10-Q
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2016
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________ to __________ |
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Commission File Number: 000-55522 |
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NATIONAL WESTERN LIFE GROUP, INC. |
(Exact name of Registrant as specified in its charter) |
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DELAWARE | 47-3339380 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
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850 EAST ANDERSON LANE | |
AUSTIN, TEXAS 78752-1602 | (512) 836-1010 |
(Address of Principal Executive Offices) | (Telephone Number) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated file" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 5, 2016, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and Class B - 200,000.
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TABLE OF CONTENTS |
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March 31, 2016 (Unaudited) and December 31, 2015 | |
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For the Three Months Ended March 31, 2016 and 2015 (Unaudited) | |
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For the Three Months Ended March 31, 2016 and 2015 (Unaudited) | |
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For the Three Months Ended March 31, 2016 and 2015 (Unaudited) | |
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For the Three Months Ended March 31, 2016 and 2015 (Unaudited) | |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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| (Unaudited) | | |
ASSETS | March 31, 2016 | | December 31, 2015 |
| | | |
Investments: | | | |
Securities held to maturity, at amortized cost (fair value: $7,525,865 and $7,335,436) | $ | 7,195,233 |
| | 7,173,967 |
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Securities available for sale, at fair value (cost: $2,820,091 and $2,847,414) | 2,924,376 |
| | 2,879,583 |
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Mortgage loans, net of allowance for possible losses ($650 and $650) | 110,520 |
| | 108,311 |
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Policy loans | 60,488 |
| | 61,957 |
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Derivatives, index options | 42,179 |
| | 38,409 |
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Other long-term investments | 47,662 |
| | 26,787 |
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| | | |
Total investments | 10,380,458 |
| | 10,289,014 |
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Cash and cash equivalents | 141,571 |
| | 106,007 |
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Deferred policy acquisition costs | 816,523 |
| | 853,451 |
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Deferred sales inducements | 150,080 |
| | 159,166 |
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Accrued investment income | 102,040 |
| | 99,619 |
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Federal income tax receivable | 2,511 |
| | 12,512 |
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Other assets | 90,512 |
| | 92,807 |
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Total assets | $ | 11,683,695 |
| | 11,612,576 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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| (Unaudited) | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | March 31, 2016 | | December 31, 2015 |
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LIABILITIES: | | | |
| | | |
Future policy benefits: | | | |
Universal life and annuity contracts | $ | 9,565,173 |
| | 9,561,358 |
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Traditional life reserves | 137,819 |
| | 138,000 |
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Other policyholder liabilities | 154,199 |
| | 155,261 |
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Deferred Federal income tax liability | 70,798 |
| | 49,333 |
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Other liabilities | 102,450 |
| | 96,638 |
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Total liabilities | 10,030,439 |
| | 10,000,590 |
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COMMITMENTS AND CONTINGENCIES (Note 8) |
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STOCKHOLDERS’ EQUITY: | |
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Common stock: | |
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Class A - $.01 par value; 7,500,000 shares authorized; 3,436,166 issued and outstanding in 2016 and 2015 | 34 |
| | 34 |
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Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2016 and 2015 | 2 |
| | 2 |
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Additional paid-in capital | 41,716 |
| | 41,716 |
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Accumulated other comprehensive income | 24,340 |
| | 329 |
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Retained earnings | 1,587,164 |
| | 1,569,905 |
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Total stockholders’ equity | 1,653,256 |
| | 1,611,986 |
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Total liabilities and stockholders' equity | $ | 11,683,695 |
| | 11,612,576 |
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Note: The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited Consolidated Financial Statements as of that date.
See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
(In thousands, except per share amounts)
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| 2016 | | 2015 |
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Premiums and other revenues: | | | |
Universal life and annuity contract charges | $ | 42,010 |
| | 37,313 |
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Traditional life premiums | 4,173 |
| | 4,347 |
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Net investment income | 95,500 |
| | 99,923 |
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Other revenues | 4,878 |
| | 5,329 |
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Net realized investment gains (losses): | |
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Total other-than-temporary impairment (“OTTI”) gains (losses) | 26 |
| | 160 |
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Portion of OTTI (gains) losses recognized in other comprehensive income | (26 | ) | | (160 | ) |
Net OTTI losses recognized in earnings | — |
| | — |
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Other net investment gains (losses) | 2,381 |
| | 978 |
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Total net realized investment gains (losses) | 2,381 |
| | 978 |
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Total revenues | 148,942 |
| | 147,890 |
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Benefits and expenses: | |
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Life and other policy benefits | 15,601 |
| | 19,266 |
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Amortization of deferred policy acquisition costs | 35,220 |
| | 27,652 |
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Universal life and annuity contract interest | 49,017 |
| | 49,039 |
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Other operating expenses | 23,307 |
| | 20,510 |
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Total benefits and expenses | 123,145 |
| | 116,467 |
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Earnings before Federal income taxes | 25,797 |
| | 31,423 |
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Federal income taxes | 8,538 |
| | 10,097 |
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Net earnings | $ | 17,259 |
| | 21,326 |
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Basic earnings per share: | |
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Class A | $ | 4.88 |
| | $ | 6.03 |
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Class B | $ | 2.44 |
| | $ | 3.02 |
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Diluted earnings per share: | |
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Class A | $ | 4.88 |
| | $ | 6.03 |
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Class B | $ | 2.44 |
