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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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FORM
10-Q
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þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the Quarterly Period Ended September 30, 2009
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o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from __________ to __________
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Commission
File Number: 2-17039
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NATIONAL
WESTERN LIFE INSURANCE COMPANY
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(Exact
name of Registrant as specified in its charter)
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COLORADO
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84-0467208
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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850
EAST ANDERSON LANE
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AUSTIN,
TEXAS 78752-1602
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(512)
836-1010
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(Address
of Principal Executive Offices)
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(Telephone
Number)
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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 þ No o
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|
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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.
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Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
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As
of November 5, 2009, the number of shares of Registrant's common stock
outstanding was: Class A – 3,425,966 and Class
B - 200,000.
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Page
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3
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3
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3
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September
30, 2009 (Unaudited) and December 31, 2008
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5
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For
the Three Months Ended September 30, 2009 and 2008
(Unaudited)
|
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6
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For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
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7
|
|
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For
the Three Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
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8
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|
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For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
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9
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|
|
For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
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11
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For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
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13
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46
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Financial
Condition and Results of Operations
|
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72
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73
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73
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73
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73
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73
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73
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74
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NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
|
(In
thousands)
|
||||||||
|
(Unaudited)
|
||||||||
|
September
30,
|
December
31,
|
|||||||
|
ASSETS
|
2009
|
2008
|
||||||
|
Investments:
|
||||||||
|
Securities
held to maturity, at amortized cost
|
||||||||
|
(fair
value: $4,259,696 and $3,727,353)
|
$ | 4,082,605 | 3,831,417 | |||||
|
Securities
available for sale, at fair value
|
||||||||
|
(cost:
$1,963,559 and $1,904,053)
|
2,033,249 | 1,745,266 | ||||||
|
Mortgage
loans, net of allowance for possible losses
|
||||||||
|
($3,577
and $4,587)
|
88,986 | 90,733 | ||||||
|
Policy
loans
|
75,916 | 79,277 | ||||||
|
Derivatives,
index options
|
66,987 | 11,920 | ||||||
|
Other
long-term investments
|
33,809 | 14,168 | ||||||
|
Total
investments
|
6,381,552 | 5,772,781 | ||||||
|
Cash
and short-term investments
|
35,669 | 67,796 | ||||||
|
Deferred
policy acquisition costs
|
624,377 | 701,984 | ||||||
|
Deferred
sales inducements
|
116,883 | 120,955 | ||||||
|
Accrued
investment income
|
72,005 | 64,872 | ||||||
|
Federal
income tax receivable
|
- | 1,820 | ||||||
|
Other
assets
|
63,280 | 56,272 | ||||||
| $ | 7,293,766 | 6,786,480 | ||||||
See
accompanying notes to condensed consolidated financial statements.
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
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CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
|
(In
thousands, except share amounts)
|
||||||||
|
(Unaudited)
|
||||||||
|
September
30,
|
December
31,
|
|||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
2009
|
2008
|
||||||
|
LIABILITIES:
|
||||||||
|
Future
policy benefits:
|
||||||||
|
Traditional
life and annuity contracts
|
$ | 135,186 | 137,530 | |||||
|
Universal
life and annuity contracts
|
5,764,603 | 5,424,968 | ||||||
|
Other
policyholder liabilities
|
129,771 | 131,963 | ||||||
|
Federal
income tax liability:
|
||||||||
|
Current
|
14,162 | - | ||||||
|
Deferred
|
46,236 | 26,506 | ||||||
|
Other
liabilities
|
105,284 | 79,300 | ||||||
|
Total
liabilities
|
6,195,242 | 5,800,267 | ||||||
|
COMMITMENTS
AND CONTINGENCIES (Notes 5 and 8)
|
||||||||
|
STOCKHOLDERS’
EQUITY:
|
||||||||
|
Common
stock:
|
||||||||
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Class
A - $1 par value; 7,500,000 shares authorized; 3,425,966
|
||||||||
|
and
3,425,966 issued and outstanding in 2009 and 2008
|
3,426 | 3,426 | ||||||
|
Class
B - $1 par value; 200,000 shares authorized, issued,
|
||||||||
|
and
outstanding in 2009 and 2008
|
200 | 200 | ||||||
|
Additional
paid-in capital
|
36,680 | 36,680 | ||||||
|
Accumulated
other comprehensive income (loss)
|
14,959 | (65,358 | ) | |||||
|
Retained
earnings
|
1,043,259 | 1,011,265 | ||||||
|
Total
stockholders’ equity
|
1,098,524 | 986,213 | ||||||
| $ | 7,293,766 | 6,786,480 | ||||||
See
accompanying notes to condensed consolidated financial statements.
