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, 2017
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, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definition of "accelerated filer." "large accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o   Accelerated filer  x   Non-accelerated filer (Do not check if a smaller reporting company)  o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 3, 2017, 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
 
Page
 
 
 
 
 
 
June 30, 2017 (Unaudited) and December 31, 2016
 
 
For the Three Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
For the Three Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
June 30,
2017
 
December 31,
2016
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,466,140 and $7,337,611)
$
7,230,187

 
7,159,259

Securities available for sale, at fair value (cost: $2,943,326 and $2,991,042)
3,042,758

 
3,060,363

Mortgage loans, net of allowance for possible losses ($650 and $650)
183,698

 
174,534

Policy loans
57,899

 
58,699

Derivatives, index options
149,341

 
120,644

Other long-term investments
53,864

 
53,954

 
 
 
 
Total investments
10,717,747

 
10,627,453

 
 
 
 
Cash and cash equivalents
109,068

 
51,247

Deferred policy acquisition costs
808,296

 
835,194

Deferred sales inducements
140,596

 
147,111

Accrued investment income
98,034

 
99,245

Federal income tax receivable
14,393

 
—

Other assets
133,128

 
134,731

 
 
 
 
Total assets
$
12,021,262

 
11,894,981


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
June 30,
2017
 
December 31,
2016
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,781,357

 
9,722,313

Traditional life reserves
135,618

 
136,782

Other policyholder liabilities
146,252

 
143,391

Deferred Federal income tax liability
57,841

 
64,990

Federal income tax payable
—

 
789

Other liabilities
119,814

 
104,888

 
 
 
 
Total liabilities
10,240,882

 
10,173,153

 
 
 
 
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 2017 and 2016
34

 
34

Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2017 and 2016
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income
20,083

 
10,552

Retained earnings
1,718,545

 
1,669,524

 
 
 
 
Total stockholders’ equity
1,780,380

 
1,721,828

 
 
 
 
Total liabilities and stockholders' equity
$
12,021,262

 
11,894,981


Note:  The Condensed Consolidated Balance Sheet at December 31, 2016 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, 2017 and 2016
(Unaudited)
(In thousands, except per share amounts)
 
2017
 
2016
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
40,697

 
41,448

Traditional life premiums
4,133

 
4,917

Net investment income
142,612

 
113,251

Other revenues
4,537

 
4,696

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
23

 
27

Portion of OTTI (gains) losses recognized in other comprehensive income
(23
)
 
(27
)
Net OTTI losses recognized in earnings
—

 
—

Other net investment gains (losses)
6,247

 
2,782

Total net realized investment gains (losses)
6,247

 
2,782

 
 
 
 
Total revenues
198,226

 
167,094

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
17,854

 
15,540

Amortization of deferred policy acquisition costs
33,058

 
28,966

Universal life and annuity contract interest
82,170

 
62,799

Other operating expenses
26,343

 
19,403

 
 
 
 
Total benefits and expenses
159,425

 
126,708

 
 
 
 
Earnings before Federal income taxes
38,801

 
40,386

 
 
 
 
Federal income taxes
13,318

 
14,100

 
 
 
 
Net earnings
$
25,483

 
26,286

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
7.21

 
$
7.43

Class B
$
3.60

 
$
3.72

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
7.21

 
$
7.43

Class B
$
3.60

 
$
3.72


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).


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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2017 and 2016
(Unaudited)
(In thousands, except per share amounts)

 
2017
 
2016
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
82,061

 
83,458

Traditional life premiums
8,354

 
9,090

Net investment income
314,354

 
208,751

Other revenues
9,042

 
9,574

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
43

 
53

Portion of OTTI (gains) losses recognized in other comprehensive income
(43
)
 
(53
)
Net OTTI losses recognized in earnings
—

 
—

Other net investment gains (losses)
8,832

 
5,163

Total net realized investment gains (losses)
8,832

 
5,163

 
 
 
 
Total revenues
422,643

 
316,036

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
37,611

 
31,141

Amortization of deferred policy acquisition costs
67,270

 
64,186

Universal life and annuity contract interest
192,063

 
111,816

Other operating expenses
51,435

 
42,710

 
 
 
 
Total benefits and expenses
348,379

 
249,853

 
 
 
 
Earnings before Federal income taxes
74,264

 
66,183

 
 
 
 
Federal income taxes
25,243

 
22,638

 
 
 
 
Net earnings
$
49,021

 
43,545

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
13.86

 
$
12.31

Class B
$
6.93

 
$
6.16

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
13.86

 
$
12.31

Class B
$
6.93

 
$
6.16

 
 
 
 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).


