NWLI 2011 Q3 10Q
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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FORM 10-Q |
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R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2011
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o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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 |
(Exact name of Registrant as specified in its charter) |
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COLORADO | 84-0467208 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
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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 November 8, 2011, the number of shares of Registrant's common stock outstanding was: Class A – 3,434,763 and Class B - 200,000.
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TABLE OF CONTENTS |
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September 30, 2011 (Unaudited) and December 31, 2010 | |
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For the Three Months Ended September 30, 2011 and 2010 (Unaudited) | |
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For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) | |
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For the Three Months Ended September 30, 2011 and 2010 (Unaudited) | |
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For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) | |
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For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) | |
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For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) | |
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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)
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| (Unaudited) | | |
ASSETS | September 30, 2011 | | December 31, 2010 |
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Investments: | | | |
Securities held to maturity, at amortized cost (fair value: $5,943,190 and $5,259,332) | $ | 5,484,905 |
| | 4,977,516 |
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Securities available for sale, at fair value (cost: $2,386,834 and $2,221,579) | 2,589,228 |
| | 2,390,107 |
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Mortgage loans, net of allowance for possible losses ($4,001 and $3,962) | 161,842 |
| | 141,247 |
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Policy loans | 74,223 |
| | 78,448 |
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Derivatives, index options | 17,769 |
| | 80,284 |
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Other long-term investments | 34,331 |
| | 29,569 |
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Total investments | 8,362,298 |
| | 7,697,171 |
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Cash and short-term investments | 91,902 |
| | 80,332 |
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Deferred policy acquisition costs | 715,134 |
| | 691,939 |
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Deferred sales inducements | 151,414 |
| | 143,844 |
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Accrued investment income | 89,772 |
| | 79,720 |
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Federal income tax receivable | 8,447 |
| | 427 |
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Other assets | 83,175 |
| | 80,515 |
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Total assets | $ | 9,502,142 |
| | 8,773,948 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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| (Unaudited) | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | September 30, 2011 | | December 31, 2010 |
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LIABILITIES: | | | |
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Future policy benefits: | | | |
Universal life and annuity contracts | $ | 7,772,708 |
| | 7,108,599 |
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Traditional life and annuity contracts | 139,203 |
| | 139,182 |
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Other policyholder liabilities | 148,384 |
| | 151,526 |
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Deferred Federal income tax liability | 64,851 |
| | 57,857 |
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Federal income tax payable | — |
| | — |
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Other liabilities | 99,600 |
| | 97,993 |
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Total liabilities | 8,224,746 |
| | 7,555,157 |
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COMMITMENTS AND CONTINGENCIES (Note 8) |
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STOCKHOLDERS’ EQUITY: | |
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Common stock: | |
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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 |
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Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2011 and 2010 | 200 |
| | 200 |
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Additional paid-in capital | 38,041 |
| | 37,140 |
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Accumulated other comprehensive income | 58,112 |
| | 50,408 |
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Retained earnings | 1,177,608 |
| | 1,127,614 |
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Total stockholders’ equity | 1,277,396 |
| | 1,218,791 |
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Total liabilities and stockholders' equity | $ | 9,502,142 |
| | 8,773,948 |
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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.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 2011 and 2010
(Unaudited)
(In thousands, except per share amounts)
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| 2011 | | 2010 |
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Premiums and other revenues: | | | |
Universal life and annuity contract charges | $ | 34,550 |
| | 32,898 |
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Traditional life and annuity contract premiums | 4,685 |