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
|
For
the Three Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands, except per share amounts)
|
||||||||
|
2009
|
2008
|
|||||||
|
Premiums
and other revenue:
|
||||||||
|
Traditional
life and annuity premiums
|
$ | 3,707 | 4,057 | |||||
|
Universal
life and annuity contract charges
|
37,683 | 32,885 | ||||||
|
Net
investment income
|
116,276 | 69,582 | ||||||
|
Other
revenues
|
5,086 | 3,056 | ||||||
|
Net
realized investment gains (losses):
|
||||||||
|
Total
other-than-temporary impairment (“OTTI”) losses
|
(4,666 | ) | (21,635 | ) | ||||
|
Portion
of OTTI losses recognized in other comprehensive income
|
4,572 | - | ||||||
|
Net
OTTI losses recognized in earnings
|
(94 | ) | (21,635 | ) | ||||
|
Other
net investment gains
|
151 | 15 | ||||||
|
Total
net realized investment gains (losses)
|
57 | (21,620 | ) | |||||
|
Total
revenues
|
162,809 | 87,960 | ||||||
|
Benefits
and expenses:
|
||||||||
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Life
and other policy benefits
|
19,965 | 10,794 | ||||||
|
Amortization
of deferred policy acquisition costs and
|
||||||||
|
deferred
sales inducements
|
28,436 | 37,188 | ||||||
|
Universal
life and annuity contract interest
|
80,608 | 38,339 | ||||||
|
Other
operating expenses
|
36,426 | 17,905 | ||||||
|
Total
benefits and expenses
|
165,435 | 104,226 | ||||||
|
Loss
before Federal income taxes
|
(2,626 | ) | (16,266 | ) | ||||
|
Provision
(benefit) for Federal income taxes:
|
||||||||
|
Current
|
18,036 | 3,488 | ||||||
|
Deferred
|
(19,548 | ) | (9,954 | ) | ||||
|
Total
Federal income taxes
|
(1,512 | ) | (6,466 | ) | ||||
|
Net
loss
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$ | (1,114 | ) | (9,800 | ) | |||
|
Basic
Loss Per Share:
|
||||||||
|
Class
A
|
$ | (0.32 | ) | (2.78 | ) | |||
|
Class
B
|
$ | (0.16 | ) | (1.39 | ) | |||
|
Diluted
Loss Per Share:
|
||||||||
|
Class
A
|
$ | (0.32 | ) | (2.78 | ) | |||
|
Class
B
|
$ | (0.16 | ) | (1.39 | ) | |||
See
accompanying notes to condensed consolidated financial statements.
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands, except per share amounts)
|
||||||||
|
2009
|
2008
|
|||||||
|
Premiums
and other revenues:
|
||||||||
|
Traditional
life and annuity premiums
|
$ | 12,227 | 12,575 | |||||
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Universal
life and annuity contract charges
|
115,116 | 98,696 | ||||||
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Net
investment income
|
280,625 | 201,290 | ||||||
|
Other
revenues
|
12,187 | 9,348 | ||||||
|
Net
realized investment gains (losses):
|
||||||||
|
Total
other-than-temporary impairment (“OTTI”) losses
|
(11,796 | ) | (23,085 | ) | ||||
|
Portion
of OTTI losses recognized in other comprehensive income
|
6,395 | - | ||||||
|
Net
OTTI losses recognized in earnings
|
(5,401 | ) | (23,085 | ) | ||||
|
Other
net investment gains
|
279 | 1,154 | ||||||
|
Total
net realized investment losses
|
(5,122 | ) | (21,931 | ) | ||||
|
Total
revenues
|
415,033 | 299,978 | ||||||
|
Benefits
and expenses:
|
||||||||
|
Life
and other policy benefits
|
43,241 | 28,905 | ||||||
|
Amortization
of deferred policy acquisition costs and
|
||||||||
|
deferred
sales inducements
|
84,933 | 93,699 | ||||||
|
Universal
life and annuity contract interest
|
173,525 | 98,511 | ||||||
|
Other
operating expenses
|
65,770 | 45,962 | ||||||
|
Total
benefits and expenses
|
367,469 | 267,077 | ||||||
|
Earnings
before Federal income taxes
|
47,564 | 32,901 | ||||||
|
Provision
(benefit) for Federal income taxes:
|
||||||||
|
Current
|
39,041 | 15,307 | ||||||
|
Deferred
|
(24,233 | ) | (5,194 | ) | ||||
|
Total
Federal income taxes
|
14,808 | 10,113 | ||||||
|
Net
earnings
|
$ | 32,756 | 22,788 | |||||
|
Basic
Earnings Per Share:
|
||||||||
|
Class
A
|
$ | 9.29 | 6.47 | |||||
|
Class
B
|
$ | 4.65 | 3.23 | |||||
|
Diluted
Earnings Per Share:
|
||||||||
|
Class
A
|
$ | 9.28 | 6.42 | |||||
|
Class
B
|
$ | 4.65 | 3.23 | |||||
See
accompanying notes to condensed consolidated financial statements.