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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Net earnings
$
25,483

 
26,286

 
 
 
 
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
7,788

 
21,457

Net unrealized liquidity gains (losses)
(30
)
 
9

Reclassification adjustment for net amounts included in net earnings
(1,068
)
 
(113
)
 
 
 
 
Net unrealized gains (losses) on securities
6,690

 
21,353

 
 
 
 
Foreign currency translation adjustments
(86
)
 
(203
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(933
)
 
(284
)
 
 
 
 
Other comprehensive income (loss)
5,671

 
20,866

 
 
 
 
Comprehensive income (loss)
$
31,154

 
47,152


See accompanying notes to Condensed Consolidated Financial Statements (unaudited).


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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2017 and 2016
(Unaudited)
(In thousands)

 
2017
 
2016
 
 
 
 
Net earnings
$
49,021

 
43,545

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
13,267

 
46,103

Net unrealized liquidity gains (losses)
13

 
18

Reclassification adjustment for net amounts included in net earnings
(1,758
)
 
(573
)
 
 
 
 
Net unrealized gains (losses) on securities
11,522

 
45,548

 
 
 
 
Foreign currency translation adjustments
(171
)
 
(103
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(1,820
)
 
(567
)
 
 
 
 
Other comprehensive income (loss)
9,531

 
44,878

 
 
 
 
Comprehensive income (loss)
$
58,552

 
88,423

 
 
 
 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).







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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
36

 
36

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
36

 
36

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
41,716

 
41,716

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
41,716

 
41,716

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
22,813

 
12,347

Change in unrealized gains (losses) during period, net of tax
11,509

 
45,530

 
 
 
 
   Balance at end of period
34,322

 
57,877

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(203
)
 
(240
)
Amortization
28

 
34

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

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(15
)
 
(16
)
 
 
 
 
   Balance at end of period
(190
)
 
(222
)
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Six Months Ended June 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,661

 
2,825

Change in translation adjustments during period
(171
)
 
(103
)
 
 
 
 
  Balance at end of period
2,490

 
2,722

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(14,718
)
 
(14,602
)
Amortization of net prior service cost and net loss, net of tax
(1,820
)
 
(567
)
 
 
 
 
  Balance at end of period
(16,538
)
 
(15,169
)
 
 
 
 
Accumulated other comprehensive income at end of period
20,083

 
45,207

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,669,524

 
1,569,905

   Net earnings
49,021

 
43,545

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,718,545

 
1,613,450

 
 
 
 
Total stockholders' equity
$
1,780,380

 
$
1,700,409


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, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
49,021

 
43,545

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

 
 

Universal life and annuity contract interest
192,063

 
111,816

Surrender charges and other policy revenues
(23,568
)
 
(11,782
)
Realized (gains) losses on investments
(8,832
)
 
(5,163
)
Accretion/amortization of discounts and premiums, investments
221

 
4

Depreciation and amortization
4,962

 
4,012

(Increase) decrease in value of derivatives
(93,421
)
 
10,806

(Increase) decrease in deferred policy acquisition and sales inducement costs
20,987

 
11,677

(Increase) decrease in accrued investment income
1,211

 
656

(Increase) decrease in other assets
(3,307
)
 
(3,373
)
Increase (decrease) in liabilities for future policy benefits
6,748

 
(533
)
Increase (decrease) in other policyholder liabilities
2,862

 
(5,960
)
Increase (decrease) in Federal income taxes liability
(15,182
)
 
22,450

Increase (decrease) in deferred Federal income tax
(12,281
)
 
9,914

Increase (decrease) in other liabilities
9,264

 
(2,605
)
 
 
 
 
Net cash provided by operating activities
130,748

 
185,464

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
—

Securities available for sale
22,184

 
7,966

Other investments
—

 
3,712

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
233,272

 
188,498

Securities available for sale
144,929

 
98,929

Derivatives, index options
100,516

 
2,090

Property and equipment
2,731

 
—

Purchases of:
 

 
 

Securities held to maturity
(296,706
)
 
(185,189
)
Securities available for sale
(116,927
)
 
(122,013
)
Derivatives, index options
(36,587
)
 
(38,376
)
Other investments
(188
)
 
(23,231
)
Property and equipment
(233
)
 
—

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, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
22,685

 
16,254

Cost of mortgage loans acquired
(31,779
)
 
(38,550
)
Decrease (increase) in policy loans
800

 
1,370

 
 
 
 
Net cash provided by/(used in) investing activities
44,697

 
(157,795
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
360,928

 
429,101

Return of account balances on universal life and annuity contracts
(478,290
)
 
(468,639
)
 
 
 
 
Net cash provided by (used in) financing activities
(117,362
)
 
(39,538
)
 
 
 
 
Effect of foreign exchange
(262
)
 
(157
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
57,821

 
(12,026
)
Cash and cash equivalents at beginning of period
51,247

 
106,007

 
 