| | 3,961 |
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Net investment income | 44,538 |
| | 106,605 |
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Other revenues | 5,643 |
| | 6,075 |
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Net realized investment gains (losses): | |
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Total other-than-temporary impairment (“OTTI”) losses | (1,741 | ) | | (538 | ) |
Portion of OTTI losses recognized in other comprehensive income | 1,719 |
| | 123 |
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Net OTTI losses recognized in earnings | (22 | ) | | (415 | ) |
Other net investment gains (losses) | 2,960 |
| | 2,087 |
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Total net realized investment gains (losses) | 2,938 |
| | 1,672 |
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Total revenues | 92,354 |
| | 151,211 |
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Benefits and expenses: | |
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Life and other policy benefits | 12,363 |
| | 13,335 |
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Amortization of deferred policy acquisition costs | 29,909 |
| | 32,608 |
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Universal life and annuity contract interest | 1,873 |
| | 86,792 |
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Other operating expenses | 18,948 |
| | (2,181 | ) |
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Total benefits and expenses | 63,093 |
| | 130,554 |
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Earnings before Federal income taxes | 29,261 |
| | 20,657 |
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Federal income taxes | 9,996 |
| | 7,218 |
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Net earnings | $ | 19,265 |
| | 13,439 |
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Basic earnings per share: | |
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Class A | $ | 5.45 |
| | 3.81 |
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Class B | $ | 2.73 |
| | 1.90 |
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Diluted earnings per share: | |
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Class A | $ | 5.45 |
| | 3.81 |
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Class B | $ | 2.73 |
| | 1.90 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
(In thousands, except per share amounts)
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| 2011 | | 2010 |
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Premiums and other revenues: | | | |
Universal life and annuity contract charges | $ | 97,014 |
| | 96,433 |
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Traditional life and annuity premiums | 13,314 |
| | 12,475 |
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Net investment income | 275,777 |
| | 261,740 |
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Other revenues | 20,247 |
| | 20,394 |
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Net realized investment gains (losses): | |
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Total other-than-temporary impairment (“OTTI”) losses | (1,741 | ) | | (846 | ) |
Portion of OTTI losses recognized in other comprehensive income | 1,719 |
| | 123 |
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Net OTTI losses recognized in earnings | (22 | ) | | (723 | ) |
Other net investment gains (losses) | 6,542 |
| | 2,017 |
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Total net realized investment gains (losses) | 6,520 |
| | 1,294 |
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Total revenues | 412,872 |
| | 392,336 |
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Benefits and expenses: | |
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Life and other policy benefits | 34,177 |
| | 40,141 |
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Amortization of deferred policy acquisition costs | 96,246 |
| | 74,614 |
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Universal life and annuity contract interest | 147,254 |
| | 167,423 |
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Other operating expenses | 58,727 |
| | 32,223 |
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Total benefits and expenses | 336,404 |
| | 314,401 |
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Earnings before Federal income taxes | 76,468 |
| | 77,935 |
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Federal income taxes | 25,203 |
| | 25,276 |
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Net earnings | $ | 51,265 |
| | 52,659 |
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Basic earnings per share: | |
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Class A | $ | 14.51 |
| | 14.93 |
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Class B | $ | 7.25 |
| | 7.46 |
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Diluted earnings per share: | |
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Class A | $ | 14.49 |
| | 14.89 |
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Class B | $ | 7.25 |
| | 7.46 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2011 and 2010
(Unaudited)
(In thousands)
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| 2011 | | 2010 |
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Net earnings | $ | 19,265 |
| | 13,439 |
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Other comprehensive income, net of effects of deferred costs and taxes: | |
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Unrealized gains (losses) on securities: | |
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Net unrealized holding gains arising during period | 5,543 |
| | 20,421 |
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Net unrealized liquidity gains (losses) | (498 | ) | | (123 | ) |
Reclassification adjustment for net amounts included in net earnings | (2,069 | ) | | (326 | ) |
Amortization of net unrealized (gains) losses related to transferred securities | 11 |
| | 20 |
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Net unrealized gains (losses) on securities | 2,987 |
| | 19,992 |