|
For
the Three Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
loss
|
$ | (1,114 | ) | (9,800 | ) | |||
|
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
|
37,279 | (34,258 | ) | |||||
|
Reclassification
adjustment for net amounts
|
||||||||
|
included
in net earnings
|
(17 | ) | 11,707 | |||||
|
Amortization
of net unrealized gains related to
|
||||||||
|
transferred
securities
|
6 | 11 | ||||||
|
Net
unrealized gains (losses) on securities
|
37,268 | (22,540 | ) | |||||
|
Foreign
currency translation adjustments
|
79 | (8 | ) | |||||
|
Benefit
plans:
|
||||||||
|
Amortization
of net prior service cost and net gain
|
411 | 342 | ||||||
|
Other
comprehensive income (loss)
|
37,758 | (22,206 | ) | |||||
|
Comprehensive
income (loss)
|
$ | 36,644 | (32,006 | ) | ||||
See
accompanying notes to condensed consolidated financial statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
earnings
|
$ | 32,756 | 22,788 | |||||
|
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
|
76,792 | (49,353 | ) | |||||
|
Reclassification
adjustment for net amounts
|
||||||||
|
included
in net earnings
|
2,855 | 11,097 | ||||||
|
Amortization
of net unrealized losses related to
|
||||||||
|
transferred
securities
|
(38 | ) | (3 | ) | ||||
|
Net
unrealized gains (losses) on securities
|
79,609 | (38,259 | ) | |||||
|
Foreign
currency translation adjustments
|
(19 | ) | (150 | ) | ||||
|
Benefit
plans:
|
||||||||
|
Amortization
of net prior service cost and net gain
|
1,234 | 1,026 | ||||||
|
Other
comprehensive income (loss)
|
80,824 | (37,383 | ) | |||||
|
Comprehensive
income (loss)
|
$ | 113,580 | (14,595 | ) | ||||
See
accompanying notes to condensed consolidated financial statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Common
stock:
|
||||||||
|
Balance
at beginning of period
|
$ | 3,626 | 3,622 | |||||
|
Shares
exercised under stock option plan
|
- | 4 | ||||||
|
Balance
at end of period
|
3,626 | 3,626 | ||||||
|
Additional
paid-in capital:
|
||||||||
|
Balance
at beginning of period
|
36,680 | 36,236 | ||||||
|
Shares
exercised under the stock option plan
|
- | 444 | ||||||
|
Balance
at end of period
|
36,680 | 36,680 | ||||||
|
Accumulated
other comprehensive income (loss):
|
||||||||
|
Unrealized
gains (losses) on non-impaired securities:
|
||||||||
|
Balance
at beginning of period
|
(53,770 | ) | 1,184 | |||||
|
Change
in unrealized gains (losses) during period
|
81,514 | (38,259 | ) | |||||
|
Balance
at end of period
|
27,744 | (37,075 | ) | |||||
|
Unrealized
losses on impaired held to maturity securities:
|
||||||||
|
Balance
at beginning of period
|
- | - | ||||||
|
Cumulative
effect of change in accounting principle (See Note 3)
|
(507 | ) | - | |||||
|
Amortization
|
29 | - | ||||||
|
Other-than-temporary
impairments
|
(1,446 | ) | - | |||||
|
Balance
at end of period
|
(1,924 | ) | - | |||||
|
Unrealized
losses on impaired available for sale securities:
|
||||||||
|
Balance
at beginning of period
|
- | - | ||||||
|
Other-than-temporary
impairments
|
(570 | ) | - | |||||
|
Recoveries
|
82 | - | ||||||
|
Balance
at end of period
|
(488 | ) | - | |||||
|
Foreign
currency translation adjustments:
|
||||||||
|
Balance
at beginning of period
|
2,966 | 3,078 | ||||||
|
Change
in translation adjustments during period
|
(19 | ) | (150 | ) | ||||
|
Balance
at end of period
|
2,947 | 2,928 | ||||||
|
Benefit
plan liability adjustment:
|
||||||||
|
Balance
at beginning of period
|
(14,554 | ) | (11,327 | ) | ||||
|
Amortization
of net prior service cost and net gain
|
1,234 | 1,026 | ||||||
|
Balance
at end of period
|
(13,320 | ) | (10,301 | ) | ||||
|
Accumulated
other comprehensive income (loss) at end of period
|
14,959 | (44,448 | ) | |||||
Continued
on next page
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
Retained
earnings:
|
||||||||
|
Balance
at beginning of period
|
1,011,265 | 978,892 | ||||||
|
Cumulative
