the numbering used in Item 601 of Regulation S-K of The Securities and Exchange Commission.

Exhibit 2	-	Order Confirming Third Amended Joint Consensual Plan Of Reorganization Proposed By The Debtors And The Official Committee Of Unsecured Creditors (As Modified As of August 28, 1998) (incorporated by reference to Exhibit 2 to the Company's Form 8-K dated August 28, 1998).
Exhibit 3(a)	-	Restated Articles of Incorporation of National Western Life Insurance Company dated April 10, 1968 (incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3(b)	-	Amendment to the Articles of Incorporation of National Western Life Insurance Company dated July 29, 1971 (incorporated by reference to Exhibit 3(b) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3(c)	-	Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 10, 1976 (incorporated by reference to Exhibit 3(c) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3(d)	-	Amendment to the Articles of Incorporation of National Western Life Insurance Company dated April 28, 1978 (incorporated by reference to Exhibit 3(d) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3(e)	-	Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 1, 1979 (incorporated by reference to Exhibit 3(e) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3(f)	-	Bylaws of National Western Life Insurance Company as amended through April 24, 1987  (incorporated by reference to Exhibit 3(f) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 3ii(g)	-	Bylaws of National Western Life Insurance Company dated August 24, 2007 (incorporated by reference to Exhibit 3ii(g) to the Company’s Form 10-Q September 30, 2007).
Exhibit 10(a)	-	National Western Life Insurance Company Non-Qualified Defined Benefit Plan dated July 26, 1991 (incorporated by reference to Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1995).

Exhibit 10(c)	-	National Western Life Insurance Company Non-Qualified Deferred Compensation Plan, as amended and restated, dated March 27, 1995 (incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 10(d)	-	First Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1995 (incorporated by reference to Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 10(e)	-	National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit 10(f)	-	First Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(g)	-	Second Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(g) to the Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(h)	-	Second Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(i)	-	Third Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(j)	-	Fourth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective June 20, 1997 (incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1997).
Exhibit 10(k)	-	First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan effective June 19, 1998 (incorporated by reference to Exhibit 10(k) to the Company's Form 10-Q for the quarter ended June 30, 1998).
Exhibit 10(m)	-	Fifth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1998 (incorporated by reference to Exhibit 10(m) to the Company's Form 10-Q for the quarter ended September 30, 1998).
Exhibit 10(n)	-	Sixth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(n) to the Company's Form 10-K for the year ended December 31, 1998).
Exhibit 10(o)	-	Third Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective August 7, 1998  (incorporated by reference to Exhibit 10(o)  to the Company's Form 10-K for the year ended December 31, 1998).
Exhibit 10(p)	-	Exchange Agreement by and among National Western Life Insurance Company, NWL Services, Inc., Alternative Benefit Management, Inc., and American National Insurance Company effective November 23, 1998 (incorporated by reference to Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1998).
Exhibit 10(s)	-	Seventh Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(s) to the Company's Form 10-K for the year ended December 31, 2000).
Exhibit 10(u)	-	Eighth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 1, 2000 (incorporated by reference to Exhibit 10(u) to the Company's Form 10-K for the year ended December 31, 2000).

Exhibit 10(v)	-	Fourth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 1, 2000 (incorporated by reference to Exhibit 10(v) to the Company's Form 10-K for the year ended December 31, 2000).
Exhibit 10(w)	-	Second Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(w) to the Company's Form 10-Q for the quarter ended September 30, 2001).
Exhibit 10(z)	-	Fifth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective January 1, 2001 (incorporated by reference to Exhibit 10(z) to the Company's Form 10-K for the year ended December 31, 2001).
Exhibit 10(ae)	-	Sixth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective August 23, 2002 (incorporated by reference to Exhibit 10(ae) to the Company's Form 10-Q for the quarter ended September 30, 2002).
Exhibit 10(af)	-	Seventh Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective October 18, 2002 (incorporated by reference to Exhibit 10(af) to the Company's Form 10-Q for the quarter ended September 30, 2002).
Exhibit 10(ai)	-	Eighth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective January 1, 2003 (incorporated by reference to Exhibit 10(ai) to the Company's Form 10-K for the year ended December 31, 2002).
Exhibit 10(am)	-	Ninth amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective November 1, 2003 (incorporated by reference to Exhibit 10(am) to the Company's Form 10-K for the year ended December 31, 2003).
Exhibit 10(an)	-	Ninth amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 5, 2003 (incorporated by reference to Exhibit 10(an) to the Company's Form 10-K for the year ended December 31, 2003.)
Exhibit 10(ar)	-	Third Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(ar) to the Company's Form 10-Q for the quarter ended September 30, 2004).
Exhibit 10(as)	-	Amendment to the National Western Life Insurance Company Group Excess Benefit Plan effective December 15, 2004 (incorporated by reference to Exhibit 10(as) to the Company's Form 10-K for the year ended December 31, 2004).
Exhibit 10(at)	-	The National Western Life Insurance Company Employee Health Plan was amended and restated effective August 20, 2004 (incorporated by reference to Exhibit 10(at) to the Company's Form 10-K for the year ended December 31, 2004).
Exhibit 10(au)	-	Tenth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 31, 2004 (incorporated by reference to Exhibit 10(au) to the Company's Form 10-K for the year ended December 31, 2004).
Exhibit 10(az)	-	National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(az) to 8-K dated July 1, 2005).
Exhibit 10(ba)	-	First Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(ba) to 8-K dated August 22, 2005).
Exhibit 10(bb)	-	Second Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(bb) to 8-K dated December 15, 2005).

