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 September 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 November 2, 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
 
 
 
 
 
 
September 30, 2017 (Unaudited) and December 31, 2016
 
 
For the Three Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
For the Three Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
For the Nine Months Ended September 30, 2017 and 2016 (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
September 30,
2017
 
December 31,
2016
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,498,922 and $7,337,611)
$
7,264,995

 
7,159,259

Securities available for sale, at fair value (cost: $2,942,594 and $2,991,042)
3,045,603

 
3,060,363

Mortgage loans, net of allowance for possible losses ($650 and $650)
188,623

 
174,534

Policy loans
57,466

 
58,699

Derivatives, index options
163,536

 
120,644

Other long-term investments
48,933

 
53,954

 
 
 
 
Total investments
10,769,156

 
10,627,453

 
 
 
 
Cash and cash equivalents
170,560

 
51,247

Deferred policy acquisition costs
813,642

 
835,194

Deferred sales inducements
134,636

 
147,111

Accrued investment income
103,038

 
99,245

Federal income tax receivable
7,858

 
—

Other assets
139,401

 
134,731

 
 
 
 
Total assets
$
12,138,291

 
11,894,981


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

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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
September 30,
2017
 
December 31,
2016
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,856,403

 
9,722,313

Traditional life reserves
135,366

 
136,782

Other policyholder liabilities
137,072

 
143,391

Deferred Federal income tax liability
56,016

 
64,990

Federal income tax payable
—

 
789

Other liabilities
150,752

 
104,888

 
 
 
 
Total liabilities
10,335,609

 
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
20,572

 
10,552

Retained earnings
1,740,358

 
1,669,524

 
 
 
 
Total stockholders’ equity
1,802,682

 
1,721,828

 
 
 
 
Total liabilities and stockholders' equity
$
12,138,291

 
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).


4
Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands, except per share amounts)
 
2017
 
2016
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
40,268

 
40,333

Traditional life premiums
5,285

 
4,631

Net investment income
151,691

 
126,981

Other revenues
4,672

 
4,476

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
26

 
27

Portion of OTTI (gains) losses recognized in other comprehensive income
(26
)
 
(27
)
Net OTTI losses recognized in earnings
—

 
—

Other net investment gains (losses)
2,074

 
5,426

Total net realized investment gains (losses)
2,074

 
5,426

 
 
 
 
Total revenues
203,990

 
181,847

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
21,015

 
17,430

Amortization of deferred policy acquisition costs
18,722

 
24,395

Universal life and annuity contract interest
107,799

 
67,776

Other operating expenses
22,596

 
23,595

 
 
 
 
Total benefits and expenses
170,132

 
133,196

 
 
 
 
Earnings before Federal income taxes
33,858

 
48,651

 
 
 
 
Federal income taxes
12,045

 
14,915

 
 
 
 
Net earnings
$
21,813

 
33,736

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
6.17

 
$
9.54

Class B
$
3.08

 
$
4.77

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
6.17

 
$
9.54

Class B
$
3.08

 
$
4.77


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 Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands, except per share amounts)

 
2017
 
2016
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
122,329

 
123,791

Traditional life premiums
13,639

 
13,721

Net investment income
466,045

 
335,732

Other revenues
13,714

 
14,050

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
69

 
80

Portion of OTTI (gains) losses recognized in other comprehensive income
(69
)
 
(80
)
Net OTTI losses recognized in earnings
—

 
—

Other net investment gains (losses)
10,906

 
10,589

Total net realized investment gains (losses)
10,906

 
10,589

 
 
 
 
Total revenues
626,633

 
497,883

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
58,626

 
48,571

Amortization of deferred policy acquisition costs
85,992

 
88,581

Universal life and annuity contract interest
299,862

 
179,592

Other operating expenses
74,031

 
66,306

 
 
 
 
Total benefits and expenses
518,511

 
383,050

 
 
 
 
Earnings before Federal income taxes
108,122

 
114,833

 
 
 
 
Federal income taxes
37,288

 
37,553

 
 
 
 
Net earnings
$
70,834

 
77,280

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
20.03

 
$
21.85

Class B
$
10.02

 
$
10.93

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
20.03

 
$
21.85

Class B
$
10.02

 
$
10.93

 
 
 
 

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 September 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Net earnings
$
21,813

 
33,736

 
 
 
 
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
2,212

 
2,824

Net unrealized liquidity gains (losses)
9

 
9

Reclassification adjustment for net amounts included in net earnings
(988
)
 
(1,398
)
 
 
 
 
Net unrealized gains (losses) on securities
1,233

 
1,435

 
 
 
 
Foreign currency translation adjustments
166

 
22

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(910
)
 
(283
)
 
 
 
 
Other comprehensive income (loss)
489

 
1,174

 
 
 
 
