Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
 
Commission File Number: 000-55522
 
 
NATIONAL WESTERN LIFE GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
DELAWARE
47-3339380
(State of Incorporation)
(I.R.S. Employer Identification Number)
 
 
850 EAST ANDERSON LANE
 
AUSTIN, TEXAS 78752-1602
(512) 836-1010
(Address of Principal Executive Offices)
(Telephone Number)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes 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 August 4, 2016, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and  Class B - 200,000.




TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
June 30, 2016 (Unaudited) and December 31, 2015
 
 
For the Three Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
For the Three Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
For the Six Months Ended June 30, 2016 and 2015 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
(Unaudited)
 
 
ASSETS
June 30,
2016
 
December 31,
2015
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,634,961 and $7,335,436)
$
7,177,135

 
7,173,967

Securities available for sale, at fair value (cost: $2,863,039 and $2,847,414)
3,030,659

 
2,879,583

Mortgage loans, net of allowance for possible losses ($650 and $650)
130,677

 
108,311

Policy loans
60,587

 
61,957

Derivatives, index options
63,319

 
38,409

Other long-term investments
48,056

 
26,787

Short-term investments
69,255

 
—

 
 
 
 
Total investments
10,579,688

 
10,289,014

 
 
 
 
Cash and cash equivalents
93,981

 
106,007

Deferred policy acquisition costs
794,406

 
853,451

Deferred sales inducements
141,103

 
159,166

Accrued investment income
98,963

 
99,619

Federal income tax receivable
—

 
12,512

Other assets
93,076

 
92,807

 
 
 
 
Total assets
$
11,801,217

 
11,612,576


See accompanying notes to condensed consolidated financial statements (unaudited).

3
Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
June 30,
2016
 
December 31,
2015
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,622,852

 
9,561,358

Traditional life reserves
136,469

 
138,000

Other policyholder liabilities
149,301

 
155,261

Deferred Federal income tax liability
83,413

 
49,333

Federal income tax payable
9,938

 
—

Other liabilities
98,835

 
96,638

 
 
 
 
Total liabilities
10,100,808

 
10,000,590

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $.01 par value; 7,500,000 shares authorized; 3,436,166 issued and outstanding in 2016 and 2015
34

 
34

Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2016 and 2015
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income
45,207

 
329

Retained earnings
1,613,450

 
1,569,905

 
 
 
 
Total stockholders’ equity
1,700,409

 
1,611,986

 
 
 
 
Total liabilities and stockholders' equity
$
11,801,217

 
11,612,576


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).


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands, except per share amounts)
 
2016
 
2015
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
41,448

 
38,345

Traditional life premiums
4,917

 
5,162

Net investment income
113,251

 
102,259

Other revenues
4,696

 
5,194

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
27

 
(2
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(27
)
 
(105
)
Net OTTI losses recognized in earnings
—

 
(107
)
Other net investment gains (losses)
2,782

 
4,365

Total net realized investment gains (losses)
2,782

 
4,258

 
 
 
 
Total revenues
167,094

 
155,218

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
15,540

 
16,120

Amortization of deferred policy acquisition costs
28,966

 
28,070

Universal life and annuity contract interest
62,799

 
49,431

Other operating expenses
19,403

 
18,802

 
 
 
 
Total benefits and expenses
126,708

 
112,423

 
 
 
 
Earnings before Federal income taxes
40,386

 
42,795

 
 
 
 
Federal income taxes
14,100

 
13,937

 
 
 
 
Net earnings
$
26,286

 
28,858

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
7.43

 
$
8.16

Class B
$
3.72

 
$
4.08

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
7.43

 
$
8.16

Class B
$
3.72

 
$
4.08


See accompanying notes to condensed consolidated financial statements (unaudited).