Exhibit 10(bc)	-	Tenth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan (Exhibit 10(bc) to 8-K dated December 15, 2005).
Exhibit 10(bd)	-	National Western Life Insurance Company Retirement Bonus Program for Robert L. Moody (Exhibit 10(bd) to 8-K dated December 15, 2005).
Exhibit 10(be)	-	Eleventh Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan (Exhibit 10(be) to 8-K dated December 15, 2005).
Exhibit 10(bf)	-	Non-Qualified Defined Benefit Plan for the President of the National Western Life Insurance Company (Exhibit 10(bf) to 8-K dated December 15, 2005).
Exhibit 10(bg)	-	National Western Life Insurance Company 2006 Executive Officer Bonus Program (Exhibit 10(bg) to 8-K dated February 17, 2006).
Exhibit 10(bh)	-	National Western Life Insurance Company 2006 Executive Officer Bonus Program (as amended) (Exhibit 10(bh) to 8-K dated April 21, 2006).
Exhibit 10(bi)	-	2006 International Marketing Officer Bonus Program (Exhibit 10(bi) to 8-K dated June 23, 2006).
Exhibit 10(bj)	-	2006 Domestic Marketing Officer Bonus Program (Exhibit 10(bj) to 8-K dated June 23, 2006).
Exhibit 10(bk)	-	National Western Life Insurance Company Harvest Nonqualified Deferred Compensation Plan (Exhibit 10(bk) to 8-K dated June 23, 2006).
Exhibit 10(bl)	-	Amendment No. 16 to Loan Agreement (Exhibit 10(bl) to 8-K dated July 31, 2006).
Exhibit 10(bm)	-	Life Systems, Incorporated Termination Agreement (Exhibit 10(bm) to 8-K dated March 30, 2007).
Exhibit 10(bn)	-	National Western Life Insurance Company 2007 Executive Officer Bonus Program (Exhibit 10(bn) to 8-K dated April 19, 2007).
Exhibit 10(bo)	-	National Western Life Insurance Company 2007 Domestic Marketing Officer Bonus Program (Exhibit 10(bo) to 8-K dated April 19, 2007).
Exhibit 10(bp)	-	National Western Life Insurance Company 2007 International Marketing Officer Bonus Program (Exhibit 10(bp) to 8-K dated April 19, 2007).
Exhibit 10(bq)	-	National Western Life Insurance Company 2008 Executive Officer Bonus Program (Exhibit 10(bq) to 8-K dated March 17, 2008).
Exhibit 10(br)	-	National Western Life Insurance Company 2008 Domestic Marketing Officer Bonus Program (Exhibit 10(br) to 8-K dated August 22, 2008).
Exhibit 10(bs)	-	National Western Life Insurance Company 2008 International Marketing Officer Bonus Program (Exhibit 10(bs) to 8-K dated August 22, 2008).
Exhibit 10(bt)	-	National Western Life Insurance Company 2008 Domestic Marketing Officer Bonus Program (as amended) (Exhibit 10(bt) to 8-K dated October 16, 2008).
Exhibit 10(bu)	-	National Western Life Insurance Company 2008 Incentive Plan (Exhibit 10(bu) to S-8 dated September 2, 2008).
Exhibit 10(bv)	-	National Western Life Insurance Company 2008 Senior Vice President Bonus Program Program (Exhibit 10(bv) to Form 10-K dated December 31, 2008).