Comprehensive income (loss)
$
22,302

 
34,910


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 Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)

 
2017
 
2016
 
 
 
 
Net earnings
$
70,834

 
77,280

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
15,479

 
48,927

Net unrealized liquidity gains (losses)
22

 
27

Reclassification adjustment for net amounts included in net earnings
(2,746
)
 
(1,971
)
 
 
 
 
Net unrealized gains (losses) on securities
12,755

 
46,983

 
 
 
 
Foreign currency translation adjustments
(5
)
 
(81
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(2,730
)
 
(850
)
 
 
 
 
Other comprehensive income (loss)
10,020

 
46,052

 
 
 
 
Comprehensive income (loss)
$
80,854

 
123,332

 
 
 
 

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 Nine Months Ended September 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
12,733

 
46,956

 
 
 
 
   Balance at end of period
35,546

 
59,303

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(203
)
 
(240
)
Amortization
45

 
52

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

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(23
)
 
(25
)
 
 
 
 
   Balance at end of period
(181
)
 
(213
)
 
 
 
 
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 Nine Months Ended September 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
(5
)
 
(81
)
 
 
 
 
  Balance at end of period
2,656

 
2,744

 
 
 
 
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
(2,730
)
 
(850
)
 
 
 
 
  Balance at end of period
(17,448
)
 
(15,452
)
 
 
 
 
Accumulated other comprehensive income at end of period
20,572

 
46,381

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

 
1,569,905

   Net earnings
70,834

 
77,280

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,740,358

 
1,647,185

 
 
 
 
Total stockholders' equity
$
1,802,682

 
$
1,735,318


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 Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
70,834

 
77,280

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

 
 

Universal life and annuity contract interest
299,862

 
179,592

Surrender charges and other policy revenues
(33,682
)
 
(34,955
)
Realized (gains) losses on investments
(10,905
)
 
(10,589
)
Accretion/amortization of discounts and premiums, investments
308

 
51

Depreciation and amortization
7,379

 
5,823

(Increase) decrease in value of derivatives
(138,552
)
 
(8,307
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
19,895

 
10,799

(Increase) decrease in accrued investment income
(3,793
)
 
(1,618
)
(Increase) decrease in other assets
(7,762
)
 
(3,683
)
Increase (decrease) in liabilities for future policy benefits
6,616

 
3,408

Increase (decrease) in other policyholder liabilities
(6,319
)
 
(5,175
)
Increase (decrease) in Federal income taxes liability
(8,647
)
 
21,661

Increase (decrease) in deferred Federal income tax
(14,370
)
 
10,587

Increase (decrease) in other liabilities
12,530

 
1,352

 
 
 
 
Net cash provided by operating activities
193,394

 
246,226

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
—

Securities available for sale
22,184

 
16,087

Other investments
4,943

 
3,947

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
303,081

 
304,190

Securities available for sale
222,841

 
134,208

Derivatives, index options
151,298

 
13,273

Property and equipment
2,731

 
—

Purchases of:
 

 
 

Securities held to maturity
(377,821
)
 
(231,804
)
Securities available for sale
(192,670
)
 
(229,932
)
Derivatives, index options
(55,780
)
 
(57,224
)
Other investments
(329
)
 
(27,525
)
Property and equipment
(1,697
)
 
—

Net change in short-term investments
—

 
(14,972
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
 
2017
 
2016
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
24,199

 
17,295

Cost of mortgage loans acquired
(38,166
)
 
(55,796
)
Decrease (increase) in policy loans
1,233

 
2,739

 
 
 
 
Net cash provided by/(used in) investing activities
66,047

 
(125,514
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
546,966

 
626,083

Return of account balances on universal life and annuity contracts
(687,087
)
 
(675,389
)
 
 
 
 
Net cash provided by (used in) financing activities
(140,121
)
 
(49,306
)
 
 
 
 
Effect of foreign exchange
(7
)
 
(125
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
119,313

 
71,281

Cash and cash equivalents at beginning of period
51,247

 
106,007

 
 
 
 
Cash and cash equivalents at end of period
$
170,560

 
$
177,288

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
30

 
33

Income taxes
$
60,304

 
5,032

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(9,696
)
 
(7,146
)

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 September 30, 2017, and the results of its operations and its cash flows for the three and nine months ended September 30, 2017 and September 30, 2016. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 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 nine months ended September 30, 2017 and September 30, 2016.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
1,519

 
2,151

 
4,224

 
3,033

Net OTTI losses recognized in earnings
 
—

 
—

 
—

 
—

Earnings before Federal income taxes
 
1,519

 
2,151

 
4,224

 
3,033

Federal income taxes
 
532

 
753

 
1,478

 
1,062

 
 
 
 
 
 
 
 
 
Net earnings
 
$
987

 
1,398

 
2,746

 
1,971



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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. The Company is currently evaluating this guidance.