| | $ | 3.02 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
(In thousands)
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| 2016 | | 2015 |
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Net earnings | $ | 17,259 |
| | 21,326 |
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Other comprehensive income (loss), net of effects of deferred costs and taxes: | |
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Unrealized gains (losses) on securities: | |
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Net unrealized holding gains (losses) arising during period | 24,646 |
| | 9,372 |
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Net unrealized liquidity gains (losses) | 9 |
| | 61 |
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Reclassification adjustment for net amounts included in net earnings | (460 | ) | | (165 | ) |
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Net unrealized gains (losses) on securities | 24,195 |
| | 9,268 |
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Foreign currency translation adjustments | 99 |
| | 41 |
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Benefit plans: | |
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Amortization of net prior service cost and net gain (loss) | (283 | ) | | (303 | ) |
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Other comprehensive income (loss) | 24,011 |
| | 9,006 |
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Comprehensive income (loss) | $ | 41,270 |
| | 30,332 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2016 and 2015 (Unaudited) (In thousands) |
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| 2016 | | 2015 |
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Common stock: | | | |
Balance at beginning of period | $ | 36 |
| | 3,636 |
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Shares exercised under stock option plan | — |
| | — |
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Balance at end of period | 36 |
| | 3,636 |
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Additional paid-in capital: | |
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Balance at beginning of period | 41,716 |
| | 38,116 |
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Shares exercised under stock option plan | — |
| | — |
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Balance at end of period | 41,716 |
| | 38,116 |
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Accumulated other comprehensive income: | |
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Unrealized gains on non-impaired securities: | |
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Balance at beginning of period | 12,347 |
| | 54,229 |
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Change in unrealized gains (losses) during period, net of tax | 24,186 |
| | 9,207 |
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Balance at end of period | 36,533 |
| | 63,436 |
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Unrealized losses on impaired held to maturity securities: | |
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Balance at beginning of period | (240 | ) | | (1,262 | ) |
Amortization | 17 |
| | 104 |
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Other-than-temporary impairments, non-credit, net of tax | — |
| | — |
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Additional credit loss on previously impaired securities | — |
| | — |
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Change in shadow deferred policy acquisition costs | (8 | ) | | (43 | ) |
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Balance at end of period | (231 | ) | | (1,201 | ) |
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Unrealized losses on impaired available for sale securities: | |
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Balance at beginning of period | (1 | ) | | (1 | ) |
Other-than-temporary impairments, non-credit, net of tax | — |
| | — |
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Change in shadow deferred policy acquisition costs | — |
| | — |
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Recoveries, net of tax | — |
| | — |
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Balance at end of period | (1 | ) | | (1 | ) |
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| Continued on Next Page | |
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NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued) For the Three Months Ended March 31, 2016 and 2015 (Unaudited) (In thousands) |
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| 2016 | | 2015 |
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Foreign currency translation adjustments: | |
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Balance at beginning of period | 2,825 |
| | 2,685 |
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Change in translation adjustments during period | 99 |
| | 41 |
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Balance at end of period | 2,924 |
| | 2,726 |
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Benefit plan liability adjustment: | |
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Balance at beginning of period | (14,602 | ) | | (13,865 | ) |
Amortization of net prior service cost and net loss, net of tax | (283 | ) | | (303 | ) |
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Balance at end of period | (14,885 | ) | | (14,168 | ) |
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Accumulated other comprehensive income at end of period | 24,340 |
| | 50,792 |
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Retained earnings: | | | |
Balance at beginning of period | 1,569,905 |
| | 1,472,782 |
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Net earnings | 17,259 |
| | 21,326 |
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Stockholder dividends | — |
| | — |
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Balance at end of period | 1,587,164 |
| | 1,494,108 |
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Total stockholders' equity | $ | 1,653,256 |
| | $ | 1,586,652 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2016 and 2015 (Unaudited) (In thousands) |
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| 2016 | | 2015 |
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Cash flows from operating activities: | | | |
Net earnings | $ | 17,259 |
| | 21,326 |
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Adjustments to reconcile net earnings to net cash from operating activities: | |
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Universal life and annuity contract interest | 49,017 |
| | 49,039 |
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Surrender charges and other policy revenues | (5,796 | ) | | (3,894 | ) |
Realized (gains) losses on investments | (2,381 | ) | | (978 | ) |
Accretion/amortization of discounts and premiums, investments | (23 | ) | | (4 | ) |
Depreciation and amortization | 1,985 |
| | 841 |
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(Increase) decrease in value of derivatives | 12,901 |
| | 8,287 |
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(Increase) decrease in deferred policy acquisition and sales inducement costs | 11,095 |
| | 2,919 |
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(Increase) decrease in accrued investment income | (2,421 | ) | | (5,418 | ) |
(Increase) decrease in other assets | 188 |
| | (7,227 | ) |
Increase (decrease) in liabilities for future policy benefits | 629 |
| | (129 | ) |
Increase (decrease) in other policyholder liabilities | (1,063 | ) | | 14,168 |
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Increase (decrease) in Federal income taxes liability | 10,001 |
| | (3,294 | ) |
Increase (decrease) in deferred Federal income tax | 8,536 |
| | 8,327 |
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Increase (decrease) in other liabilities | 3,380 |
| | 6,804 |
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Net cash provided by operating activities | 103,307 |
| | 90,767 |
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Cash flows from investing activities: | |
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Proceeds from sales of: | |
