NWLI 2011 Q2 10Q

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

For the Quarterly Period Ended June 30, 2011
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: 2-17039
 
 
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
COLORADO
84-0467208
(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 R   No £
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 R   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated file" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  £     Accelerated filer  R   Non-accelerated filer  £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No R
As of August 5, 2011, the number of shares of Registrant's common stock outstanding was: Class A – 3,434,763 and  Class B - 200,000.


TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
June 30, 2011 (Unaudited) and December 31, 2010
 
 
For the Three Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Three Months Ended June 20, 2011 and 2010 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4.  Removed and Reserved
 
 
 
 


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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
(Unaudited)
 
 
ASSETS
June 30,
2011
 
December 31,
2010
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $5,636,086 and $5,259,332)
$
5,302,866

 
4,977,516

Securities available for sale, at fair value (cost: $2,304,913 and $2,221,579)
2,493,163

 
2,390,107

Mortgage loans, net of allowance for possible losses ($4,001 and $3,962)
160,897

 
141,247

Policy loans
75,743

 
78,448

Derivatives, index options
97,698

 
80,284

Other long-term investments
33,355

 
29,569

 
 
 
 
Total investments
8,163,722

 
7,697,171

 
 
 
 
Cash and short-term investments
80,667

 
80,332

Deferred policy acquisition costs
702,458

 
691,939

Deferred sales inducements
146,045

 
143,844

Accrued investment income
85,687

 
79,720

Federal income tax receivable
—

 
427

Other assets
83,851

 
80,515

 
 
 
 
Total assets
$
9,262,430

 
8,773,948


See accompanying notes to condensed consolidated financial statements.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
June 30,
2011
 
December 31,
2010
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
7,561,174

 
7,108,599

Traditional life and annuity contracts
138,377

 
139,182

Other policyholder liabilities
145,753

 
151,526

Deferred Federal income tax liability
46,695

 
57,857

Federal income tax payable
3,843

 
—

Other liabilities
110,078

 
97,993

 
 
 
 
Total liabilities
8,005,920

 
7,555,157

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,434,763 and 3,429,241 issued and outstanding in 2011 and 2010, respectively
3,435

 
3,429

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2011 and 2010
200

 
200

Additional paid-in capital
38,351

 
37,140

Accumulated other comprehensive income
54,909

 
50,408

Retained earnings
1,159,615

 
1,127,614

 
 
 
 
Total stockholders’ equity
1,256,510

 
1,218,791

 
 
 
 
Total liabilities and stockholders' equity
$
9,262,430

 
8,773,948


Note:  The Condensed Consolidated Balance Sheet at December 31, 2010, has been derived from the audited Consolidated Financial Statements as of that date.

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands, except per share amounts)

 
2011
 
2010
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
32,632

 
31,439

Traditional life and annuity contract premiums
4,607

 
4,898

Net investment income
97,724

 
52,285

Other revenues
4,698

 
8,168

Net realized investment gains (losses):
 

 
 

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

 
(86
)
Portion of OTTI losses recognized in other comprehensive income
—

 
—

Net OTTI losses recognized in earnings
—

 
(86
)
Other net investment gains (losses)
490

 
137

Total net realized investment gains (losses)
490

 
51

 
 
 
 
Total revenues
140,151

 
96,841

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
9,598

 
13,519

Amortization of deferred policy acquisition costs
38,848

 
18,237

Universal life and annuity contract interest
53,232

 
17,931

Other operating expenses
19,060

 
17,087

 
 
 
 
Total benefits and expenses
120,738

 
66,774

 
 
 
 
Earnings before Federal income taxes
19,413

 
30,067

 
 
 
 
Federal income taxes
5,623

 
9,255

 
 
 
 
Net earnings
$
13,790

 
20,812

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
3.90

 
5.90

Class B
$
1.95

 
2.95

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
3.90

 
5.88

Class B
$
1.95

 
2.95


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands, except per share amounts)

 
2011
 
2010
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
62,464

 
63,535

Traditional life and annuity premiums
8,629

 
8,514

Net investment income
231,239

 
155,135

Other revenues
14,604

 
14,319

Net realized investment gains (losses):
 

 
 