Exhibit 10(bw)	-	National Western Life Insurance Company 2009 Executive Officer Bonus Program (Exhibit 10(bw) to 8-K dated February 19, 2009).
Exhibit 10(bx)	-	National Western Life Insurance Company 2009 Domestic Marketing Officer Bonus Program (Exhibit 10(bx) to 8-K dated February 19, 2009).
Exhibit 10(by)	-	National Western Life Insurance Company 2009 International Marketing Officer Bonus Program (Exhibit 10(by) to 8-K dated February 19, 2009).
Exhibit 10(bz)	-	National Western Life Insurance Company 2009 Senior Vice President Bonus Program (Exhibit 10(bz) to 8-K dated February 19, 2009).
Exhibit 10(ca)	-	National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody As Amended and Restated Effective as of January 1, 2009 (Exhibit 10(ca) to Form 10-K dated December 31, 2008).
Exhibit 10(cb)	-	Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company As Amended and Restated Effective as of January 1, 2009 (Exhibit 10(cb) to Form 10-K dated December 31, 2008).
Exhibit 10(cc)	-	National Western Life Insurance Company Grandfathered Non-Qualified Defined Benefit Plan As Amended and Restated Effective as of December 31, 2004 (Exhibit 10(cc) to Form 10-K dated December 31, 2008).
Exhibit 10(cd)	-	National Western Life Insurance Company Non-Qualified Defined Benefit Plan As Amended and Restated Effective as of January 1, 2009 (Exhibit 10(cd) to Form 10-K dated December 31, 2008).
Exhibit 10(ce)	-	National Western Life Insurance Company Grandfathered Non-Qualified Deferred Compensation Plan As Amended and Restated Effective as of December 31, 2004 (Exhibit 10(ce) to Form 10-K dated December 31, 2008).
Exhibit 10(cf)	-	National Western Life Insurance Company Non-Qualified Deferred Compensation Plan As Amended and Restated Effective as of January 1, 2009 (Exhibit 10(cf) to Form 10-K dated December 31, 2008).
Exhibit 10(cg)	-	First Amendment to The National Western Life Insurance Company Pension Plan As Amended and Restated Effective as of January 1, 2007 (Exhibit 10(cg) to Form 10-K dated December 31, 2008).
Exhibit 10(ch)	-	Amended National Western Life Insurance Company Group Excess Benefit Plan, effective May 1, 2009 (Exhibit 10(ch) to Form 10-Q dated March 31, 2009).
Exhibit 10(ci)	-	Revolving Credit Loan Agreement with Moody National Bank (Exhibit 10(ci) to 8-K dated August 31, 2009).
Exhibit 10(cj)	-	National Western Life Insurance Company 2009 Executive Officer Bonus Program (Exhibit 10(cj) to 8-K dated December 16, 2009).
Exhibit 10(ck)	-	National Western Life Insurance Company 2009 Domestic Marketing Officer Bonus Program (Exhibit 10(ck) to 8-K dated December 16, 2009).
Exhibit 10(cl)	-	National Western Life Insurance Company 2009 International Marketing Officer Bonus Program (Exhibit 10(cl) to 8-K dated December 16, 2009).
Exhibit 10(cm)	-	National Western Life Insurance Company 2009 Officer President Bonus Program (Exhibit 10(cm) to 8-K dated December 16, 2009).
Exhibit 10(cp)	-	Management/Consultant Agreement dated March 29, 2000 by and between Regent Care Operations, Limited Partnership and Regent Management Services, Limited Partnership.

Exhibit 10(cq)		Management Agreement dated October 1, 2008 by and between Regent Care San Marcos B-3, Limited Partnership and Regent Management Services, Limited Partnership.
Exhibit 10(cr)		Administrative Services Only Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan.
Exhibit 10(cs)		Premium Payment Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan.
Exhibit 10(ct)		Administrative Services Only Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan.
Exhibit 10(cu)		Premium Payment Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan.
Exhibit 21	-	Subsidiaries of the Registrant.

Exhibit 31(a)	-	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b)	-	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a)	-	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

National Western Life Insurance Company:

We have audited the accompanying consolidated balance sheets of National Western Life Insurance Company and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of earnings, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I and V. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Western Life Insurance Company and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for other-than-temporary impairments in 2009 and deferred acquisition costs in connection with modifications or exchanges of insurance contracts in 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Western Life Insurance Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

Dallas, Texas

March 16, 2010

 

61

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(In thousands)
ASSETS		2009				2008
Investments:
Securities held to maturity, at amortized cost (fair value: $4,331,077
and $3,727,353)		$	4,176,661				3,831,417
Securities available for sale, at fair value (cost: $1,967,365 and $1,904,053)			2,050,079				1,745,266
Mortgage loans, net of allowance for possible losses ($5,033 and $4,587)			98,200				90,733
Policy loans			78,336				79,277
Derivatives, index options			89,915				11,920
Other long-term investments			32,829				14,168
Total Investments			6,526,020				5,772,781
Cash and short-term investments			108,866				67,796
Deferred policy acquisition costs			626,440				701,984
Deferred sales inducements			122,232				120,955
Accrued investment income			71,572				64,872
Federal income tax receivable			-				1,820
Other assets			63,605				56,272
		$	7,518,735				6,786,480