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Securities held to maturity | — |
| | — |
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Securities available for sale | 7,693 |
| | 5,752 |
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Other investments | 1,803 |
| | — |
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Proceeds from maturities and redemptions of: | |
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Securities held to maturity | 54,386 |
| | 101,444 |
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Securities available for sale | 72,477 |
| | 48,565 |
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Derivatives, index options | 2,090 |
| | 26,450 |
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Purchases of: | |
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Securities held to maturity | (75,192 | ) | | (271,797 | ) |
Securities available for sale | (49,370 | ) | | (152,742 | ) |
Derivatives, index options | (19,332 | ) | | (19,166 | ) |
Other investments | (21,517 | ) | | (421 | ) |
Net change in short-term investments | — |
| | (14,989 | ) |
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| Continued on Next Page | |
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NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued) For the Three Months Ended March 31, 2016 and 2015 (Unaudited) (In thousands) |
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| 2016 | | 2015 |
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Principal payments on mortgage loans | 13,354 |
| | 6,907 |
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Cost of mortgage loans acquired | (15,542 | ) | | (1,281 | ) |
Decrease (increase) in policy loans | 1,469 |
| | (232 | ) |
Other, net | — |
| | — |
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Net cash used in investing activities | (27,681 | ) | | (271,510 | ) |
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Cash flows from financing activities: | |
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Deposits to account balances for universal life and annuity contracts | 194,091 |
| | 202,472 |
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Return of account balances on universal life and annuity contracts | (234,307 | ) | | (227,744 | ) |
Issuance of common stock under stock option plan | — |
| | — |
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Net cash provided by (used in) financing activities | (40,216 | ) | | (25,272 | ) |
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Effect of foreign exchange | 154 |
| | 41 |
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Net increase (decrease) in cash and cash equivalents | 35,564 |
| | (205,974 | ) |
Cash and cash equivalents at beginning of period | 106,007 |
| | 277,078 |
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Cash and cash equivalents at end of period | $ | 141,571 |
| | $ | 71,104 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |
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Cash paid during the period for: | |
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Interest | $ | 13 |
| | 10 |
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Income taxes | $ | (10,000 | ) | | 5,247 |
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Noncash operating activities: | | | |
Deferral of sales inducements | $ | (2,397 | ) | | (4,680 | ) |
See accompanying notes to condensed consolidated financial statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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(1) | CONSOLIDATION AND BASIS OF PRESENTATION |
On October 1, 2015, National Western Life Insurance Company ("National Western", "NWLIC", or "company") completed its previously announced holding company reorganization. As a result of the reorganization, National Western became a wholly owned subsidiary of National Western Life Group, Inc. ("NWLGI"), a Delaware Corporation, and NWLGI replaced National Western as the publicly held company.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of NWLGI and its subsidiaries (“Company”) as of March 31, 2016, and the results of its operations and its cash flows for the for the three months ended March 31, 2016 and 2015. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. It is recommended that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and are accessible free of charge through the Company's internet site at www.nwlgi.com or the Securities and Exchange Commission internet site at www.sec.gov. The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements as of that date.
Prior to the reorganization, the accompanying consolidated financial statements included the accounts of National Western and its wholly owned subsidiaries: The Westcap Corporation, Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., NWL Services, Inc., NWLSM, Inc., and NWL Financial, Inc. During the fourth quarter of 2015, subsequent to the reorganization, National Western transferred ownership of Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., and NWL Services, Inc. to NWLGI via a dividend transaction resulting in those entities becoming wholly owned subsidiaries of NWLGI.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying condensed consolidated financial statements include (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate.
The table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three months ended March 31, 2016 and 2015.
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Affected Line Item in the Statements of Earnings | | Amount Reclassified From Accumulated Other Comprehensive Income |
| | Three Months Ended March 31, |
| | 2016 | | 2015 |
| | (In thousands) |
| | | | |
Other net investment gains (losses) | | $ | 708 |
| | 254 |
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Net OTTI losses recognized in earnings | | — |
| | — |
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Earnings before Federal income taxes | | 708 |
| | 254 |
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Federal income taxes | | 248 |
| | 89 |
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| | | | |
Net earnings | | $ | 460 |
| | 165 |
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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(2) | NEW ACCOUNTING PRONOUNCEMENTS |
In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this standard during the three month period ended March 31, 2016. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
In January 2016, the FASB released accounting standards update 2016-01 Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. The provisions of this update become effective for interim and annual periods beginning after December 15, 2017. The Company does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.
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.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NWLIC is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on the greater of statutory earnings from operations excluding capital gains or 10% of statutory surplus of the company. The maximum dividend payment which may be made without prior approval in 2016 is $117.1 million. National Western did not declare or pay cash dividends on its common stocks during the three months ended March 31, 2016 and 2015.
As discussed in Note 1, Consolidation and Basis of Presentation, on October 1, 2015, NWLIC completed its previously announced holding company reorganization and became a wholly owned subsidiary of NWLGI. While remaining under the same Colorado Division of Insurance restrictions pertaining to dividend amounts, dividends declared by NWLIC from that date forward are payable entirely to NWLGI as the sole owner of NWLIC.
The reorganization effective October 1, 2015 provided for the conversion of each share of Class A common stock, par value $1.00 per share, and each share of Class B common stock, par value $1.00 per share, of NWLIC issued and outstanding immediately prior to the effective time of the merger, into one duly issued, fully paid and non-assessable share of Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, of NWLGI. Consequently, NWLGI replaced NWLIC as the publicly held company and is the successor issuer to NWLIC.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.