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

 
(334
)
Portion of OTTI losses recognized in other comprehensive income
—

 
26

Net OTTI losses recognized in earnings
—

 
(308
)
Other net investment gains (losses)
3,582

 
(70
)
Total net realized investment gains (losses)
3,582

 
(378
)
 
 
 
 
Total revenues
320,518

 
241,125

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
21,814

 
26,806

Amortization of deferred policy acquisition costs
66,337

 
42,006

Universal life and annuity contract interest
145,381

 
80,631

Other operating expenses
39,778

 
34,404

 
 
 
 
Total benefits and expenses
273,310

 
183,847

 
 
 
 
Earnings before Federal income taxes
47,208

 
57,278

 
 
 
 
Federal income taxes
15,207

 
18,058

 
 
 
 
Net earnings
$
32,001

 
39,220

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
9.06

 
11.12

Class B
$
4.53

 
5.56

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
9.04

 
11.08

Class B
$
4.53

 
5.56


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)

 
2011
 
2010
 
 
 
 
Net earnings
$
13,790

 
20,812

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

 
 

Unrealized gains on securities:
 

 
 

Net unrealized holding gains arising during period
5,769

 
15,787

Net unrealized liquidity gains (losses)
149

 
506

Reclassification adjustment for net amounts included in net earnings
(194
)
 
141

Amortization of net unrealized (gains) losses related to transferred securities
14

 
(3
)
 
 
 
 
Net unrealized gains on securities
5,738

 
16,431

 
 
 
 
Foreign currency translation adjustments
(59
)
 
57

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
292

 
289

 
 
 
 
Other comprehensive income
5,971

 
16,777

 
 
 
 
Comprehensive income
$
19,761

 
37,589


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)

 
2011
 
2010
 
 
 
 
Net earnings
$
32,001

 
39,220

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

 
 

Unrealized gains on securities:
 

 
 

Net unrealized holding gains arising during period
5,775

 
31,479

Net unrealized liquidity gains (losses)
350

 
(2,807
)
Reclassification adjustment for net amounts included in net earnings
(2,079
)
 
—

Amortization of net unrealized losses related to transferred securities
7

 
4

 
 
 
 
Net unrealized gains on securities
4,053

 
28,676

 
 
 
 
Foreign currency translation adjustments
(134
)
 
(96
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
582

 
579

 
 
 
 
Other comprehensive income
4,501

 
29,159

 
 
 
 
Comprehensive income
$
36,502

 
68,379


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)

 
2011
 
2010
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,629

 
3,626

Shares exercised under stock option plan
6

 
—

 
 
 
 
       Balance at end of period
3,635

 
3,626

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,140

 
36,680

Shares exercised under stock option plan
1,211

 
—

 
 
 
 
       Balance at end of period
38,351

 
36,680

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
62,499

 
31,639

Change in unrealized gains during period, net of tax
3,703

 
28,308

 
 
 
 
   Balance at end of period
66,202

 
59,947

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(2,713
)
 
(2,751
)
Cumulative effect of change in accounting principal
—

 
—

Amortization
165

 
80

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

 
(26
)
Additional credit loss on previously impaired securities
—

 
50

Change in shadow deferred policy acquisition costs
185

 
(62
)
 
 
 
 
   Balance at end of period
(2,363
)
 
(2,709
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
—

 
(562
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Recoveries, net of tax
—

 
326

 
 
 
 
  Balance at end of period
—

 
(236
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)

Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,585

 
2,893

Change in translation adjustments during period
(134
)
 
(96
)
 
 
 
 
  Balance at end of period
2,451

 
2,797

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(11,963
)
 
(13,459
)
Amortization of net prior service cost and net gain, net of tax
582

 
579

 
 
 
 
  Balance at end of period
(11,381
)
 
(12,880
)
 
 
 
 
Accumulated other comprehensive income at end of period
54,909

 
46,919

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,127,614

 
1,055,987

   Net earnings
32,001

 
39,220

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,159,615

 
1,095,207

 
 
 
 
Total stockholders' equity
$
1,256,510

 
$
1,182,432


See accompanying notes to condensed consolidated financial statements.