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Foreign currency translation adjustments | (21 | ) | | (43 | ) |
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Benefit plans: | |
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Amortization of net prior service cost and net gain | 236 |
| | 289 |
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Other comprehensive income | 3,202 |
| | 20,238 |
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Comprehensive income | $ | 22,467 |
| | 33,677 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2011 and 2010
(Unaudited)
(In thousands)
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| 2011 | | 2010 |
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Net earnings | $ | 51,265 |
| | 52,659 |
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Other comprehensive income, net of effects of deferred costs and taxes: | |
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Unrealized gains (losses) on securities: | |
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Net unrealized holding gains arising during period | 11,318 |
| | 49,093 |
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Net unrealized liquidity gains (losses) | (148 | ) | | (123 | ) |
Reclassification adjustment for net amounts included in net earnings | (4,148 | ) | | (326 | ) |
Amortization of net unrealized (gains) losses related to transferred securities | 18 |
| | 24 |
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Net unrealized gains (losses) on securities | 7,040 |
| | 48,668 |
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Foreign currency translation adjustments | (155 | ) | | (139 | ) |
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Benefit plans: | |
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Amortization of net prior service cost and net gain | 819 |
| | 868 |
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Other comprehensive income | 7,704 |
| | 49,397 |
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Comprehensive income | $ | 58,969 |
| | 102,056 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) (In thousands)
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| 2011 | | 2010 |
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Common stock: | | | |
Balance at beginning of period | $ | 3,629 |
| | 3,626 |
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Shares exercised under stock option plan | 6 |
| | 3 |
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Balance at end of period | 3,635 |
| | 3,629 |
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Additional paid-in capital: | |
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Balance at beginning of period | 37,140 |
| | 36,680 |
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Shares exercised under stock option plan | 901 |
| | 274 |
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Balance at end of period | 38,041 |
| | 36,954 |
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Accumulated other comprehensive income: | |
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Unrealized gains on non-impaired securities: | |
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Balance at beginning of period | 62,499 |
| | 31,639 |
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Change in unrealized gains during period, net of tax | 7,188 |
| | 48,435 |
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Balance at end of period | 69,687 |
| | 80,074 |
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Unrealized losses on impaired held to maturity securities: | |
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Balance at beginning of period | (2,713 | ) | | (2,751 | ) |
Cumulative effect of change in accounting principal | — |
| | — |
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Amortization | 163 |
| | 30 |
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Other-than-temporary impairments, non-credit, net of tax | — |
| | (123 | ) |
Additional credit loss on previously impaired securities | — |
| | — |
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Change in shadow deferred policy acquisition costs | 184 |
| | — |
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Balance at end of period | (2,366 | ) | | (2,844 | ) |
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Unrealized losses on impaired available for sale securities: | |
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Balance at beginning of period | — |
| | (562 | ) |
Other-than-temporary impairments, non-credit, net of tax | (1,117 | ) | | — |
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Change in shadow deferred policy acquisition costs | 622 |
| | — |
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Recoveries, net of tax | — |
| | 326 |
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Balance at end of period | (495 | ) | | (236 | ) |
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Foreign currency translation adjustments: | |
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Balance at beginning of period | 2,585 |
| | 2,893 |
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Change in translation adjustments during period | (155 | ) | | (139 | ) |
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Balance at end of period | 2,430 |
| | 2,754 |
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Benefit plan liability adjustment: | |
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Balance at beginning of period | (11,963 | ) | | (13,459 | ) |
Amortization of net prior service cost and net gain, net of tax | 819 |
| | 868 |
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Balance at end of period | (11,144 | ) | | (12,591 | ) |
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Accumulated other comprehensive income at end of period | 58,112 |
| | 67,157 |
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Retained earnings: | | | |
Balance at beginning of period | 1,127,614 |
| | 1,055,987 |
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Net earnings | 51,265 |
| | 52,659 |
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Stockholder dividends | (1,271 | ) | | (1,271 | ) |
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Balance at end of period | 1,177,608 |
| | 1,107,375 |