 
 
Cash and cash equivalents at end of period
$
109,068

 
$
93,981

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
19

 
23

Income taxes
$
52,706

 
(10,000
)
 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(3,986
)
 
(5,366
)

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

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (“Company”) as of June 30, 2017, and the results of its operations and its cash flows for the three and six months ended June 30, 2017 and June 30, 2016. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2017 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, 2016 which is 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, 2016 has been derived from the audited consolidated financial statements as of that date.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NWLGI and its wholly owned subsidiaries: National Western Life Insurance Company ("NWLIC" or "National Western"), Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., and NWL Services, Inc. National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., and Braker P III, LLC. Where comments or disclosures are made specifically in reference to the insurance operations of National Western, the "company" is used in order to distinguish such comments from the consolidated entity. All significant intercorporate transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying Condensed Consolidated Financial Statements include: (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) 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, 2017 and June 30, 2016.

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,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
1,644

 
174

 
2,705

 
882

Net OTTI losses recognized in earnings
 
—

 
—

 
—

 
—

Earnings before Federal income taxes
 
1,644

 
174

 
2,705

 
882

Federal income taxes
 
576

 
61

 
947

 
309

 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,068

 
113

 
1,758

 
573



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

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

In January 2016, the FASB released accounting standards update (ASU) 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 ASU 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.

In March 2017, the FASB released ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Adoption of this guidance is not expected to have a material effect on the Company’s results of operations or financial position.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period for premiums is being shortened to the earliest call date. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating this guidance.

In May 2017, the FASB released ASU 2017-09, Compensation-Stock Compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Accounting Standards Codification (ASC) Topic 718. An entity shall account for the effects of a modification described in ASC paragraphs 718-20-35-3 through 35-9, unless all the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The provisions of this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company does not expect a material effect on the results of operations or financial position with the adoption of this ASU.

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.



13
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(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 lesser of statutory earnings from operations, excluding capital gains, from the prior calendar year or 10% of statutory surplus of the company as of previous calendar year-end.  The maximum dividend payment which may be made without prior approval in 2017 is $86.0 million. As the sole owner of NWLIC, all dividends declared by National Western are payable entirely to NWLGI and are eliminated in consolidation. During the second quarter of 2017 National Western declared and paid a $4.0 million dividend to NWLGI. National Western did not declare or pay cash dividends on its common shares during the six months ended June 30, 2016.

NWLGI did not declare or pay cash dividends on its common shares during the six months ended June 30, 2017 and 2016.



14
Table of Contents

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 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,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
25,483

 
 
 
26,286

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
25,483

 
 
 
26,286

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
24,762

 
721

 
25,543

 
743

 
 
 
 
 
 
 
 
Net income
$
24,762

 
721

 
25,543

 
743

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
—

 
—

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

 
200

 
3,436

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
7.21

 
3.60

 
7.43

 
3.72

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
7.21

 
3.60

 
7.43

 
3.72


Stock options that were outstanding during the three months ended June 30, 2017 and 2016, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive, were approximately 0 and 20,800, respectively.

15
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
49,021

 
 
 
43,545

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
49,021

 
 
 
43,545

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
47,635

 
1,386

 
42,313

 
1,232

 
 
 
 
 
 
 
 
Net income
$
47,635

 
1,386

 
42,313

 
1,232

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
—

 
—

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

 
200

 
3,436

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
13.86

 
6.93

 
12.31

 
6.16

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
13.86

 
6.93

 
12.31

 
6.16


Stock options that were outstanding during the six months ended June 30, 2017 and 2016, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 0 and 20,800, 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 comply 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,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
27

 
27

 
54

 
53

Interest cost
239

 
250

 
478

 
500

Expected return on plan assets
(307
)
 
(304
)
 
(614
)
 
(608
)
Amortization of prior service cost
—

 
—

 
—

 
—

Amortization of net loss
159

 
193

 
318

 
386

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
118

 
166

 
236

 
331


The service cost shown above for each period represents 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 2017 plan year is $0.2 million. There was no remaining contribution payable for the 2016 plan year as of June 30, 2017. As of June 30, 2017, the company had contributed a total of $0.1 million to the plan for the 2017 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 then President of the company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").


17
Table of Contents

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

Effective July 1, 2005, National Western established a second non-qualified defined benefit plan for the benefit of the then Chairman of the company.  This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified plan, while complying with the requirements of the Act.

Effective November 1, 2005, National Western established a third non-qualified defined benefit plan for the benefit of the then President of the company.  This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified plan as previously discussed, while complying with the requirements of the Act.