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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)
 
2011
 
2010
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
32,001

 
39,220

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

 
 

Universal life and annuity contract interest
145,381

 
80,631

Surrender charges and other policy revenues
(15,280
)
 
(18,787
)
Realized (gains) losses on investments
(3,582
)
 
378

Accrual and amortization of investment income
(1,369
)
 
(933
)
Depreciation and amortization
390

 
2,191

(Increase) decrease in value of index options
(22,750
)
 
70,482

Increase in deferred policy acquisition and sales inducement costs
(26,674
)
 
(50,732
)
Increase in accrued investment income
(5,967
)
 
(4,276
)
Increase in other assets
(2,756
)
 
(14,362
)
Increase in liabilities for future policy benefits
7,775

 
13,308

(Decrease) increase in other policyholder liabilities
(5,774
)
 
3,483

Decrease in Federal income taxes
(8,555
)
 
(17,355
)
(Decrease) increase in other liabilities
(2,390
)
 
19,437

Other, net
—

 
1

 
 
 
 
Net cash provided by operating activities
90,450

 
122,686

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities available for sale
11,196

 
8,860

Other investments
3,348

 
2,725

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
221,449

 
315,447

Securities available for sale
52,482

 
39,740

Index options
34,615

 
21,159

Purchases of:
 

 
 

Securities held to maturity
(530,454
)
 
(664,897
)
Securities available for sale
(143,859
)
 
(203,900
)
Other investments
(37,058
)
 
(25,460
)
Principal payments on mortgage loans
8,961

 
16,017

Cost of mortgage loans acquired
(28,476
)
 
(38,366
)
Decrease in policy loans
2,705

 
449

Other, net
—

 
—

 
 
 
 
Net cash used in investing activities
(405,091
)
 
(528,226
)
 
 
 
 
 
Continued on Next Page
 

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 2011 and 2010
(Unaudited)
(In thousands)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
719,078

 
653,171

Return of account balances on universal life and annuity contracts
(405,185
)
 
(298,582
)
Issuance of common stock under stock option plan
1,217

 
—

 
 
 
 
Net cash provided by financing activities
315,110

 
354,589

 
 
 
 
Effect of foreign exchange
(134
)
 
(95
)
 
 
 
 
Net increase (decrease) in cash and short-term investments
335

 
(51,046
)
Cash and short-term investments at beginning of period
80,332

 
108,866

 
 
 
 
Cash and short-term investments at end of period
$
80,667

 
$
57,820

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
10

 
$
20

Income taxes
$
24,211

 
$
35,840

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
5,225

 
$
8,898


See accompanying notes to condensed consolidated financial statements.



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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
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 Insurance Company and its subsidiaries (“Company”) as of June 30, 2011, and the results of its operations and its cash flows for the three and six months ended June 30, 2011 and 2010. The results of operations for the six months ended June 30, 2011 and 2010 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, 2010 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, 2010 has been derived from the audited consolidated financial statements as of that date.

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., NWLSM, 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 U.S. generally accepted accounting principles ("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 Company is implementing new actuarial reserving systems that enhance its ability to provide better estimates used in establishing future policy liabilities, monitor the deferred acquisition cost asset and the deferred sales inducements asset as well as support other actuarial processes within the Company. The implementation of these new reserving systems for specific blocks of business began in the second quarter of 2009 and is expected to be completed in the fourth quarter of 2011.  As the Company applies these new systems to a line of business, current reserving assumptions are reviewed and updated as appropriate. During the three months ended June 30, 2010, a correction was made to traditional life policy-related expense of $1.3 million.  This change was related to reserve calculations on current face amounts of insurance in force but should have been calculated on the ultimate face amounts.  During the three months ended March 31, 2010, a correction was made to a surrender charge assumption for future years on one deferred annuity product line.  This change resulted in an unlocking adjustment that increased the Deferred Policy Acquisition Costs (“DPAC”) amortization expense by $2.7 million in that quarter.  As the amounts of these corrections were determined to have occurred over the course of multiple previously reported periods, it was concluded that the amounts of the corrections were immaterial to the financial results reported in any of these periods, as well as the current period.

Certain amounts in the prior year condensed consolidated financial statements have been reclassified to conform to the current year presentation.