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Total stockholders' equity | $ | 1,277,396 |
| | $ | 1,215,115 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2011 and 2010 (Unaudited) (In thousands) |
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| 2011 | | 2010 |
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Cash flows from operating activities: | | | |
Net earnings | $ | 51,265 |
| | 52,659 |
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Adjustments to reconcile net earnings to net cash from operating activities: | |
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Universal life and annuity contract interest | 147,254 |
| | 167,423 |
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Surrender charges and other policy revenues | (1,340 | ) | | (28,569 | ) |
Realized (gains) losses on investments | (6,520 | ) | | (1,294 | ) |
Accrual and amortization of investment income | (2,140 | ) | | (1,565 | ) |
Depreciation and amortization | 603 |
| | 3,475 |
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(Increase) decrease in value of index options | 38,774 |
| | 63,860 |
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Increase in deferred policy acquisition and sales inducement costs | (52,324 | ) | | (77,107 | ) |
Increase in accrued investment income | (10,052 | ) | | (9,283 | ) |
Increase in other assets | (2,599 | ) | | (14,268 | ) |
Increase in liabilities for future policy benefits | 17,250 |
| | 26,109 |
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(Decrease) increase in other policyholder liabilities | (3,142 | ) | | 8,104 |
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Decrease in Federal income taxes | (4,353 | ) | | (10,184 | ) |
(Decrease) increase in other liabilities | (322 | ) | | 554 |
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Other, net | — |
| | (522 | ) |
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Net cash provided by operating activities | 172,354 |
| | 179,392 |
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Cash flows from investing activities: | |
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Proceeds from sales of: | |
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Securities available for sale | 19,248 |
| | 28,778 |
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Other investments | 4,732 |
| | 3,544 |
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Proceeds from maturities and redemptions of: | |
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Securities held to maturity | 375,016 |
| | 534,123 |
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Securities available for sale | 89,379 |
| | 53,767 |
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Index options | 73,980 |
| | 31,302 |
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Purchases of: | |
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Securities held to maturity | (884,205 | ) | | (1,137,958 | ) |
Securities available for sale | (263,937 | ) | | (292,976 | ) |
Index options | (50,239 | ) | | (41,234 | ) |
Other investments | (10,361 | ) | | (531 | ) |
Principal payments on mortgage loans | 13,577 |
| | 17,352 |
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Cost of mortgage loans acquired | (33,918 | ) | | (52,882 | ) |
Decrease (increase) in policy loans | 4,225 |
| | (255 | ) |
Other, net | — |
| | — |
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Net cash used in investing activities | (662,503 | ) | | (856,970 | ) |
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| Continued on Next Page | |
| 2011 | | 2010 |
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Cash flows from financing activities: | |
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Deposits to account balances for universal life and annuity contracts | 1,116,161 |
| | 1,060,960 |
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Return of account balances on universal life and annuity contracts | (615,196 | ) | | (463,191 | ) |
Issuance of common stock under stock option plan | 908 |
| | 277 |
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Net cash provided by financing activities | 501,873 |
| | 598,046 |
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Effect of foreign exchange | (154 | ) | | (137 | ) |
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Net increase (decrease) in cash and short-term investments | 11,570 |
| | (79,669 | ) |
Cash and short-term investments at beginning of period | 80,332 |
| | 108,866 |
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Cash and short-term investments at end of period | $ | 91,902 |
| | $ | 29,197 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |
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Cash paid during the period for: | |
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Interest | $ | 10 |
| | $ | 30 |
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Income taxes | $ | 30,209 |
| | $ | 35,600 |
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Noncash operating activities: | | | |
Deferral of sales inducements | $ | 12,386 |
| | $ | 17,486 |
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See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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(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 September 30, 2011, and the results of its operations and its cash flows for the three and nine months ended September 30, 2011 and 2010. The results of operations for the nine months ended September 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 September 30, 2011, corrections were made to universal life and traditional life tax reserves which increased tax reserves by $15.1 million. At the corporate tax rate of 35%, the correction decreased current tax expense by $5.3 million which was offset by an increase in deferred tax expense by the same amount. 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.
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 requirements 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 debt 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 adoption of this guidance will not have a significant impact 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.