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| Three Months Ended March 31, |
| 2016 | | 2015 |
| Class A | | Class B | | Class A | | Class B |
| (In thousands except per share amounts) |
| | | | | | | |
Numerator for Basic and Diluted Earnings Per Share: | | | | | | | |
Net income | $ | 17,259 |
| | | | 21,326 |
| | |
Dividends - Class A shares | — |
| | | | — |
| | |
Dividends - Class B shares | — |
| | | | — |
| | |
| | | | | | | |
Undistributed income | $ | 17,259 |
| | | | 21,326 |
| | |
| | | | | | | |
Allocation of net income: | |
| | | | |
| | |
Dividends | $ | — |
| | — |
| | — |
| | — |
|
Allocation of undistributed income | 16,771 |
| | 488 |
| | 20,723 |
| | 603 |
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| | | | | | | |
Net income | $ | 16,771 |
| | 488 |
| | 20,723 |
| | 603 |
|
| | | | | | | |
Denominator: | |
| | |
| | |
| | |
|
Basic earnings per share - weighted-average shares | 3,436 |
| | 200 |
| | 3,436 |
| | 200 |
|
Effect of dilutive stock options | 1 |
| | — |
| | 2 |
| | — |
|
| | | | | | | |
Diluted earnings per share - adjusted weighted-average shares for assumed conversions | 3,437 |
| | 200 |
| | 3,438 |
| | 200 |
|
| | | | | | | |
Basic Earnings Per Share | $ | 4.88 |
| | 2.44 |
| | 6.03 |
| | 3.02 |
|
| | | | | | | |
Diluted Earnings Per Share | $ | 4.88 |
| | 2.44 |
| | 6.03 |
| | 3.02 |
|
Stock options that were outstanding during the three months ended March 31, 2016 and 2015, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive, were approximately 20,800 and 21,800, respectively.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(5) | PENSION AND OTHER POSTRETIREMENT PLANS |
| |
(A) | Defined Benefit Pension Plans |
National Western sponsors a qualified defined benefit pension plan covering employees enrolled prior to 2008. The plan provides benefits based on the participants' 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 of 1974 ("ERISA"). On October 19, 2007, National Western's Board of Directors approved an amendment to freeze the pension plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. Fair values of plan assets and liabilities are measured as of the prior December 31 for each respective year. The following table summarizes the components of net periodic benefit cost.
|
| | | | | | |
| Three Months Ended |
| March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Service cost | $ | 26 |
| | 51 |
|
Interest cost | 250 |
| | 246 |
|
Expected return on plan assets | (304 | ) | | (330 | ) |
Amortization of prior service cost | — |
| | 1 |
|
Amortization of net loss | 193 |
| | 196 |
|
| | | |
Net periodic benefit cost | $ | 165 |
| | 164 |
|
The service costs shown in the above table represent plan expenses expected to be paid out of plan assets. Under the clarified rules of the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.
The company's minimum required contribution for the 2016 plan year is $0.2 million. There was no remaining contribution payable for the 2015 plan year as of March 31, 2016. As of March 31, 2016, the company had contributed a total of $0.0 million to the plan for the 2016 plan year.
National Western also sponsors a nonqualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. The pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension obligations under the plan. However, the company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the company has a contingent liability with respect to the plan in the event that a plan participant continues employment with National Western beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the then Chairman of the company. As previously mentioned, these additional obligations are a liability to the company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the Chairman and the President of the company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").
Effective July 1, 2005, National Western established a second nonqualified defined benefit plan for the benefit of the Chairman and the President of the company. This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed nonqualified defined benefit plan, while complying with the requirements of the Act.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the components of net periodic benefit costs for the Chairman and President's nonqualified defined benefit plans.
|
| | | | | | |
| Three Months Ended |
| March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Service cost | $ | 109 |
| | 64 |
|
Interest cost | 265 |
| | 219 |
|
Amortization of prior service cost | 15 |
| | 15 |
|
Amortization of net loss | 501 |
| | 378 |
|
| | | |
Net periodic benefit cost | $ | 890 |
| | 676 |
|
The company expects to contribute $2.0 million to these plans in 2016. As of March 31, 2016, the company has contributed $0.4 million to the plans.
| |
(B) | Defined Benefit Postretirement Healthcare Plans |
National Western sponsors two healthcare plans to provide postretirement benefits to certain fully-vested individuals. The following table summarizes the components of net periodic benefit costs.
|
| | | | | | |
| Three Months Ended |
| March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Interest cost | $ | 30 |
| | 32 |
|
Amortization of prior service cost | 26 |
| | 26 |
|
Amortization of net loss | — |
| | 15 |
|
| | | |
Net periodic benefit cost | $ | 56 |
| | 73 |
|
The company expects to contribute minimal amounts to the plan in 2016.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(6) | SEGMENT AND OTHER OPERATING INFORMATION |
The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information for the quarters ended March 31, 2016 and March 31, 2015 is provided below.