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

During June 2011 the Financial Accounting Standards Board ("FASB") issued new guidance, Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220). The guidance relates to the reporting of Other Comprehensive Income. The guidance will improve the comparability, consistency, and transparency of financial reporting and will increase the prominence of items reported in other comprehensive income. The effective date is for interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not have a significant impact on the consolidated financial statements.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


During May 2011 the FASB issued new guidance, Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820). The objective relates to the development of common requirement for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles ("GAAP") and International Financial Reporting Standards ("IFRS"). The guidance will improve the comparability of fair value measurements presented and disclosed in financial statements. The effective date is for interim and annual periods beginning after December 15, 2011. The adoption of this guidance will not have a significant impact on the consolidated financial statements.

During April 2011 the FASB issued new guidance, Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860). The objective is to improve the accounting for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before they mature. The effective date is for interim and annual periods beginning on or after December 15, 2011. The Company has no repurchase agreements, therefore the adoption of this guidance will not have an impact on the consolidated financial statements.

During April 2011 the FASB issued new guidance, Accounting Standards Update No. 2011-02, Receivables (Topic 310). The guidance established the effective date for ASU No. 2011-01, Receivables (Topic 310), for interim and annual periods beginning on or after June 15, 2011 and should be retrospectively applied to the beginning of the annual period of adoption. The objective is to help creditors in determining whether the creditor has granted a concession and whether the debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debit restructuring. The adoption of this guidance will not have a significant impact on the consolidated financial statements.

During October 2010 the FASB issued new guidance, Accounting Standards Update No. 2010-26, Financial Services - Insurance (Topic 944) Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, affecting insurance companies that incur costs in the acquisition of new and renewal insurance contracts. The guidance addresses the diversity in practice regarding the interpretation for which costs relating to the acquisition of new or renewal business qualifies for deferral. The new guidance specifies the acquisition costs which are capitalizable and those which must be expensed. The effective date is for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

During July 2010 the FASB issued new guidance that requires additional disclosures related to an entity's financing receivables and the nature of its credit risks related to financing receivables. The effective date is for interim and annual periods ending after December 15, 2010. The adoption of this guidance did not have a significant impact on the consolidated financial statements.

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 dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on statutory earnings and surplus levels of the Company. The maximum dividend payment which may be made without prior approval in 2011 is $87.5 million. The Company did not pay cash dividends on common stock during the six months ended June 30, 2011 and 2010.

(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.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended June 30,
 
2011
 
2010
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
13,790

 
 
 
20,812

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
13,790

 
 
 
20,812

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
 
 
—

 
—

Allocation of undistributed income
13,400

 
390

 
20,222

 
590

 
 
 
 
 
 
 
 
Net income
$
13,400

 
390

 
20,222

 
590

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,434

 
200

 
3,426

 
200

Effect of dilutive stock options
3

 
—

 
14

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,437

 
200

 
3,440

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
3.90

 
1.95

 
5.90

 
2.95

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
3.90

 
1.95

 
5.88

 
2.95



15
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Six Months Ended June 30,
 
2011
 
2010
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
32,001

 
 
 
39,220

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
32,001

 
 
 
39,220

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
31,096

 
905

 
38,108

 
1,112

 
 
 
 
 
 
 
 
Net income
$
31,096

 
905

 
38,108

 
1,112

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,432

 
200

 
3,426

 
200

Effect of dilutive stock options
6

 
—

 
14

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,438

 
200

 
3,440

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
9.06

 
4.53

 
11.12

 
5.56

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
9.04

 
4.53

 
11.08

 
5.56


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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 complies 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. Going forward future pension expense is projected to be minimal. 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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
—

 
—

 
—

 
—

Interest cost
258

 
258

 
517

 
517

Expected return on plan assets
(259
)
 
(259
)
 
(518
)
 
(518
)
Amortization of prior service cost
1

 
1

 
2

 
2

Amortization of net loss
126

 
126

 
250

 
250

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
126

 
126

 
251

 
251


The Company expects to contribute $406,000 to the plan in 2011. As of June 30, 2011, the Company has contributed $193,000 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 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 of the Chairman and the President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, 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 defined benefit 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 defined benefit plan as previously discussed, while complying with the requirements of the Act.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The following table summarizes the components of net periodic benefit costs for the Chairman and President non-qualified defined benefit plans.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
13

 
13

 
26

 
26

Interest cost
266

 
266

 
532

 
532

Amortization of prior service cost
129

 
129

 
258

 
258

Amortization of net loss
165

 
165

 
329

 
329

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
573

 
573

 
1,145

 
1,145


The Company expects to contribute $2.0 million to these plans in 2011.  As of June 30, 2011, the Company has contributed $0.9 million to the plans.