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands except per share amounts)
		2009				2008				2007
Premiums and other revenue:
Traditional life and annuity premiums		$	17,043				17,752				19,513
Universal life and annuity contract charges			145,651				133,424				119,677
Net investment income			393,531				273,362				318,137
Other revenues			17,348				12,769				13,683
Net realized investment (losses) gains:
Total other-than-temporary impairment (“OTTI”) losses			(13,847	)			(27,215	)			(67	)
Portion of OTTI losses recognized in other comprehensive income			8,326				-				-
Net OTTI losses recognized in earnings			(5,521	)			(27,215	)			(67	)
Other net investment gains			354				987				3,564
Total net realized investment (losses) gains			(5,167	)			(26,228	)			3,497
Total revenues			568,406				411,079				474,507
Benefits and expenses:
Life and other policy benefits			48,997				39,759				41,326
Amortization of deferred policy acquisition costs and deferred sales inducements			115,163				127,161				88,413
Universal life and annuity contract interest			242,816				138,960				164,391
Other operating expenses			92,192				55,630				55,130
Total benefits and expenses			499,168				361,510				349,260
Earnings before Federal income taxes			69,238				49,569				125,247
Federal income taxes			23,754				15,927				39,876
Net earnings		$	45,484				33,642				85,371
Basic Earnings Per Share:
Class A			12.90				9.54				24.24
Class B			6.45				4.77				12.12
Diluted Earnings Per Share:
Class A			12.87				9.48				23.95
Class B			6.45				4.77				12.12

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
		2009				2008				2007
Net earnings		$	45,484				33,642				85,371
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			82,686				(66,789	)			1,035
Net unrealized liquidity losses			(3,312	)			-				-
Reclassification adjustment for net amounts included in net earnings			2,756				11,866				(3,103	)
Amortization of net unrealized (gains) losses
related to transferred securities			(34	)			(31	)			104
Net unrealized gains (losses) on securities			82,096				(54,954	)			(1,964	)
Foreign currency translation adjustments			(73	)			(112	)			(44	)
Benefit plans:
Amortization of net prior service cost and net gain			1,095				(3,227	)			1,235
Net loss arising during the period			-				-				(2,561	)
Other comprehensive income (loss)			83,118				(58,293	)			(3,334	)
Comprehensive income (loss)		$	128,602				(24,651	)			82,037

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
		2009				2008				2007
Common stock:
Balance at beginning of period		$	3,626				3,622				3,621
Shares exercised under stock option plan			-				4				1
Balance at end of period			3,626				3,626				3,622
Additional paid-in capital:
Balance at beginning of period			36,680				36,236				36,110
Shares exercised under stock option plan			-				444				126
Balance at end of period			36,680				36,680				36,236
Accumulated other comprehensive income (loss):
Unrealized (losses) gains on non-impaired securities:
Balance at beginning of period			(53,770	)			1,184				3,148
Change in unrealized gains (losses) during period			85,409				(54,954	)			(1,964	)
Balance at end of period			31,639				(53,770	)			1,184
Unrealized losses on impaired held to maturity securities:
Balance at beginning of period			-				-				-
Cumulative effect of change in accounting principle (See Note 1)			(507	)			-				-
Amortization			43				-				-
Other-than-temporary impairments			(2,287	)			-				-
Balance at end of period			(2,751	)			-				-
Unrealized losses on impaired available for sale securities:
Balance at beginning of period			-				-				-
Other-than-temporary impairments			(581	)			-				-
Recoveries			19				-				-
Balance at end of period			(562	)			-				-
Foreign currency translation adjustments:
Balance at beginning of period			2,966				3,078				3,122
Change in translation adjustments during period			(73	)			(112	)			(44	)
Balance at end of period			2,893				2,966				3,078
Benefit plan liability adjustment:
Balance at beginning of period			(14,554	)			(11,327	)			(10,001	)
Amortization of net prior service cost and net gain			1,095				(3,227	)			(1,326	)
Balance at end of period			(13,459	)			(14,554	)			(11,327	)
Accumulated other comprehensive income (loss) at end of period			17,760				(65,358	)			(7,065	)

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
		2009				2008				2007
Retained earnings:
Balance at beginning of period			1,011,265				978,892				896,984
Cumulative effect of change in accounting principle, net of tax (See Note 1)			507				-				(2,195	)
Net earnings			45,484				33,642				85,371
Stockholder dividends			(1,269	)			(1,269	)			(1,268	)
Balance at end of period			1,055,987				1,011,265				978,892
Total stockholders' equity		$	1,114,053				986,213				1,011,685