|
| | | | | | | | | | | | | | | |
Selected Segment Information: | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
March 31, 2016 | | | | | | | | | |
Condensed Consolidated Balance Sheet Items: | | | | | | | | | |
Deferred policy acquisition costs and sales inducements | $ | 76,444 |
| | 242,788 |
| | 647,371 |
| | — |
| | 966,603 |
|
Total segment assets | 892,147 |
| | 1,253,574 |
| | 9,103,314 |
| | 284,012 |
| | 11,533,047 |
|
Future policy benefits | 766,900 |
| | 936,857 |
| | 7,999,235 |
| | — |
| | 9,702,992 |
|
Other policyholder liabilities | 15,190 |
| | 12,996 |
| | 126,013 |
| | — |
| | 154,199 |
|
| | | | | | | | | |
Three Months Ended | | | | | | | | | |
|
March 31, 2016 | | | | | | | | | |
|
Condensed Consolidated Income Statements: | | | | | | | | | |
|
Premiums and contract revenues | $ | 7,659 |
| | 32,788 |
| | 5,736 |
| | — |
| | 46,183 |
|
Net investment income | 6,133 |
| | 6,847 |
| | 77,639 |
| | 4,881 |
| | 95,500 |
|
Other revenues | 24 |
| | 36 |
| | 60 |
| | 4,758 |
| | 4,878 |
|
| | | | | | | | | |
Total revenues | 13,816 |
| | 39,671 |
| | 83,435 |
| | 9,639 |
| | 146,561 |
|
| | | | | | | | | |
Life and other policy benefits | 3,621 |
| | 5,168 |
| | 6,812 |
| | — |
| | 15,601 |
|
Amortization of deferred acquisition costs | 2,011 |
| | 5,105 |
| | 28,104 |
| | — |
| | 35,220 |
|
Universal life and annuity contract interest | 3,843 |
| | 5,683 |
| | 39,491 |
| | — |
| | 49,017 |
|
Other operating expenses | 3,575 |
| | 5,526 |
| | 9,590 |
| | 4,616 |
| | 23,307 |
|
Federal income taxes (benefit) | 252 |
| | 5,984 |
| | (185 | ) | | 1,653 |
| | 7,704 |
|
| | | | | | | | | |
Total expenses | 13,302 |
| | 27,466 |
| | 83,812 |
| | 6,269 |
| | 130,849 |
|
| | | | | | | | | |
Segment earnings (loss) | $ | 514 |
| | 12,205 |
| | (377 | ) | | 3,370 |
| | 15,712 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
Selected Segment Information: | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
March 31, 2015 | | | | | | | | | |
Condensed Consolidated Balance Sheet Items: | | | | | | | | | |
Deferred policy acquisition costs and sales inducements | $ | 65,368 |
| | 249,736 |
| | 630,240 |
| | — |
| | 945,344 |
|
Total segment assets | 783,839 |
| | 1,246,906 |
| | 8,988,348 |
| | 259,212 |
| | 11,278,305 |
|
Future policy benefits | 675,837 |
| | 949,876 |
| | 7,916,554 |
| | — |
| | 9,542,267 |
|
Other policyholder liabilities | 13,661 |
| | 17,777 |
| | 121,951 |
| | — |
| | 153,389 |
|
| | | | | | | | | |
Three Months Ended | |
| | |
| | |
| | |
| | |
|
March 31, 2015 | |
| | |
| | |
| | |
| | |
|
Condensed Consolidated Income Statements: | |
| | |
| | |
| | |
| | |
|
Premiums and contract revenues | $ | 6,487 |
| | 30,333 |
| | 4,840 |
| | — |
| | 41,660 |
|
Net investment income | 7,165 |
| | 8,614 |
| | 79,236 |
| | 4,908 |
| | 99,923 |
|
Other revenues | 16 |
| | 86 |
| | 15 |
| | 5,212 |
| | 5,329 |
|
| | | | | | | | | |
Total revenues | 13,668 |
| | 39,033 |
| | 84,091 |
| | 10,120 |
| | 146,912 |
|
| | | | | | | | | |
Life and other policy benefits | 5,113 |
| | 6,205 |
| | 7,948 |
| | — |
| | 19,266 |
|
Amortization of deferred acquisition costs | 3,181 |
| | (650 | ) | | 25,121 |
| | — |
| | 27,652 |
|
Universal life and annuity contract interest | 4,939 |
| | 7,130 |
| | 36,970 |
| | — |
| | 49,039 |
|
Other operating expenses | 3,715 |
| | 5,922 |
| | 6,178 |
| | 4,695 |
| | 20,510 |
|
Federal income taxes (benefit) | (1,051 | ) | | 6,545 |
| | 2,523 |
| | 1,738 |
| | 9,755 |
|
| | | | | | | | | |
Total expenses | 15,897 |
| | 25,152 |
| | 78,740 |
| | 6,433 |
| | 126,222 |
|
| | | | | | | | | |
Segment earnings (loss) | $ | (2,229 | ) | | 13,881 |
| | 5,351 |
| | 3,687 |
| | 20,690 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.
|
| | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Premiums and Other Revenues: | | | |
Premiums and contract revenues | $ | 46,183 |
| | 41,660 |
|
Net investment income | 95,500 |
| | 99,923 |
|
Other revenues | 4,878 |
| | 5,329 |
|
Realized gains (losses) on investments | 2,381 |
| | 978 |
|
| | | |
Total condensed consolidated premiums and other revenues | $ | 148,942 |
| | 147,890 |
|
|
| | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Federal Income Taxes: | | | |
Total segment Federal income taxes | $ | 7,704 |
| | 9,755 |
|
Taxes on realized gains (losses) on investments | 834 |
| | 342 |
|
| | | |
Total condensed consolidated Federal income taxes | $ | 8,538 |
| | 10,097 |
|
|
| | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Net Earnings: | | | |
Total segment earnings | $ | 15,712 |
| | 20,690 |
|
Realized gains (losses) on investments, net of taxes | 1,547 |
| | 636 |
|
| | | |
Total condensed consolidated net earnings | $ | 17,259 |
| | 21,326 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | |
| March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Assets: | | | |
Total segment assets | $ | 11,533,047 |
| | 11,278,305 |
|
Other unallocated assets | 150,648 |
| | 183,698 |
|
| | | |
Total condensed consolidated assets | $ | 11,683,695 |
| | 11,462,003 |
|
The Company had a stock and incentive plan ("1995 Plan") which provided for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and nonqualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock or restricted stock units; and, (4) performance awards. The 1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010. The number of shares of Class A, $1.00 par value, common stock which were allowed to be issued under the 1995 Plan, or as to which stock appreciation rights ("SARs") or other awards were allowed to be granted, could not exceed 300,000. Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A, $0.01 par value, common stock shares eligible for issue not to exceed 300,000. These plans were assumed by NWLGI from National Western pursuant to the terms of the reorganization.
All of the employees of the Company and its subsidiaries are eligible to participate in the current 2008 Plan. In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. Employee grants vest 20% annually following three years of service following the grant date. Directors' grants vest 20% annually following one year of service from the date of grant.