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands, except per share amounts)
 
2016
 
2015
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
83,458

 
75,658

Traditional life premiums
9,090

 
9,509

Net investment income
208,751

 
202,182

Other revenues
9,574

 
10,523

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
53

 
158

Portion of OTTI (gains) losses recognized in other comprehensive income
(53
)
 
(265
)
Net OTTI losses recognized in earnings
—

 
(107
)
Other net investment gains (losses)
5,163

 
5,343

Total net realized investment gains (losses)
5,163

 
5,236

 
 
 
 
Total revenues
316,036

 
303,108

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
31,141

 
35,386

Amortization of deferred policy acquisition costs
64,186

 
55,722

Universal life and annuity contract interest
111,816

 
98,470

Other operating expenses
42,710

 
39,312

 
 
 
 
Total benefits and expenses
249,853

 
228,890

 
 
 
 
Earnings before Federal income taxes
66,183

 
74,218

 
 
 
 
Federal income taxes
22,638

 
24,034

 
 
 
 
Net earnings
$
43,545

 
50,184

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
12.31

 
$
14.19

Class B
$
6.16

 
$
7.10

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
12.31

 
$
14.19

Class B
$
6.16

 
$
7.10

 
 
 
 

See accompanying notes to condensed consolidated financial statements (unaudited).



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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Net earnings
$
26,286

 
28,858

 
 
 
 
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
21,457

 
(21,202
)
Net unrealized liquidity gains (losses)
9

 
32

Reclassification adjustment for net amounts included in net earnings
(113
)
 
(1,855
)
 
 
 
 
Net unrealized gains (losses) on securities
21,353

 
(23,025
)
 
 
 
 
Foreign currency translation adjustments
(203
)
 
(53
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(284
)
 
(304
)
 
 
 
 
Other comprehensive income (loss)
20,866

 
(23,382
)
 
 
 
 
Comprehensive income (loss)
$
47,152

 
5,476


See accompanying notes to condensed consolidated financial statements (unaudited).


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Net earnings
$
43,545

 
50,184

 
 
 
 
Other comprehensive income, net of effects of deferred costs and taxes:
 

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
46,103

 
(11,830
)
Net unrealized liquidity gains (losses)
18

 
93

Reclassification adjustment for net amounts included in net earnings
(573
)
 
(2,020
)
 
 
 
 
Net unrealized gains (losses) on securities
45,548

 
(13,757
)
 
 
 
 
Foreign currency translation adjustments
(103
)
 
(12
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(567
)
 
(607
)
 
 
 
 
Other comprehensive income (loss)
44,878

 
(14,376
)
 
 
 
 
Comprehensive income (loss)
$
88,423

 
35,808

 
 
 
 

See accompanying notes to condensed consolidated financial statements (unaudited).


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
36

 
3,636

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
36

 
3,636

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
41,716

 
38,116

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
41,716

 
38,116

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
12,347

 
54,229

Change in unrealized gains (losses) during period, net of tax
45,530

 
(13,850
)
 
 
 
 
   Balance at end of period
57,877

 
40,379

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(240
)
 
(1,262
)
Amortization
34

 
172

Other-than-temporary impairments, non-credit, net of tax
—

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(16
)
 
(79
)
 
 
 
 
   Balance at end of period
(222
)
 
(1,169
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(1
)
 
(1
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Change in shadow deferred policy acquisition costs
—

 
—

Recoveries, net of tax
—

 
—

 
 
 
 
  Balance at end of period
(1
)
 
(1
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,825

 
2,685

Change in translation adjustments during period
(103
)
 
(12
)
 
 
 
 
  Balance at end of period
2,722

 
2,673

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(14,602
)
 
(13,865
)
Amortization of net prior service cost and net loss, net of tax
(567
)
 
(607
)
 
 
 
 
  Balance at end of period
(15,169
)
 
(14,472
)
 
 
 
 
Accumulated other comprehensive income at end of period
45,207

 
27,410

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,569,905

 
1,472,782

   Net earnings
43,545

 
50,184

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,613,450

 
1,522,966

 
 
 
 
Total stockholders' equity
$
1,700,409

 
$
1,592,128


See accompanying notes to condensed consolidated financial statements (unaudited).