NATIONAL WESTERN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
		2009				2008				2007
Cash flows from operating activities:
Net earnings		$	45,484				33,642				85,371
Adjustments to reconcile net earnings to net cash provided by operating activities:
Universal life and annuity contract interest			242,816				142,707				175,768
Surrender charges and other policy revenues			(54,588	)			(41,027	)			(36,191	)
Realized losses (gains) on investments			4,145				26,228				(3,497	)
Accrual and amortization of investment income			(2,095	)			(4,520	)			(4,693	)
Depreciation and amortization			(502	)			2,292				1,467
(Increase) decrease in value of derivatives			(93,085	)			17,480				56,204
(Increase) decrease in deferred policy acquisition and sales inducement costs			(34,348	)			16,418				(38,151	)
(Increase) decrease in accrued investment income			(6,699	)			162				(642	)
(Increase) decrease in other assets			(8,544	)			(9,394	)			8,378
(Decrease) increase in liabilities for future policy benefits			(4,361	)			(1,142	)			290
Increase in other policyholder liabilities			35,037				11,563				7,951
(Decrease) increase in Federal income tax liability			(23,898	)			2,572				18,893
Increase (decrease) in other liabilities			37,415				(2,108	)			(11,247	)
Other, net			748				(248	)			25
Net cash provided by operating activities			137,525				194,625				259,926
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity			-				-				5,934
Securities available for sale			19,781				1,722				33,616
Other investments			1,920				1,404				5,684
Proceeds from maturities and redemptions of:
Securities held to maturity			958,491				520,839				136,752
Securities available for sale			91,378				206,510				340,681
Derivatives			56,808				53,805				44,047
Purchases of:
Securities held to maturity			(1,245,032	)			(566,764	)			(321,609	)
Securities available for sale			(243,824	)			(218,874	)			(366,238	)
Derivatives			(41,718	)			(58,010	)			(53,073	)
Other investments			(21,245	)			(261	)			(289	)
Principal payments on mortgage loans			11,533				16,609				22,561
Cost of mortgage loans acquired			(21,551	)			(14,239	)			(19,578	)
Decrease in policy loans			941				4,495				3,084
Other, net			-				-				(2,205	)
Net cash used in investing activities			(432,518	)			(52,764	)			(170,633	)

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
		2009				2008				2007
Cash flows from financing activities:
Stockholders dividends		$	(1,269	)			(1,269	)			(1,268	)
Deposits to account balances for universal life and annuity contracts			900,773				472,776				510,647
Return of account balances on universal life and annuity contracts			(563,371	)			(591,114	)			(603,450	)
Issuance of common stock under stock option plan			-				448				127
Net cash provided by (used in) financing activities			336,133				(119,159	)			(93,944	)
Effect of foreign exchange			(70	)			(112	)			(44	)
Net increase (decrease) in cash and short-term investments			41,070				22,590				(4,695	)
Cash and short-term investments at beginning of year			67,796				45,206				49,901
Cash and short-term investments at end of year		$	108,866				67,796				45,206

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	33				41				41
Income taxes			47,659				11,687				19,298
Noncash operating activities:
Deferral of sales inducements			22,917				3,747				11,377

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Deferred policy acquisition costs, beginning of year		$	701,984				664,805				643,964
Policy acquisition costs deferred:
Agents' commissions			121,138				100,254				109,323
Other			5,758				6,742				7,180
Total costs deferred			126,896				106,996				116,503
Amortization of deferred policy acquisition costs			(115,163	)			(127,161	)			(88,413	)
Adjustments for unrealized (gains) losses
on investment securities			(87,277	)			57,344				(3,928	)
Change in accounting principal			-				-				(3,321	)
Deferred policy acquisition costs, end of year		$	626,440				701,984				664,805

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Annuity deposits		$	837,577				410,133				437,765
Universal life insurance deposits			173,167				170,933				168,279
Traditional life and other premiums			19,580				20,698				22,310
Totals		$	1,030,324				601,764				628,354

		2009				2008				2007
		(In thousands)
Net gain from operations		$	140,226				48,853				37,369
Net income			72,944				9,643				32,290
Unassigned surplus			763,134				659,490				672,793
Capital and surplus			817,042				696,574				710,935

		Amounts
		(In thousands)
Write-off of deferred acquisition costs		$	3,321
Adjustment to deferred annuity revenue			56
			3,377
Federal income tax			(1,182	)
Cumulative effect of change in accounting for
internal replacements and investment contracts		$	2,195

(2) DEPOSITS WITH REGULATORY AUTHORITIES

The following assets were on deposit with state and other regulatory authorities as required by law, at the end of each year.

		December 31,
		2009				2008
		(In thousands)
Debt securities held to maturity		$	15,584				13,633
Debt securities available for sale			669				557
Short-term investments			500				500
Totals		$	16,753				14,690

		Held to Maturity
		Less than 12 Months								12 Months or Greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Debt securities:
U.S. Government
agencies		$	69,188				810				-				-				69,188				810
U.S. Treasury			-				-				-				-				-				-
State and political
subdivisions			60,382				954				3,284				100				63,666				1,054
Foreign governments			-				-				-				-				-				-
Public utilities			48,130				308				19,364				589				67,494				897
Corporate bonds			130,981				1,510				236,663				26,294				367,644				27,804
Mortgage-backed			33,917				489				57,337				3,026				91,254				3,515
Home equity			3,030				976				13,815				4,877				16,845				5,853
Manufactured housing			1,341				69				7,423				695				8,764				764
Total temporarily
impaired securities		$	346,969				5,116				337,886				35,581				684,855				40,697

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Available for sale debt securities:
Realized gains on disposal		$	356				1,811				4,830
Realized losses on disposal			(280	)			-				(359	)
Held to maturity debt securities:
Realized gains on redemption			1,628				154				19
Realized losses on redemption			(19	)			-				-
Equity securities realized gains			189				102				250
Real estate			(52	)			-				72
Mortgage loans			(1,461	)			(1,020	)			(1,467	)
Other			(7	)			(60	)			219
Totals		$	354				987				3,564