Effective during March 2006, the Company adopted and implemented a limited stock buy-back program with respect to the 1995 Plan which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the 1995 Plan; however, the program necessitated a change in accounting from the equity classification to the liability classification. In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan.
On February 17, 2016, the Company granted 14,643 SARs to officers of National Western at the closing market price per Class A common share of $216.48. These SARs, unlike prior grants, will vest annually at a rate of 33.3% per year from the date of grant. No stock option or SAR awards were issued during the first three months of 2015.
While not previously utilized, the 2008 Plan allows for certain other share or unit awards which are solely paid out in cash based on the value of the Company's shares, or changes therein, as well as the financial performance of the Company under pre-determined target performance metrics. Certain awards, such as restricted stock units (RSUs) provide solely for cash settlement based upon the market price of the Company's Class A commons shares, often referred to as "phantom stock-based awards". Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liability awards is remeasured at the end of each reporting period based on the change in fair value of a share. The liability and corresponding expense are adjusted accordingly until the award is settled. Other awards may involve performance share units (PSUs) which are units granted at a specified dollar amount per unit, typically linked to the Company's Class A common share price, that are subsequently multiplied by an attained performance factor to derive the number of PSUs to be paid as cash compensation at the vesting date.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On February 17, 2016, the Company granted 5,727 performance stock units and 3,661 restricted stock units to officers of National Western based upon the closing market price per Class A common share of $216.48. Both the PSUs and RSUs vest three years from the date of grant. The RSUs are payable in cash at the vesting date equal to the closing price of the Company's Class A common share at that time. For PSUs, the performance period begins the first day of the calendar year, in this case January 1, 2016, and runs three years. At that time, the three-year performance outcome will be measured against the pre-defined target amounts to determine the number of PSUs earned as compensation.
The Company uses the current fair value method to measure compensation cost. As of March 31, 2016 and 2015, the liability balance was $6.2 million and $8.4 million, respectively. A summary of shares available for grant and activity is detailed below.
|
| | | | | | | | | |
| | | Options Outstanding |
| Shares Available For Grant | | Shares | | Weighted- Average Exercise Price |
| | | | | |
Stock Options: | | | | | |
Balance at January 1, 2016 | 291,000 |
| | 27,768 |
| | $ | 243.26 |
|
Exercised | — |
| | — |
| | $ | — |
|
Forfeited | — |
| | — |
| | $ | — |
|
Expired | — |
| | — |
| | $ | — |
|
Stock options granted | — |
| | — |
| | $ | — |
|
| | | | | |
Balance at March 31, 2016 | 291,000 |
| | 27,768 |
| | $ | 243.26 |
|
|
| | | | | | | | |
| Liability Awards |
| SAR | | RSU | | PSU |
| | | | | |
Balance at January 1, 2016 | 86,261 |
| | — |
| | — |
|
Exercised | (275 | ) | | — |
| | — |
|
Forfeited | — |
| | — |
| | — |
|
Granted | 14,643 |
| | 3,661 |
| | 5,727 |
|
| | | | | |
Balance at March 31, 2016 | 100,629 |
| | 3,661 |
| | 5,727 |
|
Stock options and SARs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants prior to their termination from the Company. Forfeited stock options during the three months ended March 31, 2016 were awarded under the 1995 Plan. As the 1995 Plan terminated during calendar year 2010, the forfeited shares are not shown as being added back to the "Shares Available For Grant" balance.
The total intrinsic value of SARs exercised was $0.1 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively. The total share-based liabilities paid for the exercised SARs were $0 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively. The total fair value of stock options and SARs vested during the three months ended March 31, 2016 and 2015 was $0.6 million and $0.3 million, respectively. For the three months ended March 31, 2016 and 2015, the total cash received from the exercise of stock options under the Plans was $0 million and $0 million, respectively.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes information about stock options and SARs outstanding at March 31, 2016.
|
| | | | | | | | | | |
| | Options/SARs Outstanding |
| | Number Outstanding | | Weighted- Average Remaining Contractual Life | | Number Exercisable |
| | | | | | |
Exercise prices: | | | | | |
255.13 (options) | | 20,768 |
| | 2.1 years | | 20,768 |
|
208.05 (options) | | 7,000 |
| | 2.2 years | | 7,000 |
|
114.64 (SARs) | | 23,268 |
| | 2.9 years | | 23,268 |
|
132.56 (SARs) | | 28,218 |
| | 5.7 years | | 13,508 |
|
210.22 (SARs) | | 34,500 |
| | 7.7 years | | 3,600 |
|
216.48 (SARs) | | 14,643 |
| | 9.9 years | | — |
|
| | | | | | |
Totals | | 128,397 |
| | | | 68,144 |
|
| |
| | | | |
|
Aggregate intrinsic value (in thousands) | $ | 6,536 |
| | | | $ | 4,255 |
|
The aggregate intrinsic value in the table above is based on the closing stock price of $230.63 per share on March 31, 2016.
In estimating the fair value of the share based awards outstanding at March 31, 2016 and December 31, 2015, the Company employed the Black-Scholes option pricing model with assumptions detailed below.
|
| | | | | |
| March 31, 2016 | | December 31, 2015 |
| | | |
Expected term of options | 2.0 to 9.9 years |
| | 2.3 to 8.0 years |
|
Expected volatility: | | | |
Range | 21.95% to 25.44% |
| | 21.11% to 37.77% |
|
Weighted-average | 23.57 | % | | 23.89 | % |
Expected dividend yield | 0.16 | % | | 0.14 | % |
Risk-free rate: | | | |
Range | 0.53% to 1.22% |
| | 0.22% to 1.67% |
|
Weighted-average | 0.67 | % | | 0.63 | % |
The Company reviewed the contractual term relative to the options as well as perceived future behavior patterns of exercise. Volatility is based on the Company’s historical volatility over the expected term of the option’s expected exercise date.