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 nine months ended September 30, 2011 and 2010. However, the Company did declare a cash dividend on August 19, 2011 payable December 1, 2011 to stockholders on record as of October 28, 2011. 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 was declared in August and paid in November of 2010.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, |
| 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 | $ | 19,265 |
| | | | 13,439 |
| | |
Dividends - Class A shares | (1,235 | ) | | | | (1,235 | ) | | |
Dividends - Class B shares | (36 | ) | | | | (36 | ) | | |
| | | | | | | |
Undistributed income | $ | 17,994 |
| | | | 12,168 |
| | |
| | | | | | | |
Allocation of net income: | |
| | | | |
| | |
Dividends | $ | 1,235 |
| | 36 |
| | 1,235 |
| | 36 |
|
Allocation of undistributed income | 17,485 |
| | 509 |
| | 11,823 |
| | 345 |
|
| | | | | | | |
Net income | $ | 18,720 |
| | 545 |
| | 13,058 |
| | 381 |
|
| | | | | | | |
Denominator: | |
| | |
| | |
| | |
|
Basic earnings per share - weighted-average shares | 3,435 |
| | 200 |
| | 3,427 |
| | 200 |
|
Effect of dilutive stock options | 1 |
| | — |
| | 5 |
| | — |
|
| | | | | | | |
Diluted earnings per share - adjusted weighted-average shares for assumed conversions | 3,436 |
| | 200 |
| | 3,432 |
| | 200 |
|
| | | | | | | |
Basic Earnings Per Share | $ | 5.45 |
| | 2.73 |
| | 3.81 |
| | 1.90 |
|
|
|
| |
|
| |
|
| |
|
|
Diluted Earnings Per Share | $ | 5.45 |
| | 2.73 |
| | 3.81 |
| | 1.90 |
|
|
| | | | | | | | | | | | |
| Nine Months Ended September 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 | $ | 51,265 |
| | | | 52,659 |
| | |
Dividends - Class A shares | (1,235 | ) | | | | (1,235 | ) | | |
Dividends - Class B shares | (36 | ) | | | | (36 | ) | | |
| | | | | | | |
Undistributed income | $ | 49,994 |
| | | | 51,388 |
| | |
| | | | | | | |
Allocation of net income: | |
| | | | |
| | |
Dividends | $ | 1,235 |
| | 36 |
| | 1,235 |
| | 36 |
|
Allocation of undistributed income | 48,580 |
| | 1,414 |
| | 49,931 |
| | 1,457 |
|
| | | | | | | |
Net income | $ | 49,815 |
| | 1,450 |
| | 51,166 |
| | 1,493 |
|
| | | | | | | |
Denominator: | |
| | |
| | |
| | |
|
Basic earnings per share - weighted-average shares | 3,433 |
| | 200 |
| | 3,426 |
| | 200 |
|
Effect of dilutive stock options | 4 |
| | — |
| | 11 |
| | — |
|
| | | | | | | |
Diluted earnings per share - adjusted weighted-average shares for assumed conversions | 3,437 |
| | 200 |
| | 3,437 |
| | 200 |
|
| | | | | | | |
Basic Earnings Per Share | $ | 14.51 |
| | 7.25 |
| | 14.93 |
| | 7.46 |
|
|
|
| |
|
| |
|
| |
|
|
Diluted Earnings Per Share | $ | 14.49 |
| | 7.25 |
| | 14.89 |
| | 7.46 |
|
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 September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Service cost | $ | — |
| | — |
| | — |
| | — |
|
Interest cost | 258 |
| | 259 |
| | 776 |
| | 776 |
|
Expected return on plan assets | (259 | ) | | (259 | ) | | (777 | ) | | (777 | ) |
Amortization of prior service cost | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Amortization of net loss | 126 |
| | 125 |
| | 374 |
| | 374 |
|
| | | | | | | |
Net periodic benefit cost | $ | 126 |
| | 126 |
| | 376 |
| | 376 |
|
The Company expects to contribute $406,000 to the plan in 2011. As of September 30, 2011, the Company has contributed $356,000 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.