		Nine Months*
		Ended
		December 31, 2009
Beginning balance, cumulative credit losses related
to other-than-temporary impairments		$	28
Additions for credit losses not previously recognized in
other-than-temporary impairments			299
Ending balance, cumulative credit losses related to
other-than-temporary impairments		$	327

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Income tax expense at statutory rate		$	24,234				17,349				43,837
Dividend received deduction			(1,059	)			(1,155	)			(1,192	)
Tax exempt interest			(1,699	)			(1,374	)			(813	)
Deferred tax liability correction			-				-				(2,389	)
Non deductible salary expense			373				-				-
Tax adjustment on foreign operations			537				422				231
Tax adjustment related to return			408				240				-
Nondeductible insurance			160				134				134
Nondeductible meals			109				139				108
Amortization of LSM Trust			112				111				110
Other			579				61				(150	)
Taxes on earnings from continuing operations		$	23,754				15,927				39,876

Obligations and Funded Status

		December 31,
		2009				2008
		(In thousands)
Changes in projected benefit obligations:
Projected benefit obligations at beginning of year		$	17,764				18,614
Service cost			-				-
Interest cost			1,048				1,036
Plan curtailment			-				-
Actuarial loss (gain)			779				(817	)
Benefits paid			(1,096	)			(1,069	)
Projected benefit obligations at end of year			18,495				17,764
Changes in plan assets:
Fair value of plan assets at beginning of year			12,031				15,226
Actual return on plan assets			1,998				(3,176	)
Contributions			2,139				1,050
Benefits paid			(1,096	)			(1,069	)
Fair value of plan assets at end of year			15,072				12,031
Funded status at end of year		$	(3,423	)			(5,733	)

		December 31,
		2009				2008
		(In thousands)
Amounts recognized in the Company's consolidated
financial statements:
Assets		$	-				-
Liabilities			(3,423	)			(5,733	)
Net amount recognized		$	(3,423	)			(5,733	)

Assumptions

		December 31,
		2009				2008
Weighted-average assumptions used to determine
benefit obligations:
Discount rate			5.75	%			6.00	%
Rate of compensation increase			n/a				n/a

		December 31,
		2009				2008				2007
Weighted-average assumptions used to determine
net periodic benefit cost:
Discount rate			6.00	%			6.00	%			6.00	%
Expected long-term return on plan assets			7.50	%			7.50	%			7.50	%
Rate of compensation increase			n/a				n/a				4.50	%

		December 31, 2009
		Total				Level 1				Level 2				Level 3
		(In thousands)
Cash		$	1,185				1,185				-				-
Equity securities
Domestic			8,219				8,219				-				-
International			539				539				-				-
Debt securities
U.S. government agencies			3,761				-				3,761				-
Corporate bonds			1,350				-				1,350				-
Other			18				18				-				-
Total		$	15,072				9,961				5,111				-

		December 31,
		2009				2008				2007
Asset Category:
Equity securities			58	%			58	%			59	%
Debt securities			34	%			36	%			35	%
Cash and cash equivalents			8	%			6	%			6	%
Total			100	%			100	%			100	%

		Acceptable Range
Asset Category:
Equity securities		55-65%
Debt securities		30-40%
Cash and cash equivalents		0-15%

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2010	$	1,131
2011		1,202
2012		1,232
2013		1,249
2014		1,245
2015-2019		6,381

Obligations and Funded Status

		December 31,
		2009				2008
		(In thousands)
Changes in projected benefit obligations:
Projected benefit obligations at beginning of year		$	20,740				17,104
Service cost			149				586
Interest cost			1,234				1,190
Actuarial loss			1,257				3,764
Benefits paid			(1,982	)			(1,904	)
Projected benefit obligations at end of year			21,398				20,740
Change in plan assets:
Fair value of plan assets at beginning of year			-				-
Contributions			1,982				1,904
Benefits paid			(1,982	)			(1,904	)
Fair value of plan assets at end of year			-				-
Funded status at end of year		$	(21,398	)			(20,740	)

Components of Net Periodic Benefit Cost

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Components of net periodic benefit cost:
Service cost		$	149				586				773
Interest cost			1,233				1,190				962
Amortization of prior service cost			1,039				1,039				1,039
Amortization of net loss			792				707				404
Net periodic benefit cost			3,213				3,522				3,178

2010	$	1,982
2011		1,982
2012		1,982
2013		1,982
2014		1,982
2015-2019		9,908

Assumptions

		December 31,
		2009				2008
Weighted-average assumptions used to determine
benefit obligations:
Discount rate			5.75	%			6.00	%
Expected long-term return on plan assets			n/a				n/a

		2009								2008
		1% Point				1% Point				1% Point				1% Point
		Increase				Decrease				Increase				Decrease
		(In thousands)
Effect on total of service and interest
cost components		$	24				(19	)			20				(27	)
Effect on postretirement benefit obligation		$	445				(351	)			472				(368	)

Contributions

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2010	$	86
2011		93
2012		101
2013		109
2014		117
2015-2019		743

2010	$	212,640
2011		177,200
2012		-
2013 and thereafter		-
Total	$	389,840

(10) STOCKHOLDERS' EQUITY

(A) Changes in Common Stock Shares Outstanding

Details of changes in shares of common stock outstanding are provided below.