effect of change in accounting principle,
|
||||||||
|
net
of tax (See Note 3)
|
507 | - | ||||||
|
Net
earnings
|
32,756 | 22,788 | ||||||
|
Stockholder
dividends
|
(1,269 | ) | (1,269 | ) | ||||
|
Balance
at end of period
|
1,043,259 | 1,000,411 | ||||||
|
Total
stockholders' equity
|
$ | 1,098,524 | 996,269 | |||||
See
accompanying notes to condensed consolidated financial statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
earnings
|
$ | 32,756 | 22,788 | |||||
|
Adjustments
to reconcile net earnings to net cash
|
||||||||
|
from
operating activities:
|
||||||||
|
Universal
life and annuity contract interest
|
173,525 | 98,511 | ||||||
|
Surrender
charges and other policy revenues
|
(45,205 | ) | (30,324 | ) | ||||
|
Realized
losses on investments
|
5,122 | 21,931 | ||||||
|
Accrual
and amortization of investment income
|
(3,385 | ) | (3,715 | ) | ||||
|
Depreciation
and amortization
|
(335 | ) | 786 | |||||
|
(Increase)
decrease in value of derivatives
|
(61,896 | ) | 52,824 | |||||
|
(Increase)
decrease in deferred policy acquisition and
|
||||||||
|
sales
inducement costs
|
(20,511 | ) | 14,508 | |||||
|
Increase
in accrued investment income
|
(7,133 | ) | (2,496 | ) | ||||
|
(Increase)
decrease in other assets
|
(8,457 | ) | 991 | |||||
|
Decrease
in liabilities for future policy benefits
|
(2,344 | ) | (694 | ) | ||||
|
Increase
in other policyholder liabilities
|
28,201 | 8,678 | ||||||
|
Increase
in Federal income tax liability
|
(7,159 | ) | (368 | ) | ||||
|
Increase
in other liabilities
|
37,213 | 11,116 | ||||||
|
Other
|
5 | 844 | ||||||
|
Net
cash provided by operating activities
|
120,397 | 195,380 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Proceeds
from sales of:
|
||||||||
|
Securities
held to maturity
|
- | - | ||||||
|
Securities
available for sale
|
15,612 | 1,522 | ||||||
|
Other
investments
|
1,118 | 5,382 | ||||||
|
Proceeds
from maturities and redemptions of:
|
||||||||
|
Securities
held to maturity
|
757,842 | 417,933 | ||||||
|
Securities
available for sale
|
75,592 | 190,284 | ||||||
|
Derivatives,
index options
|
38,131 | - | ||||||
|
Purchases
of:
|
||||||||
|
Securities
held to maturity
|
(953,502 | ) | (493,363 | ) | ||||
|
Securities
available for sale
|
(220,912 | ) | (190,039 | ) | ||||
|
Other
investments
|
(51,299 | ) | (47,195 | ) | ||||
|
Principal
payments on mortgage loans
|
6,676 | 12,308 | ||||||
|
Cost
of mortgage loans acquired
|
(6,049 | ) | (6,046 | ) | ||||
|
Decrease
in policy loans
|
3,361 | 2,835 | ||||||
|
Other
|
- | (4,316 | ) | |||||
|
Net
cash used in investing activities
|
(333,430 | ) | (110,695 | ) | ||||
(Continued
on next page)
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
|
||||||||
|
For
the Nine Months Ended September 30, 2009 and 2008
|
||||||||
|
(Unaudited)
|
||||||||
|
(In
thousands)
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from financing activities:
|
||||||||
|
Deposits
to account balances for universal life
|
||||||||
|
and
annuity contracts
|
$ | 611,163 | 346,119 | |||||
|
Return
of account balances on universal life
|
||||||||
|
and
annuity contracts
|
(430,243 | ) | (441,195 | ) | ||||
|
Issuance
of common stock under stock option plan
|
- | 448 | ||||||
|
Net
cash provided by (used in) financing activities
|
180,920 | (94,628 | ) | |||||
|
Effect
of foreign exchange
|
(14 | ) | (412 | ) | ||||
|
Net
decrease in cash and short-term investments
|
(32,127 | ) | (10,355 | ) | ||||
|
Cash
and short-term investments at beginning of period
|
67,796 | 45,206 | ||||||
|
Cash
and short-term investments at end of period
|
$ | 35,669 | 34,851 | |||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$ | 30 | 30 | |||||
|
Income
taxes
|
22,757 | 10,504 | ||||||
|
Noncash
operating activities:
|
||||||||
|
Net
change in deferral of sales inducements
|
15,984 | 13,148 | ||||||
See
accompanying notes to condensed consolidated financial
statements.