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 September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Service cost | $ | 9 |
| | 13 |
| | 36 |
| | 39 |
|
Interest cost | 190 |
| | 266 |
| | 722 |
| | 798 |
|
Amortization of prior service cost | 92 |
| | 129 |
| | 350 |
| | 387 |
|
Amortization of net loss | 118 |
| | 164 |
| | 447 |
| | 493 |
|
| | | | | | | |
Net periodic benefit cost | $ | 409 |
| | 572 |
| | 1,555 |
| | 1,717 |
|
The Company expects to contribute $2.0 million to these plans in 2011. As of September 30, 2011, the Company has contributed $1.3 million to the plans.
| |
(B) | Defined Benefit Postretirement Healthcare Plans |
The Company sponsors two healthcare plans to provide postretirement benefits to certain fully-vested individuals. The following table summarizes the components of net periodic benefit costs.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Interest cost | $ | 38 |
| | 34 |
| | 113 |
| | 103 |
|
Amortization of prior service cost | 28 |
| | 26 |
| | 85 |
| | 77 |
|
| | | | | | | |
Net periodic benefit cost | $ | 66 |
| | 60 |
| | 198 |
| | 180 |
|
The Company expects to contribute minimal amounts to the plan in 2011.
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 September 30, 2011 and 2010 is provided below.
|
| | | | | | | | | | | | | | | |
Selected Segment Information: | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
September 30, 2011 | | | | | | | | | |
Selected Balance Sheet Items: | | | | | | | | | |
Deferred policy acquisition costs and sales inducements | $ | 40,676 |
| | 229,656 |
| | 596,216 |
| | — |
| | 866,548 |
|
Total segment assets | 401,243 |
| | 1,034,324 |
| | 7,784,519 |
| | 219,376 |
| | 9,439,462 |
|
Future policy benefits | 335,100 |
| | 744,862 |
| | 6,831,949 |
| | — |
| | 7,911,911 |
|
Other policyholder liabilities | 13,883 |
| | 17,567 |
| | 116,934 |
| |
|
| | 148,384 |
|
| | | | | | | | | |
Three Months Ended | | | | | | | | | |
|
September 30, 2011 | | | | | | | | | |
|
Condensed Income Statements: | | | | | | | | | |
|
Premiums and contract revenues | $ | 8,345 |
| | 25,375 |
| | 5,515 |
| | — |
| | 39,235 |
|
Net investment income | 1,655 |
| | 3,253 |
| | 33,940 |
| | 5,690 |
| | 44,538 |
|
Other revenues | 3 |
| | (20 | ) | | 152 |
| | 5,508 |
| | 5,643 |
|
| | | | | | | | | |
Total revenues | 10,003 |
| | 28,608 |
| | 39,607 |
| | 11,198 |
| | 89,416 |
|
| | | | | | | | | |
Life and other policy benefits | 2,151 |
| | 4,737 |
| | 5,475 |
| | — |
| | 12,363 |
|
Amortization of deferred acquisition costs | 2,791 |
| | 8,249 |
| | 18,869 |
| | — |
| | 29,909 |
|
Universal life and annuity contract interest | 2,848 |
| | 766 |
| | (1,741 | ) | | — |
| | 1,873 |
|
Other operating expenses | 2,426 |
| | 4,353 |
| | 7,059 |
| | 5,110 |
| | 18,948 |
|
Federal income taxes (benefit) | (66 | ) | | 3,561 |
| | 3,414 |
| | 2,059 |
| | 8,968 |
|
| | | | | | | | | |
Total expenses | 10,150 |
| | 21,666 |
| | 33,076 |
| | 7,169 |
| | 72,061 |
|
| | | | | | | | | |
Segment earnings (loss) | $ | (147 | ) | | 6,942 |
| | 6,531 |
| | 4,029 |
| | 17,355 |
|
|
| | | | | | | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
Nine Months Ended | | | | | | | | | |