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.

In July 2017, the FASB released ASU 2017-11, Earnings Per Share; Distinguishing Liabilities from Equity; and, Derivatives and Hedging. This update includes: (I) Accounting for Certain Financial Instruments with Down Round Features, and (II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. Part I of this update changes the classification analysis of certain equity-linked financial instruments with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Part II of this update recharacterizes the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The Company does not expect a material effect on the results of operations or financial position with the adoption of this ASU.

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

In September 2017, the FASB released ASU 2017-13, Revenue Recognition (Topic 605), Revenue from contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). This update adds SEC paragraphs pursuant to the SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting to provide effective dates that differ for (1) public business entities and certain other specified entities and (2) all other entities. The Company does not expect an effect on the results of operations or financial position with the adoption of this ASU. The Company will adopt Topic 606 and 842 within the required effective dates set by the SEC. Amendment to Topic 605 does not affect the Company since management fees amongst affiliates are eliminated upon consolidation. Amendment to Topic 840 does not affect the Company since the Company does not have any Third-Party Value Guarantees embedded within its lease agreements that will have a material effect on the 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 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.

In the second quarter of 2017 National Western declared and paid a $4.0 million dividend to NWLGI. During the third quarter of 2017 National Western declared a $3.0 million dividend payable to NWLGI which was subsequently paid on October 16, 2017. In the nine months ended September 30, 2016, National Western declared a cash dividend of $3.0 million payable to NWLGI which was subsequently paid on October 3, 2016.

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



15
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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, by definition, assumes the issuance of common shares applicable to stock options in the denominator. However, settlement of stock option exercises in cash or by issuance of shares is at discretion of the Company's optionholders and such exercises have predominantly been in cash. Consequently, the Company's stock options outstanding are not considered potentially dilutive under accounting guidance.

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 September 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
$
21,813

 
 
 
33,736

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
21,813

 
 
 
33,736

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
21,196

 
617

 
32,782

 
954

 
 
 
 
 
 
 
 
Net income
$
21,196

 
617

 
32,782

 
954

 
 
 
 
 
 
 
 
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
$
6.17

 
3.08

 
9.54

 
4.77

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
6.17

 
3.08

 
9.54

 
4.77




16
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
$
70,834

 
 
 
77,280

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
70,834

 
 
 
77,280

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
68,831

 
2,003

 
75,095

 
2,185

 
 
 
 
 
 
 
 
Net income
$
68,831

 
2,003

 
75,095

 
2,185

 
 
 
 
 
 
 
 
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
$
20.03

 
10.02

 
21.85

 
10.93

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
20.03

 
10.02

 
21.85

 
10.93






17
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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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
27

 
26

 
81

 
79

Interest cost
240

 
250

 
718

 
750

Expected return on plan assets
(306
)
 
(304
)
 
(920
)
 
(912
)
Amortization of prior service cost
—

 
—

 
—

 
—

Amortization of net loss
159

 
193

 
477

 
579

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
120

 
165

 
356

 
496


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 September 30, 2017. As of September 30, 2017, the company had contributed a total of $0.0 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").


18
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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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
204

 
109

 
612

 
327

Interest cost
347

 
265

 
1,041

 
794

Amortization of prior service cost
15

 
15

 
45

 
45

Amortization of net loss
818

 
501

 
2,455

 
1,503

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
1,384

 
890

 
4,153

 
2,669


The company expects to contribute $2.0 million to these plans in 2017.  As of September 30, 2017, the company has contributed $1.6 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
35

 
30

 
104

 
90

Amortization of prior service cost
25

 
26

 
77

 
78

Amortization of net loss
10

 
—

 
31

 
—

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
70

 
56

 
212

 
168


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



19
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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 as of September 30, 2017 and December 31, 2016 for the Condensed Consolidated Balance Sheet items and for the three and nine months ended September 30, 2017 and September 30, 2016 for the Condensed Consolidated Statement of Earnings is provided below.

Condensed Consolidated Balance Sheet Items:

 
September 30, 2017
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
95,894

 
254,150

 
598,234

 
—

 
948,278

Total segment assets
1,071,664

 
1,238,990

 
9,306,527

 
309,197

 
11,926,378

Future policy benefits
909,407

 
904,097

 
8,178,265

 
—

 
9,991,769

Other policyholder liabilities
14,441

 
14,635

 
107,996

 
—

 
137,072



 
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



20
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Condensed Consolidated Statement of Earnings:


Three Months Ended September 30, 2017
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
9,907

 
30,353

 
5,293

 
—

 
45,553

Net investment income
17,385

 
15,711

 
114,123

 
4,472

 
151,691

Other revenues
11

 
26

 
26

 
4,609

 
4,672

 
 
 
 
 
 
 
 
 
 