12
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Insurance Company and its subsidiaries
(“Company”) as of September 30, 2009, and the results of its operations and its
cash flows for the three and nine months ended September 30, 2009 and 2008. The
results of operations for the nine months ended September 30, 2009 and 2008 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, 2008 accessible free of charge through the Company's internet site at www.nationalwesternlife.com
or the Securities and Exchange Commission internet site at www.sec.gov. The condensed
consolidated balance sheet at December 31, 2008, has been derived from the
audited consolidated financial statements as of that date. Certain amounts in
the prior year condensed consolidated financial statements have been
reclassified to conform to the current year presentation.
The
accompanying condensed consolidated financial statements include the accounts of
National Western Life Insurance Company and its wholly-owned subsidiaries: The
Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., NWL Financial,
Inc., and Regent Care San Marcos Holdings, LLC. 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) commitments and
contingencies, (5) valuation allowances for deferred tax assets, (6)
other-than-temporary impairment losses on debt securities, and (7) valuation
allowances for mortgage loans and real estate.
(2) NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued new
guidance to provide a single definition of fair value, a framework for measuring
fair value, and required additional disclosure about the use of fair value to
measure assets and liabilities. The Company adopted it for its
reporting of financial assets and financial liabilities on January 1,
2008. The effective date for implementation to non financial assets
and non financial liabilities was delayed by the FASB until the first reporting
period after November 15, 2008. The Company adopted this portion of
the guidance effective January 1, 2009. The adoption of fair value
measurements did not have a material impact on the Company’s consolidated
financial statements and results of operations.
In
December 2007, the FASB issued new guidance establishing accounting and
reporting standards for entities that have equity investments that are not
attributable directly to the parent, called noncontrolling interests or minority
interests. More specifically, the guidance addresses where and how to report
noncontrolling interests in the consolidated statements of financial position
and operations, how to account for changes in noncontrolling interests and
provides disclosure requirements. The Company adopted it effective January 1,
2009 and it did not have a material impact on the Company’s consolidated
financial condition and results of operations.
In
December 2007, the FASB issued new guidance establishing how an entity accounts
for the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests acquired, how to account for goodwill acquired and
determines what disclosures are required as part of a business combination, and
it applies prospectively to business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company adopted it effective January 1, 2009 and
it did not have an impact on the Company’s consolidated financial condition or
results of operations.
Continued
on Next Page
13
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March
2008, the FASB issued new guidance to require companies with derivative
instruments to disclose information about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for, and how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. This guidance became
effective for financial statements issued for fiscal years beginning after
November 15, 2008. The Company adopted it on January 1, 2009 with no
material impact on the consolidated financial statements. Please see
Note 10 – Fair Value Measurements for additional information pertaining to this
guidance.
In
September 2008, the FASB issued new guidance establishing disclosure
requirements by entities that assume credit risk through the sale of credit
derivatives, including credit derivatives embedded in a hybrid instrument, to
enable users of financial statements to assess the potential effect on its
financial position, financial performance, and cash flows from these credit
derivatives, and requires additional disclosure about the current status of the
payment/performance risk of a guarantee. The Company adopted the guidance
effective January 1, 2009 and it did not have a material effect on the Company’s
consolidated financial condition and results of operations.
In
December 2008, the FASB issued new guidance which requires information to be
disclosed on an annual basis pertaining to postretirement benefit plan assets.
The Company would be required to separate plan assets into the three fair value
hierarchy levels and provide a rollforward of the changes in fair value of plan
assets classified as Level 3. The disclosures about plan assets are effective
for fiscal years ending after December 15, 2009, but will have no effect on the
Company’s consolidated financial condition and results of
operations.
In
January 2009, the FASB issued new guidance to enhance guidance on impairments to
remove the exclusive reliance on a “market participant” estimate of future cash
flows to a holder’s estimate of whether there has been a “probable” adverse
change in estimated cash flows. This allows management to apply reasonable
judgment in assessing whether an other-than-temporary impairment has occurred.
It was effective for the Company as of December 31, 2008 and its adoption did
not have a significant impact on the consolidated financial statements of the
Company.
In March
2009, the FASB issued new guidance establishing enhanced disclosures regarding
an entity’s derivative and hedging activity to enable investors to better
understand the effects on an entity’s financial position, financial performance,
and cash flows. The Company adopted the guidance as of January 1,
2009. See Note 12 – Derivative Investments for disclosures regarding derivative
instruments and hedging activities.