September 30, 2011 | | | | | | | | | |
Condensed Income Statements: | | | | | | | | | |
Premiums and contract revenues | $ | 20,994 |
| | 75,551 |
| | 13,783 |
| | — |
| | 110,328 |
|
Net investment income | 11,136 |
| | 25,806 |
| | 225,882 |
| | 12,953 |
| | 275,777 |
|
Other revenues | 8 |
| | 346 |
| | 3,143 |
| | 16,750 |
| | 20,247 |
|
| | | | | | | | | |
Total revenues | 32,138 |
| | 101,703 |
| | 242,808 |
| | 29,703 |
| | 406,352 |
|
| | | | | | | | | |
Life and other policy benefits | 6,575 |
| | 13,898 |
| | 13,704 |
| | — |
| | 34,177 |
|
Amortization of deferred acquisition costs | 8,445 |
| | 24,374 |
| | 63,427 |
| | — |
| | 96,246 |
|
Universal life and annuity contract interest | 7,335 |
| | 22,192 |
| | 117,727 |
| | — |
| | 147,254 |
|
Other operating expenses | 9,453 |
| | 15,552 |
| | 18,282 |
| | 15,440 |
| | 58,727 |
|
Federal income taxes | 108 |
| | 8,417 |
| | 9,722 |
| | 4,674 |
| | 22,921 |
|
| | | | | | | | | |
Total expenses | 31,916 |
| | 84,433 |
| | 222,862 |
| | 20,114 |
| | 359,325 |
|
| | | | | | | | | |
Segment earnings | $ | 222 |
| | 17,270 |
| | 19,946 |
| | 9,589 |
| | 47,027 |
|
|
| | | | | | | | | | | | | | | |
Selected Segment Information: | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
September 30, 2010 | | | | | | | | | |
Selected Balance Sheet Items: | | | | | | | | | |
Deferred policy acquisition costs and sales inducements | $ | 41,811 |
| | 206,620 |
| | 504,973 |
| | — |
| | 753,404 |
|
Total segment assets | 393,549 |
| | 971,496 |
| | 6,802,612 |
| | 217,028 |
| | 8,384,685 |
|
Future policy benefits | 325,915 |
| | 689,807 |
| | 5,868,845 |
| | — |
| | 6,884,567 |
|
Other policyholder liabilities | 11,816 |
| | 18,064 |
| | 107,155 |
| | — |
| | 137,035 |
|
| | | | | | | | | |
Three Months Ended | |
| | |
| | |
| | |
| | |
|
September 30, 2010 | |
| | |
| | |
| | |
| | |
|
Condensed Income Statements: | |
| | |
| | |
| | |
| | |
|
Premiums and contract revenues | $ | 6,547 |
| | 25,070 |
| | 5,242 |
| | — |
| | 36,859 |
|
Net investment income | 2,296 |
| | 12,431 |
| | 86,329 |
| | 5,549 |
| | 106,605 |
|
Other revenues | (9 | ) | | 57 |
| | 494 |
| | 5,533 |
| | 6,075 |
|
| | | | | | | | | |
Total revenues | 8,834 |
| | 37,558 |
| | 92,065 |
| | 11,082 |
| | 149,539 |
|
| | | | | | | | | |
Life and other policy benefits | 3,719 |
| | 2,151 |
| | 7,465 |
| | — |
| | 13,335 |
|
Amortization of deferred acquisition costs | 2,881 |
| | 9,702 |
| | 20,025 |
| | — |
| | 32,608 |
|
Universal life and annuity contract interest | 2,965 |
| | 9,440 |
| | 74,387 |
| | — |
| | 86,792 |
|
Other operating expenses | 1,937 |
| | 2,745 |
| | (10,961 | ) | | 4,098 |
| | (2,181 | ) |
Federal income taxes (benefit) | (1,030 | ) | | 5,258 |
| | 1,648 |
| | 756 |
| | 6,632 |
|
| | | | | | | | | |
Total expenses | 10,472 |
| | 29,296 |
| | 92,564 |
| | 4,854 |
| | 137,186 |
|
| | | | | | | | | |
Segment earnings (loss) | $ | (1,638 | ) | | 8,262 |
| | (499 | ) | | 6,228 |
| | 12,353 |
|
|
| | | | | | | | | | | | | | | |
| Domestic Life Insurance | | International Life Insurance | | Annuities | | All Others | | Totals |
| | | | | (In thousands) | | | | |
| | | | | | | | | |
Nine Months Ended | | | | | | | | | |
September 30, 2010 | | | | | | | | | |