(B)
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 June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
38

 
35

 
76

 
69

Amortization of prior service cost
29

 
25

 
57

 
51

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
67

 
60

 
133

 
120


The Company expects to contribute minimal amounts to the plan in 2011.

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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 for the quarters ended June 30, 2011 and 2010 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011:
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
41,113

 
227,166

 
580,224

 


 
848,503

Total segment assets
398,712

 
1,035,273

 
7,555,300

 
219,328

 
9,208,613

Future policy benefits
331,037

 
747,058

 
6,621,456

 


 
7,699,551

Other policyholder liabilities
12,206

 
16,999

 
116,548

 


 
145,753

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2011:
 
 
 
 
 
 
 
 
 

Condensed Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
6,617

 
25,616

 
5,006

 
—

 
37,239

Net investment income
4,485

 
9,532

 
78,830

 
4,877

 
97,724

Other revenues
(2
)
 
342

 
(1,070
)
 
5,428

 
4,698

 
 
 
 
 
 
 
 
 
 
Total revenues
11,100

 
35,490

 
82,766

 
10,305

 
139,661

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
(810
)
 
4,199

 
6,209

 
—

 
9,598

Amortization of deferred acquisition costs
2,771

 
7,927

 
28,150

 
—

 
38,848

Universal life and annuity contract interest
1,849

 
8,507

 
42,876

 
—

 
53,232

Other operating expenses
3,361

 
4,273

 
6,320

 
5,106

 
19,060

Federal income taxes (benefit)
1,339

 
3,273

 
(751
)
 
1,590

 
5,451

 
 
 
 
 
 
 
 
 
 
Total expenses
8,510

 
28,179

 
82,804

 
6,696

 
126,189

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,590

 
7,311

 
(38
)
 
3,609

 
13,472



19
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
June 30, 2011:
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
12,649

 
50,176

 
8,268

 
—

 
71,093

Net investment income
9,481

 
22,553

 
191,942

 
7,263

 
231,239

Other revenues
5

 
366

 
2,991

 
11,242

 
14,604

 
 
 
 
 
 
 
 
 
 
Total revenues
22,135

 
73,095

 
203,201

 
18,505

 
316,936

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,424

 
9,161

 
8,229

 
—

 
21,814

Amortization of deferred acquisition costs
5,654

 
16,125

 
44,558

 
—

 
66,337

Universal life and annuity contract interest
4,487

 
21,426

 
119,468

 
—

 
145,381

Other operating expenses
7,027

 
11,199

 
11,223

 
10,329

 
39,778

Federal income taxes
174

 
4,856

 
6,308

 
2,615

 
13,953

 
 
 
 
 
 
 
 
 
 
Total expenses
21,766

 
62,767

 
189,786

 
12,944

 
287,263

 
 
 
 
 
 
 
 
 
 
Segment earnings
$
369

 
10,328

 
13,415

 
5,561

 
29,673


20
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2010:
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
44,834

 
210,101

 
505,419

 
—

 
760,354

Total segment assets
395,512

 
1,131,250

 
6,467,299

 
—

 
7,994,061

Future policy benefits
323,453

 
676,414

 
5,551,710

 
—

 
6,551,577

Other policyholder liabilities
10,582

 
15,219

 
106,614

 
—

 
132,415

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

June 30, 2010:
 

 
 

 
 

 
 

 
 

Condensed Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
7,064

 
24,675

 
4,598

 
—

 
36,337

Net investment income
4,704

 
2,797

 
40,227

 
4,557

 
52,285

Other revenues
182

 
228

 
1,908

 
5,850

 
8,168

 
 
 
 
 
 
 
 
 
 
Total revenues
11,950

 
27,700

 
46,733

 
10,407

 
96,790

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
5,045

 
6,094

 
2,380

 
—

 
13,519

Amortization of deferred acquisition costs
3,028

 
2,317

 
12,892

 
—

 
18,237

Universal life and annuity contract interest
2,872

 
2,201

 
12,858

 
—

 
17,931

Other operating expenses
3,418

 
4,664

 
4,742

 
4,263

 
17,087

Federal income taxes (benefit)
(737
)
 