On April
9, 2009 the FASB issued new guidance for estimating fair value when the volume
and level of activity for an asset or liability have significantly decreased and
includes guidance on identifying circumstances that indicate a transaction is
not orderly. This guidance emphasizes that even if there has been a
significant decrease in the volume and level of activity for the asset or
liability, and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market
conditions. This guidance is effective for interim and annual
reporting periods ending after June 15, 2009. As further discussed in
Note 10 – Fair Value Measurements, the adoption of this guidance did not have a
material impact on the Company’s consolidated financial condition and results of
operations.
On April
9, 2009 the FASB issued new guidance to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. It was effective for the Company as
of June 30, 2009 and did not have a significant impact on the consolidated
financial position or results of operations. See Note 10 for
additional disclosures.
On April
9, 2009 the FASB issued new guidance which amended the other-than-temporary
impairment guidance for debt securities to make the guidance more operational,
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. It did
not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. This guidance was
effective for the Company as of June 30, 2009. The impact of its adoption is
discussed in Note 3, Stockholders’ Equity.
Continued
on Next Page
14
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On May
28, 2009 the FASB issued new guidance establishing general standards of
accounting for the disclosure of events that occur after the balance sheet date,
but before the financial statements are issued or are available to be
issued. It was effective for the Company as of June 30, 2009 and did
not have a significant impact on the consolidated financial position or results
of operations. See Note 13 for additional disclosures.
On June
12, 2009 the FASB issued new guidance that changes the way entities account for
securitizations and special purpose entities. The guidance is effective as of
the beginning of the Company’s first annual reporting period beginning after
November 15, 2009 and is not expected to have a significant impact on the
consolidated financial position, results of operations or
disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
consolidated financial statements.
(3) STOCKHOLDERS'
EQUITY
The
Company is restricted by state insurance laws as to the amount of dividends
which may be paid to stockholders without prior approval from the Colorado
Division of Insurance. The Company paid no cash dividends on common
stock during the nine months ended September 30, 2009 and 2008. The
Company did declare a cash dividend on August 28, 2009 payable November 30, 2009
to stockholders on record as of October 30, 2009. The dividends
declared were $0.36 per common share to Class A stockholders and $0.18 per
common share to Class B stockholders. A dividend in the same amounts
per share on Class A and Class B shares was declared in August and paid in
November of 2008.
Change
in Accounting Principles
During
the second quarter of 2009, the Company reviewed all previously recorded
other-than-temporary impairments of securities in compliance with FASB ASC 320
10 10 guidance and estimated the credit versus the non-credit component
consistent with the methodology used in the current period to analyze and
bifurcate impairments into credit and non-credit components. As a result, the
Company determined that $0.8 million in previously recorded other-than-temporary
impairments had been due to non-credit impairments.
For each
security, the Company developed its best estimate of the net present value of
the cash flows expected to be received. The credit component of the impairment
for these securities was determined to be the difference between the amortized
cost of the security and the projected net cash flows. The non-credit component
was determined to be the difference between projected net cash flows and fair
value. The Company also determined whether management had the intent to sell the
security, or if it was more likely than not that it will be required to sell the
security, prior to the recovery of the non-credit component.
As a
result of the implementation, during the second quarter of 2009, the Company
recorded a net of tax opening balance adjustment that increased retained
earnings in the amount of $0.5 million and increased accumulated other
comprehensive loss in the amount of $0.5 million. See Note 9 for further
discussion.
Continued
on Next Page
15
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
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.