		Years Ended December 31,
		2009				2008				2007
		(In thousands)
Common stock shares outstanding:
Shares outstanding at beginning of year			3,626				3,622				3,621
Shares exercised under stock option plan			-				4				1
Shares outstanding at end of year			3,626				3,626				3,622

		December 31,				December 31,
		2009				2008
Expected term of options		2 to 10 years				2 to 10 years
Expected volatility:
Range		28.48% to 80.02%				24.70% to 77.55%
Weighted-average			46.09	%			37.10	%
Expected dividend yield			0.21	%			0.22	%
Risk-free rate:
Range		0.99% to 3.84%				1.44% to 2.40%
Weighted-average			2.49	%			1.94	%

		Years Ended December 31,
		2009								2008								2007
		Class A				Class B				Class A				Class B				Class A				Class B
		(In thousands except per share amounts)
Numerator for Basic and
Diluted Earnings Per Share:
Net income		$	45,484								33,642								85,371
Dividends – Class A
shares			(1,233	)							(1,233	)							(1,232	)
Dividends – Class B
shares			(36	)							(36	)							(36	)
Undistributed income		$	44,215								32,373								84,103
Allocation of net income:
Dividends		$	1,233				36				1,233				36				1,232				36
Allocation of
undistributed
income			42,961				1,254				31,455				918				81,715				2,388
Net income		$	44,194				1,290				32,688				954				82,947				2,424
Denominator:
Basic earnings per
share - weighted-
average shares			3,426				200				3,425				200				3,422				200
Effect of dilutive
stock options			7				-				23				-				42				-
Diluted earnings per
share - adjusted
weighted-average
shares for assumed
conversions			3,433				200				3,448				200				3,464				200
Basic Earnings Per Share		$	12.90				6.45				9.54				4.77				24.24				12.12
Diluted Earnings Per Share		$	12.87				6.45				9.48				4.77				23.95				12.12

		Amounts				Tax				Amounts
		Before				(Expense)				Net of
		Taxes				Benefit				Taxes
		(In thousands)
2009:
Unrealized gains (losses) on securities, net of effects
of deferred costs of $(108,615):
Net unrealized holding gains (losses)
arising during period		$	127,210				(44,524	)			82,686
Unrealized liquidity losses			(5,097	)			1,785				(3,312	)
Reclassification adjustment for net
losses (gains) included in net earnings			4,240				(1,484	)			2,756
Amortization of net unrealized (losses) gains
related to transferred securities			(52	)			18				(34	)
Net unrealized gains (losses) on securities			126,301				(44,205	)			82,096
Foreign currency translation adjustments			(113	)			40				(73	)
Pension liability adjustment			1,685				(590	)			1,095
Other comprehensive income		$	127,873				(44,755	)			83,118

		Domestic				International
		Life				Life								All
		Insurance				Insurance				Annuities				Others				Totals
		(In thousands)
2009:
Selected Balance Sheet Items:
Deferred policy acquisition
costs and sales inducements		$	50,093				207,337				491,242				-				748,672
Total segment assets			383,844				1,056,087				5,955,734				107,581				7,503,246
Future policy benefits			315,430				654,506				5,151,898				-				6,121,834
Other policyholder liabilities			12,021				19,757				97,153				-				128,931
Condensed Income Statements:
Premiums and contract
revenues		$	34,414				104,016				24,264				-				162,694
Net investment income			19,498				44,540				317,703				11,790				393,531
Other revenues			25				68				1,535				15,720				17,348
Total revenues			53,937				148,624				343,502				27,510				573,573
Life and other policy benefits			13,884				19,522				15,666				(75	)			48,997
Amortization of deferred
policy acquisition costs and deferred sale inducement			16,423				41,849				56,891				-				115,163
Universal life and annuity
contract interest			9,014				45,868				187,934				-				242,816
Other operating expenses			13,968				19,048				44,227				14,949				92,192
Federal income taxes			222				7,674				13,324				4,342				25,562
Total expenses			53,511				133,961				318,042				19,216				524,730
Segment earnings		$	426				14,663				25,460				8,294				48,843

		December 31, 2009
		Total				Level 1				Level 2				Level 3
		(In thousands)
Debt securities, available for sale		$	2,036,065				-				2,019,415				16,650
Equity securities, available for sale			14,014				5,536				1,321				7,157
Derivatives			89,915				-				89,915				-
Total assets		$	2,139,994				5,536				2,110,651				23,807
Policyholder account balances (a)		$	88,492				-				88,492				-
Other liabilities (b)			5,373				-				-				5,373
Total liabilities		$	93,865				-				88,492				5,373