3,874

 
4,187

 
1,914

 
9,238

 
 
 
 
 
 
 
 
 
 
Total expenses
13,626

 
19,150

 
37,059

 
6,177

 
76,012

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(1,676
)
 
8,550

 
9,674

 
4,230

 
20,778


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
June 30, 2010:
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
14,049

 
48,792

 
9,208

 
—

 
72,049

Net investment income
9,502

 
13,119

 
126,408

 
6,106

 
155,135

Other revenues
215

 
293

 
2,459

 
11,352

 
14,319

 
 
 
 
 
 
 
 
 
 
Total revenues
23,766

 
62,204

 
138,075

 
17,458

 
241,503

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
8,295

 
15,234

 
3,277

 
—

 
26,806

Amortization of deferred acquisition costs
5,768

 
8,992

 
27,246

 
—

 
42,006

Universal life and annuity contract interest
5,334

 
12,349

 
62,948

 
—

 
80,631

Other operating expenses
6,331

 
11,221

 
8,449

 
8,403

 
34,404

Federal income taxes (benefit)
(591
)
 
4,517

 
11,408

 
2,857

 
18,191

 
 
 
 
 
 
 
 
 
 
Total expenses
25,137

 
52,313

 
113,328

 
11,260

 
202,038

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(1,371
)
 
9,891

 
24,747

 
6,198

 
39,465


Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
37,239

 
36,337

 
71,093

 
72,049

Net investment income
97,724

 
52,285

 
231,239

 
155,135

Other revenues
4,698

 
8,168

 
14,604

 
14,319

Realized gains (losses) on investments
490

 
51

 
3,582

 
(378
)
 
 
 
 
 
 
 
 
Total consolidated premiums and other revenues
$
140,151

 
96,841

 
320,518

 
241,125



22
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
5,451

 
9,238

 
13,953

 
18,191

Taxes on realized gains (losses) on investments
172

 
17

 
1,254

 
(133
)
 
 
 
 
 
 
 
 
Total consolidated Federal income taxes
$
5,623

 
9,255

 
15,207

 
18,058



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
13,472

 
20,778

 
29,673

 
39,465

Realized gains (losses) on investments, net of taxes
318

 
34

 
2,328

 
(245
)
 
 
 
 
 
 
 
 
Total consolidated net earnings
$
13,790

 
20,812

 
32,001

 
39,220



 
June 30,
 
2011
 
2010
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
9,208,613

 
7,994,061

Other unallocated assets
53,817

 
51,075

 
 
 
 
Total consolidated assets
$
9,262,430

 
8,045,136


(7)
  SHARE-BASED PAYMENTS

The Company had a stock and incentive plan ("1995 Plan") which provided for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and nonqualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; and (4) performance awards. The 1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010. The number of shares of Class A, $1.00 par value, common stock which were allowed to be issued under the 1995 Plan, or as to which stock appreciation rights or other awards were allowed to be granted, could not exceed 300,000. Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A, $1.00 par value, common stock shares eligible for issue not to exceed 300,000. These shares may be authorized and unissued shares. The Company has issued only nonqualified stock options and stock appreciation rights under these plans.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


All of the employees of the Company and its subsidiaries are eligible to participate in the two plans. In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The directors' grants vest 20% annually following one full year of service to the Company from the date of grant. The employees' grants vest 20% annually following three full years of service to the Company from the date of grant. All grants issued expire after ten years. No awards were issued during the first or second quarters of 2011 and 2010.

Effective during March 2006, the Company adopted and implemented a limited stock buy-back program with respect to the 1995 Plan which provides option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders may elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the 1995 Plan; however, the program necessitated a change in accounting from the equity classification to the liability classification.

In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan.

The Company uses the current fair value method to measure compensation cost. As of June 30, 2011 and 2010, the liability balance was $3.1 million and $4.2 million, respectively. A summary of shares available for grant and stock option activity is detailed below.

 
 
 
Options Outstanding
 
Shares
Available
For Grant
 
Shares
 
Weighted-
Average
Exercise
Price
 
 
 
 
 
 
Stock Options:
 
 
 
 
 
Balance at January 1, 2011
291,000

 
95,573