|
Three
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
|
(In
thousands except per share amounts)
|
||||||||||||||||
|
Numerator
for Basic and
|
||||||||||||||||
|
Diluted
Earnings Per Share:
|
||||||||||||||||
|
Net
loss
|
$ | (1,114 | ) | (9,800 | ) | |||||||||||
|
Dividends
– Class A shares
|
(1,233 | ) | (1,233 | ) | ||||||||||||
|
Dividends
– Class B shares
|
(36 | ) | (36 | ) | ||||||||||||
|
Undistributed
loss
|
$ | (2,383 | ) | (11,069 | ) | |||||||||||
|
Allocation
of net loss:
|
||||||||||||||||
|
Dividends
|
$ | 1,233 | 36 | 1,233 | 36 | |||||||||||
|
Allocation
of undistributed loss
|
(2,315 | ) | (68 | ) | (10,755 | ) | (314 | ) | ||||||||
|
Net
loss
|
$ | (1,082 | ) | (32 | ) | (9,522 | ) | (278 | ) | |||||||
|
Denominator:
|
||||||||||||||||
|
Basic
earnings per share -
|
||||||||||||||||
|
weighted-average
shares
|
3,426 | 200 | 3,426 | 200 | ||||||||||||
|
Effect
of dilutive
|
||||||||||||||||
|
stock
options
|
- | - | - | - | ||||||||||||
|
Diluted
earnings per share -
|
||||||||||||||||
|
adjusted
weighted-average
|
||||||||||||||||
|
shares
for assumed
|
||||||||||||||||
|
conversions
|
3,426 | 200 | 3,426 | 200 | ||||||||||||
|
Basic
Loss Per Share
|
$ | (0.32 | ) | (0.16 | ) | (2.78 | ) | (1.39 | ) | |||||||
|
Diluted
Loss Per Share
|
$ | (0.32 | ) | (0.16 | ) | (2.78 | ) | (1.39 | ) | |||||||
Continued
on Next Page
16
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Earnings
per Share (continued)
|
Nine
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Class
A
|
Class
B
|
Class
A
|
Class
B
|
|||||||||||||
|
(In
thousands except per share amounts)
|
||||||||||||||||
|
Numerator
for Basic and
|
||||||||||||||||
|
Diluted
Earnings Per Share:
|
||||||||||||||||
|
Net
income
|
$ | 32,756 | 22,788 | |||||||||||||
|
Dividends
– Class A shares
|
(1,233 | ) | (1,233 | ) | ||||||||||||
|
Dividends
– Class B shares
|
(36 | ) | (36 | ) | ||||||||||||
|
Undistributed
income
|
$ | 31,487 | 21,519 | |||||||||||||
|
Allocation
of net income:
|
||||||||||||||||
|
Dividends
|
$ | 1,233 | 36 | 1,233 | 36 | |||||||||||
|
Allocation
of undistributed income
|
30,594 | 893 | 20,909 | 610 | ||||||||||||
|
Net
income
|
$ | 31,827 | 929 | 22,142 | 646 | |||||||||||
|
Denominator:
|
||||||||||||||||
|
Basic
earnings per share -
|
||||||||||||||||
|
weighted-average
shares
|
3,426 | 200 | 3,425 | 200 | ||||||||||||
|
Effect
of dilutive
|
||||||||||||||||
|
stock
options
|
4 | - | 26 | - | ||||||||||||
|
Diluted
earnings per share -
|
||||||||||||||||
|
adjusted
weighted-average
|
||||||||||||||||
|
shares
for assumed
|
||||||||||||||||
|
conversions
|
3,430 | 200 | 3,451 | 200 | ||||||||||||
|
Basic
Earnings Per Share
|
$ | 9.29 | 4.65 | 6.47 | 3.23 | |||||||||||
|
Diluted
Earnings Per Share
|
$ | 9.28 | 4.65 | 6.42 | 3.23 | |||||||||||
Continued
on Next Page
17
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) PENSION
AND OTHER POSTRETIREMENT PLANS
(A) Defined
Benefit Pension Plans
The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees. 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, the Company’s Board
of Directors approved an amendment to freeze the Pension Plan as of December 31,
2007. The freeze ceased future benefit accruals to all participants and closed
the Plan to any new participants. In addition, all participants became
immediately 100% vested in their accrued benefits as of that date. Fair values
of plan assets and liabilities are measured as of the prior December 31 for each
respective year. The following summarizes the components of net periodic benefit
cost.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$ | - | - | - | - | |||||||||||
|
Interest
cost
|
243 | 259 | 767 | 777 | ||||||||||||
|
Expected
return on plan assets
|
(222 | ) | (285 | ) | (667 | ) | (855 | ) | ||||||||
|
Amortization
of prior service cost
|
1 | 1 | 3 | 3 | ||||||||||||
|
Amortization
of net loss
|
148 | 60 | 445 | 182 | ||||||||||||
|
Net
periodic benefit cost
|
$ | 170 | 35 | 548 | 107 | |||||||||||
The
Company expects to contribute $2.1 million to the plan in
2009. During the nine months ended September 30, 2009, the Company
contributed $2.0 million to the plan.
The
Company also sponsors a non-qualified 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 pension 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 the Company 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 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 for the
Chairman and the President of the Company in order to comply with law changes
under the American Jobs Creation Act of 2004 ("Act").
Effective
July 1, 2005, the Company established a second non-qualified defined benefit
plan for the benefit of the 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, the Company established a third non-qualified defined benefit
plan for the benefit of the 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.