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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
43,545

 
50,184

Adjustments to reconcile net earnings to net cash from operating activities:
 

 
 

Universal life and annuity contract interest
111,816

 
98,470

Surrender charges and other policy revenues
(11,782
)
 
(8,302
)
Realized (gains) losses on investments
(5,163
)
 
(5,236
)
Accretion/amortization of discounts and premiums, investments
4

 
102

Depreciation and amortization
4,012

 
1,671

(Increase) decrease in value of derivatives
10,806

 
17,069

(Increase) decrease in deferred policy acquisition and sales inducement costs
11,677

 
(2,190
)
(Increase) decrease in accrued investment income
656

 
(3,311
)
(Increase) decrease in other assets
(3,373
)
 
(6,938
)
Increase (decrease) in liabilities for future policy benefits
(533
)
 
2,588

Increase (decrease) in other policyholder liabilities
(5,960
)
 
4,558

Increase (decrease) in Federal income taxes liability
22,450

 
(10,882
)
Increase (decrease) in deferred Federal income tax
9,914

 
15,735

Increase (decrease) in other liabilities
(2,605
)
 
4,658

 
 
 
 
Net cash provided by operating activities
185,464

 
158,176

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
—

Securities available for sale
7,966

 
13,131

Other investments
3,712

 
—

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
188,498

 
257,063

Securities available for sale
98,929

 
163,057

Derivatives, index options
2,090

 
64,619

Purchases of:
 

 
 

Securities held to maturity
(185,189
)
 
(534,663
)
Securities available for sale
(122,013
)
 
(310,637
)
Derivatives, index options
(38,376
)
 
(40,977
)
Other investments
(23,231
)
 
(420
)
Net change in short-term investments
(69,255
)
 
—

 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
16,254

 
18,962

Cost of mortgage loans acquired
(38,550
)
 
(1,632
)
Decrease (increase) in policy loans
1,370

 
1,712

 
 
 
 
 
 
 
 
Net cash used in investing activities
(157,795
)
 
(369,785
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
429,101

 
452,124

Return of account balances on universal life and annuity contracts
(468,639
)
 
(445,871
)
 
 
 
 
Net cash provided by (used in) financing activities
(39,538
)
 
6,253

 
 
 
 
Effect of foreign exchange
(157
)
 
(12
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(12,026
)
 
(205,368
)
Cash and cash equivalents at beginning of period
106,007

 
277,078

 
 
 
 
Cash and cash equivalents at end of period
$
93,981

 
$
71,710

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
23

 
20

Income taxes
$
(10,000
)
 
22,647

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(5,366
)
 
(6,895
)

See accompanying notes to condensed consolidated financial statements (unaudited).



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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(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 June 30, 2016, and the results of its operations and its cash flows for the three and six months ended June 30, 2016 and 2015. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 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 and six months ended June 30, 2016 and 2015.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
174

 
2,961

 
882

 
3,215

Net OTTI losses recognized in earnings
 
—

 
(107
)
 
—

 
(107
)
Earnings before Federal income taxes
 
174

 
2,854

 
882

 
3,108

Federal income taxes
 
61

 
999

 
309

 
1,088

 
 
 
 
 
 
 
 
 
Net earnings
 
$
113

 
1,855

 
573

 
2,020



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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(2)
 NEW ACCOUNTING PRONOUNCEMENTS

In June 2014, the Financial Accounting Standards Board ("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.  
In June 2016, the FASB released accounting standards update 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.


(3)
 STOCKHOLDERS' EQUITY

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 six months ended June 30, 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.


14
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator. Net income for the periods shown is allocated between Class A shares and Class B shares based upon (1) the proportionate number of shares issued and outstanding as of the end of the period, and (2) the per share share dividend rights of the two classes under the Company's Restated Certificate of Incorporation (the Class B dividend per share is equal to one-half the Class A dividend per share).
 