The pre-tax compensation cost (benefit) recognized in the financial statements related to the two plans defined above was $(1.5) million and $(0.8) million for the three months ended March 31, 2016 and 2015, respectively. The related tax (expense)/benefit recognized was $0.5 million and $0.3 million for the three months ended March 31, 2016 and 2015, respectively.
As of March 31, 2016, the total compensation cost related to nonvested share based awards not yet recognized was $3.8 million. This amount is expected to be recognized over a weighted-average period of 2.0 years. The Company recognizes compensation cost over the graded vesting periods.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(8) | COMMITMENTS AND CONTINGENCIES |
(A) Legal Proceedings
In the normal course of business, the Company is involved or may become involved in various legal actions in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. In recent years, carriers offering life insurance and annuity products have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices, and similar claims. Given the uncertainty involved in these types of actions, the ability to make a reliable evaluation of the likelihood of an unfavorable outcome or an estimate of the amount of or range of potential loss is endemic to the particular circumstances and evolving developments of each individual matter on its own merits.
On October 26, 2011 the Brazilian Superintendence of Private Insurance (“SUSEP”) attempted to serve National Western with a subpoena regarding an administrative proceeding initiated by SUSEP in which it alleged that National Western was operating as an insurance company in Brazil without due authorization. National Western had been informed that SUSEP was attempting to impose a penal fine, based on currency exchange rates at that time, of approximately $6.0 billion on the company. SUSEP unsuccessfully attempted to serve National Western with notice regarding this matter. National Western does not transact business in Brazil and has no officers, employees, property, or assets in Brazil. National Western believes that SUSEP has no jurisdiction over the company, that SUSEP's attempts at service of process were invalid, and that any penal fine would be unenforceable. In addition, a new law recently enacted in Brazil would limit the amount of any penal fine to 3 million reais (approximately $800,000 based on current exchange rates). For the reasons described above, the Company does not believe that this matter meets the definition of a material pending legal proceeding as such term is defined in Item 103 of Regulation S-K but has included the foregoing description solely due to the purported amount of the fine sought at that time. Nonetheless, National Western is in discussions with SUSEP in an effort to resolve this matter. No conclusion can be drawn at this time as to the outcome of these discussions, or whether they will continue, or how any such outcome may impact the Company’s business, results of operations, or financial condition. However, in light of the pendency of discussions with Brazilian authorities, National Western has ceased accepting new applications from residents in Brazil.
National Western was the named defendant in the case of Damaris Maldonado Vinas, et al. vs. National Western Life Insurance, in which the plaintiffs, after National Western had paid the death benefits to the beneficiary (Francisco Iglesias-Alvarez) upon the annuitant’s (Carlos Iglesias-Alvarez) death, sought to annul two annuity policies issued by National Western at the behest of Carlos Iglesias-Alvarez and which named Francisco Iglesias-Alvarez as their beneficiary. On March 31, 2016, the United States District Court for the District of Puerto Rico (the “Court”) issued its Opinion and Order on the pending Motions for Summary Judgment submitted by the parties, and therein denied National Western’s motion and granted plaintiffs’ motion voiding the two annuities and requesting a refund of the premiums paid $(2.9) million. National Western vigorously defended the case and believes that the Court’s Opinion and Order is contrary to applicable law. As such, National Western filed a Motion for Reconsideration of Opinion and Order and Corresponding Judgment with the Court on April 27, 2016, and if unsuccessful National Western intends to appeal the judgment.
Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from such other potential, pending, or threatened legal actions will have a material adverse effect on the financial condition or operating results of the Company.
Separately, the Brazilian authorities have commenced an investigation into possible violations of Brazilian criminal law in connection with the issuance of National Western insurance policies to Brazilian residents, and in assistance of such investigation a Commissioner appointed by the U.S. District Court for the Western District of Texas has issued a subpoena upon the company to provide information relating to such possible violations. No conclusion can be drawn at this time as to its outcome or how such outcome may impact the Company’s business, results of operations, or financial condition. National Western is cooperating with the relevant governmental authorities in regard to this matter.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(B) Financial Instruments
In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.
The Company had $25.9 million commitments to fund new loans and $2.9 million commitments on existing loans to extend credit relating to loans at March 31, 2016. The Company evaluates each customer's creditworthiness on a case-by-case basis.
| |
(A) | Investment Gains and Losses |
The table below presents realized investment gains and losses, excluding impairment losses, for the periods indicated.
|
| | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In thousands) |
| | | |
Available for sale debt securities: | | | |
Realized gains on disposal | $ | 677 |
| | 213 |
|
Realized losses on disposal | (6 | ) | | (9 | ) |
Held to maturity debt securities: | | | |
Realized gains on disposal | 489 |
| | 724 |
|
Realized losses on disposal | (106 | ) | | — |
|
Equity securities realized gains (losses) | 37 |
| | 50 |
|
Real estate gains (losses) | 1,290 |
| | — |
|
Other | — |
| | — |
|
| | | |
Totals | $ | 2,381 |
| | 978 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company uses the specific identification method in computing realized gains and losses. For the three months ended March 31, 2016 and 2015 the percentage of gains on bonds due to the call of securities was 36% and 75%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities.