			Amount of Gain
			or (Loss)
			Recognized In
Derivatives Not Designated	Location of Gain or (Loss) Recognized		Income on
as Hedging Instruments	In Income on Derivatives		Derivatives
			(In thousands)
Equity index options	Net investment income		$	45,345
Fixed-indexed products	Universal life and annuity contract interest			(69,115	)
			$	(23,770	)

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
		(In thousands except per share data)
2008:
Revenues		$	98,637				113,381				87,960				111,100
Earnings (loss)		$	14,446				18,142				(9,800	)			10,853
Basic earnings (loss) per share:
Class A		$	4.10				5.15				(2.78	)			3.08
Class B		$	2.05				2.57				(1.39	)			1.54
Diluted earnings (loss) per share:
Class A		$	4.07				5.10				(2.78	)			3.06
Class B		$	2.05				2.57				(1.39	)			1.54

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2009 (In thousands)
			(1)			Fair				Balance Sheet
Type of Investment		Cost				Value				Amount
Fixed maturity bonds:
Securities held to maturity:
United States government and government
agencies and authorities		$	105,092				107,133				105,092
States, municipalities, and political subdivisions			140,393				141,718				140,393
Foreign governments			9,963				10,755				9,963
Public utilities			625,661				658,109				625,661
Corporate			1,511,565				1,555,016				1,511,565
Mortgage-backed			1,730,319				1,810,715				1,730,319
Asset-backed			53,668				47,631				53,668
Total securities held to maturity			4,176,661				4,331,077				4,176,661
Securities available for sale:
United States government and government
agencies and authorities			-				-				-
States, municipalities, and political subdivisions			20,490				18,971				18,971
Foreign Government			10,358				11,317				11,317
Public utilities			322,653				338,729				338,729
Corporate			1,349,878				1,409,860				1,409,860
Mortgage-backed			233,841				236,984				236,984
Asset-backed			24,192				20,204				20,204
Total securities available for sale			1,961,412				2,036,065				2,036,065
Total fixed maturity bonds			6,138,073				6,367,142				6,212,726
Equity securities:
Securities available for sale:
Common stocks:
Public utilities			980				1,218				1,218
Banks, trust and insurance companies (2)			40				55				55
Corporate			3,017				3,765				3,765
Preferred stocks			1,721				1,819				1,819
Total equity securities			5,758				6,857				6,857
Derivatives			89,915								89,915
Mortgage loans			98,200								98,200
Policy loans			78,336								78,336
Other long-term investments (3)			32,829								32,829
Total investments other than
investments in related parties		$	6,443,111								6,518,863

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2009, 2008 and 2007
(In thousands)
							(1)
		Balance at				Charged to												Balance at
		Beginning				Costs and												End of
Description		of Period				Expenses				Reductions				Transfers				Period
Valuation accounts deducted
from applicable assets:
Allowance for possible
losses on mortgage loans:
December 31, 2009		$	4,587				446				-				-				5,033
December 31, 2008		$	3,567				1,020				-				-				4,587
December 31, 2007		$	2,100				1,467				-				-				3,567
Allowance for possible
losses on real estate:
December 31, 2009		$	-				-				-				-				-
December 31, 2008		$	-				-				-				-				-
December 31, 2007		$	-				-				-				-				-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NATIONAL WESTERN LIFE INSURANCE COMPANY

(Registrant)

Date: October 22, 2010		/S/Robert L. Moody
		By:  Robert L. Moody, Chairman of the Board and
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature		Title (Capacity)		Date
/S/Robert L. Moody		Chairman of the Board and		October 22, 2010
Robert L. Moody		Chief Executive Officer, and Director
		(Principal Executive Officer)
/S/ Ross R. Moody		President and Chief Operating Officer, and Director		October 22, 2010
Ross R. Moody
/S/ Brian M. Pribyl		Senior Vice President - Chief Financial		October 22, 2010
Brian M. Pribyl		Officer, and Treasurer
		(Principal Financial Officer)
/S/ Thomas F. Kopetic		Vice President, Controller & Assistant Treasurer		October 22, 2010
Thomas F. Kopetic		(Principal Accounting Officer)
/S/Stephen E. Glasgow		Director		October 22, 2010
Stephen E. Glasgow
/S/E. Douglas McLeod		Director		October 22, 2010
E. Douglas McLeod
/S/Charles D. Milos		Director		October 22, 2010
Charles D. Milos
/S/Frances A. Moody-Dahlberg		Director		October 22, 2010
Frances A. Moody-Dahlberg
/S/Russell S. Moody		Director		October 22, 2010
Russell S. Moody
/S/Louis E. Pauls, Jr.		Director		October 22, 2010
Louis E. Pauls, Jr.
/S/E.J. Pederson		Director		October 22, 2010
E.J. Pederson

 

129

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