Continued
on Next Page
18
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following summarizes the components of net periodic benefit costs for these
non-qualified plans.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$ | 38 | 146 | 112 | 439 | |||||||||||
|
Interest
cost
|
308 | 298 | 925 | 893 | ||||||||||||
|
Amortization
of prior service cost
|
260 | 260 | 780 | 780 | ||||||||||||
|
Amortization
of net loss
|
197 | 177 | 593 | 530 | ||||||||||||
|
Net
periodic benefit cost
|
$ | 803 | 881 | 2,410 | 2,642 | |||||||||||
The
Company expects to contribute $2.0 million to these plans in
2009. During the nine months ended September 30, 2009, the Company
contributed $1.3 million to the plans.
(B) Defined
Contribution Pension Plans
The
Company sponsors a qualified 401(k) plan for substantially all employees and a
non-qualified deferred compensation plan primarily for senior
officers. The Company makes annual contributions to the 401(k) plan
of one percent of each employee's compensation in 2009 and
2008. Additional Company matching contributions of up to two percent
of each employee's compensation are also made each year based on the employee's
personal level of salary deferrals to the plan. All Company contributions are
subject to a vesting schedule based on the employee's years of
service.
(C) Defined
Benefit Postretirement Plans
The
Company sponsors two healthcare plans to provide postretirement benefits to
certain fully vested individuals. The following summarizes the
components of net periodic benefit costs.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Interest
cost
|
$ | 33 | 34 | 98 | 101 | |||||||||||
|
Amortization
of prior service cost
|
25 | 25 | 77 | 77 | ||||||||||||
|
Amortization
of net loss
|
- | 1 | - | 4 | ||||||||||||
|
Net
periodic benefit cost
|
$ | 58 | 60 | 175 | 182 | |||||||||||
As
previously disclosed in its financial statements for the year ended December 31,
2008, the Company expects to contribute minimal amounts to the plan in
2009.
Continued
on Next Page
19
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
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 and for the periods ended September 30, 2009 and 2008 is
provided below.
|
Selected
Segment Information:
|
||||||||||||||||||||
|
Domestic
|
International
|
|||||||||||||||||||
|
Life
|
Life
|
All
|
||||||||||||||||||
|
Insurance
|
Insurance
|
Annuities
|
Others
|
Totals
|
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|
(In
thousands)
|
||||||||||||||||||||
|
September
30, 2009:
|
||||||||||||||||||||
|
Selected
Balance Sheet Items:
|
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|
Deferred
policy acquisition
|
||||||||||||||||||||
|
costs
and sales inducements
|
$ | 59,722 | 202,510 | 479,028 | - | 741,260 | ||||||||||||||
|
Total
segment assets
|
397,154 | 1,019,901 | 5,698,414 | 157,769 | 7,273,238 | |||||||||||||||
|
Future
policy benefits
|
321,157 | 626,283 | 4,952,349 | - | 5,899,789 | |||||||||||||||
|
Other
policyholder liabilities
|
12,128 | 20,424 | 97,219 | - | 129,771 | |||||||||||||||
|
Three
Months Ended
|
||||||||||||||||||||
|
September
30, 2009:
|
||||||||||||||||||||
|
Condensed
Income Statements:
|
||||||||||||||||||||
|
Premiums
and contract
|
||||||||||||||||||||
|
revenues
|
$ | 8,166 | 25,706 | 7,518 | - | 41,390 | ||||||||||||||
|
Net
investment income (loss)
|
(364 | ) | 18,362 | 91,072 | 7,206 | 116,276 | ||||||||||||||
|
Other
income
|
2 | 17 | 1,647 | 3,420 | 5,086 | |||||||||||||||
|
Total
revenues
|
7,804 | 44,085 | 100,237 | 10,626 | 162,752 | |||||||||||||||
|
Life
and other policy benefits
|
8,233 | (1,141 | ) | 12,873 | - | 19,965 | ||||||||||||||
|
Amortization
of deferred
|
||||||||||||||||||||
|
policy
acquisition costs
|
1,136 | 10,495 | 16,805 | - | 28,436 | |||||||||||||||
|
Universal
life and annuity
|
||||||||||||||||||||
|
contract
interest
|
2,244 | 17,646 | 60,718 | - | 80,608 | |||||||||||||||
|
Other
operating expenses
|
4,071 | 5,935 | 22,391 | 4,029 | 36,426 | |||||||||||||||
|
Federal
income taxes (benefit)
|
(2,555 | ) | 3,424 | (4,411 | ) | 2,010 | (1,532 | ) | ||||||||||||
|
Total
expenses
|
13,129 | 36,359 | 108,376 | 6,039 | 163,903 | |||||||||||||||
|
Segment
earnings (loss)
|
$ | (5,325 | ) | 7,726 | (8,139 | ) | 4,587 | |||||||||||||