Three Months Ended June 30,
 
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
$
26,286

 
 
 
28,858

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
26,286

 
 
 
28,858

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
25,543

 
743

 
28,042

 
816

 
 
 
 
 
 
 
 
Net income
$
25,543

 
743

 
28,042

 
816

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,436

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
1

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,436

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
7.43

 
3.72

 
8.16

 
4.08

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
7.43

 
3.72

 
8.16

 
4.08


Stock options that were outstanding during the three months ended June 30, 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 20,800, respectively.

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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
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
$
43,545

 
 
 
50,184

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
43,545

 
 
 
50,184

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
42,313

 
1,232

 
48,765

 
1,419

 
 
 
 
 
 
 
 
Net income
$
42,313

 
1,232

 
48,765

 
1,419

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,436

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
1

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,436

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
12.31

 
6.16

 
14.19

 
7.10

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
12.31

 
6.16

 
14.19

 
7.10


Stock options that were outstanding during the six months ended June 30, 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 21,300, respectively.


16
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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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
27

 
51

 
53

 
102

Interest cost
250

 
246

 
500

 
492

Expected return on plan assets
(304
)
 
(330
)
 
(608
)
 
(660
)
Amortization of prior service cost
—

 
1

 
—

 
2

Amortization of net loss
193

 
196

 
386

 
392

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
166

 
164

 
331

 
328


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 June 30, 2016. As of June 30, 2016, the company had contributed a total of $0.1 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 then 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 then 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.


17
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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 then Chairman and President's nonqualified defined benefit plans.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
109

 
64

 
218

 
128

Interest cost
264

 
219

 
529

 
438

Amortization of prior service cost
15

 
15

 
30

 
30

Amortization of net loss
501

 
379

 
1,002

 
757

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
889

 
677

 
1,779

 
1,353


The company expects to contribute $2.0 million to these plans in 2016.  As of June 30, 2016, the company has contributed $0.9 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
30

 
33

 
60

 
65

Amortization of prior service cost
26

 
26

 
52

 
52

Amortization of net loss
—

 
15

 
—

 
30

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
56

 
74

 
112

 
147


The company expects to contribute minimal amounts to the plan in 2016.



18
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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 June 30, 2016 and June 30, 2015 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
77,592

 
242,335

 
615,582

 
—

 
935,509

Total segment assets
918,422

 
1,252,093

 
9,193,956

 
289,974

 
11,654,445

Future policy benefits
782,641

 
926,045

 
8,050,635

 
—

 
9,759,321

Other policyholder liabilities
14,741

 
15,345

 
119,215

 
—

 
149,301

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2016
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
8,648

 
31,437

 
6,280

 
—

 
46,365

Net investment income
9,584

 
10,593

 
86,556

 
6,518

 
113,251

Other revenues
6

 
4

 
(54
)
 
4,740

 
4,696

 
 
 
 
 
 
 
 
 
 
Total revenues
18,238

 
42,034

 
92,782

 
11,258

 
164,312

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,670

 
4,583

 
6,287

 
—

 
15,540

Amortization of deferred policy acquisition costs
3,309

 
(681
)
 
26,338

 
—

 
28,966

Universal life and annuity contract interest
7,217

 
2,673

 
52,909

 
—

 
62,799

Other operating expenses
3,323

 
5,650

 
5,927

 
4,503

 
19,403

Federal income taxes (benefit)
(86
)
 
10,402

 
444

 
2,367

 
13,127

 
 
 
 
 
 
 
 
 
 
Total expenses
18,433

 
22,627

 
91,905

 
6,870

 
139,835

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(195
)
 
19,407

 
877

 
4,388

 
24,477


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
16,307

 
64,225

 
12,016

 
—

 
92,548

Net investment income
15,717

 
17,440

 
164,195

 
11,399

 
208,751

Other revenues
30

 
40

 
6

 
9,498

 
9,574

 
 