Condensed Income Statements: | | | | | | | | | |
Premiums and contract revenues | $ | 20,596 |
| | 73,862 |
| | 14,450 |
| | — |
| | 108,908 |
|
Net investment income | 11,798 |
| | 25,550 |
| | 212,737 |
| | 11,655 |
| | 261,740 |
|
Other revenues | 206 |
| | 350 |
| | 2,953 |
| | 16,885 |
| | 20,394 |
|
| | | | | | | | | |
Total revenues | 32,600 |
| | 99,762 |
| | 230,140 |
| | 28,540 |
| | 391,042 |
|
| | | | | | | | | |
Life and other policy benefits | 12,014 |
| | 17,385 |
| | 10,742 |
| | — |
| | 40,141 |
|
Amortization of deferred acquisition costs | 8,649 |
| | 18,694 |
| | 47,271 |
| | — |
| | 74,614 |
|
Universal life and annuity contract interest | 8,299 |
| | 21,789 |
| | 137,335 |
| | — |
| | 167,423 |
|
Other operating expenses | 8,268 |
| | 13,966 |
| | (2,512 | ) | | 12,501 |
| | 32,223 |
|
Federal income taxes (benefit) | (1,621 | ) | | 9,775 |
| | 13,056 |
| | 3,613 |
| | 24,823 |
|
| | | | | | | | | |
Total expenses | 35,609 |
| | 81,609 |
| | 205,892 |
| | 16,114 |
| | 339,224 |
|
| | | | | | | | | |
Segment earnings (loss) | $ | (3,009 | ) | | 18,153 |
| | 24,248 |
| | 12,426 |
| | 51,818 |
|
Reconciliations of segment information to the Company's condensed consolidated financial statements are provided below.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Premiums and Other Revenues: | | | | | | | |
Premiums and contract revenues | $ | 39,235 |
| | 36,859 |
| | 110,328 |
| | 108,908 |
|
Net investment income | 44,538 |
| | 106,605 |
| | 275,777 |
| | 261,740 |
|
Other revenues | 5,643 |
| | 6,075 |
| | 20,247 |
| | 20,394 |
|
Realized gains (losses) on investments | 2,938 |
| | 1,672 |
| | 6,520 |
| | 1,294 |
|
| | | | | | | |
Total consolidated premiums and other revenues | $ | 92,354 |
| | 151,211 |
| | 412,872 |
| | 392,336 |
|
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Federal Income Taxes: | | | | | | | |
Total segment Federal income taxes | $ | 8,968 |
| | 6,632 |
| | 22,921 |
| | 24,823 |
|
Taxes on realized gains (losses) on investments | 1,028 |
| | 586 |
| | 2,282 |
| | 453 |
|
| | | | | | | |
Total consolidated Federal income taxes | $ | 9,996 |
| | 7,218 |
| | 25,203 |
| | 25,276 |
|
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| (In thousands) |
| | | | | | | |
Net Earnings: | | | | | | | |
Total segment earnings | $ | 17,355 |
| | 12,353 |
| | 47,027 |
| | 51,818 |
|
Realized gains (losses) on investments, net of taxes | 1,910 |
| | 1,086 |
| | 4,238 |
| | 841 |
|
| | | | | | | |
Total consolidated net earnings | $ | 19,265 |
| | 13,439 |
| | 51,265 |
| | 52,659 |
|
|
| | | | | | |
| September 30, |
| 2011 | | 2010 |
| (In thousands) |
| | | |
Assets: | | | |
Total segment assets | $ | 9,439,462 |
| | 8,384,685 |
|
Other unallocated assets | 62,680 |
| | 21,216 |
|
| | | |
Total consolidated assets | $ | 9,502,142 |
| | 8,405,901 |
|
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.
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 three 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 September 30, 2011 and 2010, the liability balance was $1.7 million and $3.0 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 |
| | $ | 180.42 |
|
Exercised | — |
| | (8,005 | ) | | 93.21 | |