Total revenues
27,303

 
46,090

 
119,442

 
9,081

 
201,916

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,483

 
8,437

 
9,095

 
—

 
21,015

Amortization of deferred policy acquisition costs
2,517

 
(21,585
)
 
37,790

 
—

 
18,722

Universal life and annuity contract interest
14,119

 
9,112

 
84,568

 
—

 
107,799

Other operating expenses
4,086

 
5,661

 
8,714

 
4,135

 
22,596

Federal income taxes (benefit)
1,061

 
15,473

 
(7,007
)
 
1,792

 
11,319

 
 
 
 
 
 
 
 
 
 
Total expenses
25,266

 
17,098

 
133,160

 
5,927

 
181,451

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,037

 
28,992

 
(13,718
)
 
3,154

 
20,465


 
Nine Months Ended September 30, 2017
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
27,822

 
91,563

 
16,583

 
—

 
135,968

Net investment income
51,998

 
48,581

 
346,031

 
19,435

 
466,045

Other revenues
30

 
73

 
90

 
13,521

 
13,714

 
 
 
 
 
 
 
 
 
 
Total revenues
79,850

 
140,217

 
362,704

 
32,956

 
615,727

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
13,850

 
19,399

 
25,377

 
—

 
58,626

Amortization of deferred acquisition costs
8,300

 
(7,874
)
 
85,566

 
—

 
85,992

Universal life and annuity contract interest
41,576

 
36,871

 
221,415

 
—

 
299,862

Other operating expenses
13,975

 
18,846

 
28,588

 
12,622

 
74,031

Federal income taxes (benefit)
740

 
25,125

 
605

 
7,001

 
33,471

 
 
 
 
 
 
 
 
 
 
Total expenses
78,441

 
92,367

 
361,551

 
19,623

 
551,982

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,409

 
47,850

 
1,153

 
13,333

 
63,745


21
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Three Months Ended September 30, 2016
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
8,507

 
31,066

 
5,391

 
—

 
44,964

Net investment income
12,294

 
12,763

 
97,384

 
4,540

 
126,981

Other revenues
7

 
10

 
139

 
4,320

 
4,476

 
 
 
 
 
 
 
 
 
 
Total revenues
20,808

 
43,839

 
102,914

 
8,860

 
176,421

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
5,338

 
5,038

 
7,054

 
—

 
17,430

Amortization of deferred acquisition costs
(4,331
)
 
7,296

 
21,430

 
—

 
24,395

Universal life and annuity contract interest
9,795

 
11,287

 
46,694

 
—

 
67,776

Other operating expenses
4,847

 
6,691

 
7,526

 
4,531

 
23,595

Federal income taxes (benefit)
1,667

 
3,591

 
6,549

 
1,209

 
13,016

 
 
 
 
 
 
 
 
 
 
Total expenses
17,316

 
33,903

 
89,253

 
5,740

 
146,212

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
3,492

 
9,936

 
13,661

 
3,120

 
30,209


 
Nine Months Ended September 30, 2016
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
24,814

 
95,291

 
17,407

 
—

 
137,512

Net investment income
28,011

 
30,203

 
261,579

 
15,939

 
335,732

Other revenues
37

 
50

 
145

 
13,818

 
14,050

 
 
 
 
 
 
 
 
 
 
Total revenues
52,862

 
125,544

 
279,131

 
29,757

 
487,294

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
13,629

 
14,789

 
20,153

 
—

 
48,571

Amortization of deferred acquisition costs
989

 
11,720

 
75,872

 
—

 
88,581

Universal life and annuity contract interest
20,855

 
19,643

 
139,094

 
—

 
179,592

Other operating expenses
11,745

 
17,867

 
23,044

 
13,650

 
66,306

Federal income taxes (benefit)
1,833

 
19,977

 
6,808

 
5,229

 
33,847

 
 
 
 
 
 
 
 
 
 
Total expenses
49,051

 
83,996

 
264,971

 
18,879

 
416,897

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
3,811

 
41,548

 
14,160

 
10,878

 
70,397

 
 
 
 
 
 
 
 
 
 


22
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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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
45,553

 
44,964

 
135,968

 
137,512

Net investment income
151,691

 
126,981

 
466,045

 
335,732

Other revenues
4,672

 
4,476

 
13,714

 
14,050

Realized gains (losses) on investments
2,074

 
5,426

 
10,906

 
10,589

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
203,990

 
181,847

 
626,633

 
497,883


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
11,319

 
13,016

 
33,471

 
33,847

Taxes on realized gains (losses) on investments
726

 
1,899

 
3,817

 
3,706

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
12,045

 
14,915

 
37,288

 
37,553


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
20,465

 
30,209

 
63,745

 
70,397

Realized gains (losses) on investments, net of taxes
1,348

 
3,527