 
 
 
 
 
 
 
 
Total revenues
32,054

 
81,705

 
176,217

 
20,897

 
310,873

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
8,291

 
9,751

 
13,099

 
—

 
31,141

Amortization of deferred acquisition costs
5,320

 
4,424

 
54,442

 
—

 
64,186

Universal life and annuity contract interest
11,060

 
8,356

 
92,400

 
—

 
111,816

Other operating expenses
6,898

 
11,176

 
15,517

 
9,119

 
42,710

Federal income taxes (benefit)
166

 
16,386

 
259

 
4,020

 
20,831

 
 
 
 
 
 
 
 
 
 
Total expenses
31,735

 
50,093

 
175,717

 
13,139

 
270,684

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
319

 
31,612

 
500

 
7,758

 
40,189

 
 
 
 
 
 
 
 
 
 

20
Table of Contents

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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
70,561

 
254,785

 
657,108

 
—

 
982,454

Total segment assets
811,768

 
1,247,941

 
9,000,323

 
264,269

 
11,324,301

Future policy benefits
702,621

 
954,684

 
7,964,226

 
—

 
9,621,531

Other policyholder liabilities
11,846

 
16,398

 
115,537

 
—

 
143,781

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

June 30, 2015
 

 
 

 
 

 
 

 
 

Condensed Consolidated Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
7,937

 
29,364

 
6,206

 
—

 
43,507

Net investment income
8,005

 
8,785

 
79,509

 
5,960

 
102,259

Other revenues
4

 
(25
)
 
4

 
5,211

 
5,194

 
 
 
 
 
 
 
 
 
 
Total revenues
15,946

 
38,124

 
85,719

 
11,171

 
150,960

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,882

 
5,587

 
6,651

 
—

 
16,120

Amortization of deferred acquisition costs
1,698

 
5,163

 
21,209

 
—

 
28,070

Universal life and annuity contract interest
5,460

 
6,927

 
37,044

 
—

 
49,431

Other operating expenses
3,442

 
5,212

 
5,434

 
4,714

 
18,802

Federal income taxes (benefit)
467

 
4,932

 
4,961

 
2,086

 
12,446

 
 
 
 
 
 
 
 
 
 
Total expenses
14,949

 
27,821

 
75,299

 
6,800

 
124,869

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
997

 
10,303

 
10,420

 
4,371

 
26,091



21
Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
14,424

 
59,697

 
11,046

 
—

 
85,167

Net investment income
15,170

 
17,399

 
158,745

 
10,868

 
202,182

Other revenues
20

 
61

 
19

 
10,423

 
10,523

 
 
 
 
 
 
 
 
 
 
Total revenues
29,614

 
77,157

 
169,810

 
21,291

 
297,872

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
8,995

 
11,792

 
14,599

 
—

 
35,386

Amortization of deferred acquisition costs
4,879

 
4,513

 
46,330

 
—

 
55,722

Universal life and annuity contract interest
10,399

 
14,057

 
74,014

 
—

 
98,470

Other operating expenses
7,157

 
11,134

 
11,612

 
9,409

 
39,312

Federal income taxes (benefit)
(584
)
 
11,477

 
7,484

 
3,824

 
22,201

 
 
 
 
 
 
 
 
 
 
Total expenses
30,846

 
52,973

 
154,039

 
13,233

 
251,091

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(1,232
)
 
24,184

 
15,771

 
8,058

 
46,781

 
 
 
 
 
 
 
 
 
 


22
Table of Contents

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
46,365

 
43,507

 
92,548

 
85,167

Net investment income
113,251

 
102,259

 
208,751

 
202,182

Other revenues
4,696

 
5,194

 
9,574

 
10,523

Realized gains (losses) on investments
2,782

 
4,258

 
5,163

 
5,236

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
167,094

 
155,218

 
316,036

 
303,108


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)