The table below presents net impairment losses recognized in earnings for the periods indicated.
|
| | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2016 | | 2015 |
| | (In thousands) |
| | | | |
Total other-than-temporary impairment gains (losses) on debt securities | | $ | 26 |
| | 160 |
|
Portion of loss (gain) recognized in comprehensive income | | (26 | ) | | (160 | ) |
| | | | |
Net impairment losses on debt securities recognized in earnings | | — |
| | — |
|
Equity securities impairments | | — |
| | — |
|
| | | | |
Totals | | $ | — |
| | — |
|
The table below presents a roll forward of credit losses on securities for which the Company also recorded non-credit other-than-temporary impairments in other comprehensive loss.
|
| | | | | | |
| For the Three Months Ended March 31, 2016 | | For the Year Ended December 31, 2015 |
| (In thousands) |
| | | |
Beginning balance, cumulative credit losses related to other-than-temporary impairments | $ | 2,278 |
| | 2,298 |
|
Reductions for securities sold during current period | (629 | ) | | (20 | ) |
Additions for credit losses not previously recognized in other-than-temporary impairments | — |
| | — |
|
| | | |
Ending balance, cumulative credit losses related to other-than-temporary impairments | $ | 1,649 |
| | 2,278 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(B) | Debt and Equity Securities |
The table below presents amortized costs and fair values of securities held to maturity at March 31, 2016.
|
| | | | | | | | | | | | |
| Securities Held to Maturity |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
| | | | | | | |
Debt securities: | | | | | | | |
U.S. agencies | $ | 10,015 |
| | 183 |
| | — |
| | 10,198 |
|
U.S. Treasury | 1,928 |
| | 342 |
| | — |
| | 2,270 |
|
States and political subdivisions | 441,630 |
| | 37,605 |
| | (26 | ) | | 479,209 |
|
Public utilities | 1,094,032 |
| | 63,064 |
| | (2,326 | ) | | 1,154,770 |
|
Corporate | 4,159,049 |
| | 177,686 |
| | (33,112 | ) | | 4,303,623 |
|
Residential mortgage-backed | 1,475,990 |
| | 85,835 |
| | (421 | ) | | 1,561,404 |
|
Home equity | 10,639 |
| | 1,618 |
| | — |
| | 12,257 |
|
Manufactured housing | 1,950 |
| | 184 |
| | — |
| | 2,134 |
|
| | | | | | | |
Totals | $ | 7,195,233 |
| | 366,517 |
| | (35,885 | ) | | 7,525,865 |
|
The table below presents amortized costs and fair values of securities available for sale at March 31, 2016.
|
| | | | | | | | | | | | |
| Securities Available for Sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
| | | | | | | |
Debt securities: | | | | | | | |
States and political subdivisions | $ | 584 |
| | — |
| | (20 | ) | | 564 |
|
Foreign governments | 9,949 |
| | 636 |
| | — |
| | 10,585 |
|
Public utilities | 162,228 |
| | 7,879 |
| | (996 | ) | | 169,111 |
|
Corporate | 2,586,105 |
| | 113,956 |
| | (25,493 | ) | | 2,674,568 |
|
Residential mortgage-backed | 33,606 |
| | 3,183 |
| | (35 | ) | | 36,754 |
|
Home equity | 13,050 |
| | 357 |
| | (31 | ) | | 13,376 |
|
Manufactured housing | 931 |
| | 21 |
| | — |
| | 952 |
|
| 2,806,453 |
| | 126,032 |
| | (26,575 | ) | | 2,905,910 |
|
| | | | | | | |
Equity securities | 13,638 |
| | 5,032 |
| | (204 | ) | | 18,466 |
|
| | | | | | | |
Totals | $ | 2,820,091 |
| | 131,064 |
| | (26,779 | ) | | 2,924,376 |
|
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below presents amortized costs and fair values of securities held to maturity at December 31, 2015.
|
| | | | | | | | | | | | |
| Securities Held to Maturity |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
| | | | | | | |
Debt securities: | | | | | | | |
U.S. agencies | $ | 15,019 |
| | 275 |
| | — |
| | 15,294 |
|
U.S. Treasury | 1,927 |
| | 317 |
| | — |
| | 2,244 |
|
States and political subdivisions | 435,941 |
| | 29,129 |
| | (662 | ) | | 464,408 |
|
Public utilities | 1,044,063 |
| | 42,271 |
| | (6,621 | ) | | 1,079,713 |
|
Corporate | 4,160,628 |
| | 114,920 |
| | (72,913 | ) | | 4,202,635 |
|
Residential mortgage-backed | 1,503,021 |
| | 59,013 |
| | (6,227 | ) | | 1,555,807 |
|
Home equity | 11,047 |
| | 1,701 |
| | — |
| | 12,748 |
|
Manufactured housing | 2,321 |
| | 266 |
| | — |
| | 2,587 |
|
| | | | | | | |
Totals | $ | 7,173,967 |
| | 247,892 |
| | (86,423 | ) | | 7,335,436 |
|
The table below presents amortized costs and fair values of securities available for sale at December 31, 2015.
|
| | | | | | | | | | | | |
| Securities Available for Sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| (In thousands) |
| | | | | | | |
Debt securities: | | | | | | | |
States and political subdivisions | $ | 586 |
| | — |
| | (34 | ) | | 552 |
|
Foreign governments | 9,947 |
| | 408 |
| | — |
| | 10,355 |
|
Public utilities | 129,980 |
| | 5,354 |
| | (775 | ) | | 134,559 |
|
Corporate | 2,635,536 |
| | 73,132 |
| | (54,503 | ) | | 2,654,165 |
|
Residential mortgage-backed | 36,463 |
| | 3,103 |
| | — |
| | 39,566 |
|
Home equity | 20,123 |
| | 825 |
| | (12 | ) | | 20,936 |
|
Manufactured housing | |