The following table summarizes the components of net periodic benefit costs for the nonqualified defined benefit plans.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
204

 
109

 
408

 
218

Interest cost
347

 
264

 
694

 
529

Amortization of prior service cost
15

 
15

 
30

 
30

Amortization of net loss
819

 
501

 
1,637

 
1,002

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
1,385

 
889

 
2,769

 
1,779


The company expects to contribute $2.0 million to these plans in 2017.  As of June 30, 2017, 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,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
39

 
30

 
69

 
60

Amortization of prior service cost
26

 
26

 
52

 
52

Amortization of net loss
21

 
—

 
21

 
—

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
86

 
56

 
142

 
112


The company expects to contribute minimal amounts to the plan in 2017.



18
Table of Contents

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 as of June 30, 2017 and December 31, 2016 for the Condensed Consolidated Balance Sheet items and for the three and six months ended June 30, 2017 and June 30, 2016 for the Condensed Consolidated Statement of Earnings is provided below.

Condensed Consolidated Balance Sheet Items:

 
June 30, 2017
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
93,029

 
231,433

 
624,430

 
—

 
948,892

Total segment assets
1,034,170

 
1,221,136

 
9,252,875

 
307,990

 
11,816,171

Future policy benefits
881,156

 
910,493

 
8,125,326

 
—

 
9,916,975

Other policyholder liabilities
13,104

 
12,973

 
120,175

 
—

 
146,252



 
December 31, 2016
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
90,485

 
243,106

 
648,714

 
—

 
982,305

Total segment assets
971,990

 
1,232,648

 
9,193,980

 
298,481

 
11,697,099

Future policy benefits
830,460

 
919,380

 
8,109,255

 
—

 
9,859,095

Other policyholder liabilities
13,998

 
10,528

 
118,865

 
—

 
143,391



19
Table of Contents

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

Condensed Consolidated Statement of Earnings:


Three Months Ended June 30, 2017
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
9,066

 
29,710

 
6,054

 
—

 
44,830

Net investment income
15,023

 
14,251

 
105,474

 
7,864

 
142,612

Other revenues
6

 
21

 
38

 
4,472

 
4,537

 
 
 
 
 
 
 
 
 
 
Total revenues
24,095

 
43,982

 
111,566

 
12,336

 
191,979

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
5,448

 
4,677

 
7,729

 
—

 
17,854

Amortization of deferred policy acquisition costs
2,994

 
6,305

 
23,759

 
—

 
33,058

Universal life and annuity contract interest
11,210

 
11,377

 
59,583

 
—

 
82,170

Other operating expenses
5,157

 
7,207

 
9,814

 
4,165

 
26,343

Federal income taxes (benefit)
(242
)
 
4,928

 
3,656

 
2,790

 
11,132

 
 
 
 
 
 
 
 
 
 
Total expenses
24,567

 
34,494

 
104,541

 
6,955

 
170,557

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(472
)
 
9,488

 
7,025

 
5,381

 
21,422


 
Six Months Ended June 30, 2017
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
17,915

 
61,210

 
11,290

 
—

 
90,415

Net investment income
34,613

 
32,870

 
231,908

 
14,963

 
314,354

Other revenues
19

 
47

 
64

 
8,912

 
9,042

 
 
 
 
 
 
 
 
 
 
Total revenues
52,547

 
94,127

 
243,262

 
23,875

 
413,811

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
10,367

 
10,962

 
16,282

 
—

 
37,611

Amortization of deferred acquisition costs
5,783

 
13,711

 
47,776

 
—

 
67,270

Universal life and annuity contract interest
27,457

 
27,759

 
136,847

 
—

 
192,063

Other operating expenses
9,889

 
13,185

 
19,874

 
8,487

 
51,435

Federal income taxes (benefit)
(321
)
 
9,652

 
7,612

 
5,209

 
22,152

 
 
 
 
 
 
 
 
 
 
Total expenses
53,175

 
75,269

 
228,391

 
13,696

 
370,531

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(628
)
 
18,858

 
14,871

 
10,179

 
43,280


20
Table of Contents

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


Three Months Ended June 30, 2016
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 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


 
Six Months Ended June 30, 2016
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 


21
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,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
44,830

 
46,365

 
90,415

 
92,548

Net investment income
142,612

 
113,251

 
314,354

 
208,751

Other revenues
4,537

 
4,696

 
9,042

 
9,574

Realized gains (losses) on investments
6,247

 
2,782

 
8,832

 
5,163

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
198,226

 
167,094

 
422,643

 
316,036


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
11,132

 
13,127

 
22,152

 
20,831

Taxes on realized gains (losses) on investments
2,186

 
973

 
3,091

 
1,807

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
13,318

 
14,100

 
25,243

 
22,638


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
21,422

 
24,477

 
43,280

 
40,189

Realized gains (losses) on investments, net of taxes
4,061

 
1,809

 
5,741

 
3,356