NWLI 2011 Q3 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 September 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 November 8, 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
 
 
 
 
 
 
September 30, 2011 (Unaudited) and December 31, 2010
 
 
For the Three Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
For the Three Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
For the Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
September 30,
2011
 
December 31,
2010
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $5,943,190 and $5,259,332)
$
5,484,905

 
4,977,516

Securities available for sale, at fair value (cost: $2,386,834 and $2,221,579)
2,589,228

 
2,390,107

Mortgage loans, net of allowance for possible losses ($4,001 and $3,962)
161,842

 
141,247

Policy loans
74,223

 
78,448

Derivatives, index options
17,769

 
80,284

Other long-term investments
34,331

 
29,569

 
 
 
 
Total investments
8,362,298

 
7,697,171

 
 
 
 
Cash and short-term investments
91,902

 
80,332

Deferred policy acquisition costs
715,134

 
691,939

Deferred sales inducements
151,414

 
143,844

Accrued investment income
89,772

 
79,720

Federal income tax receivable
8,447

 
427

Other assets
83,175

 
80,515

 
 
 
 
Total assets
$
9,502,142

 
8,773,948


See accompanying notes to condensed consolidated financial statements.

3
Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
September 30,
2011
 
December 31,
2010
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
7,772,708

 
7,108,599

Traditional life and annuity contracts
139,203

 
139,182

Other policyholder liabilities
148,384

 
151,526

Deferred Federal income tax liability
64,851

 
57,857

Federal income tax payable
—

 
—

Other liabilities
99,600

 
97,993

 
 
 
 
Total liabilities
8,224,746

 
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
38,041

 
37,140

Accumulated other comprehensive income
58,112

 
50,408

Retained earnings
1,177,608

 
1,127,614

 
 
 
 
Total stockholders’ equity
1,277,396

 
1,218,791

 
 
 
 
Total liabilities and stockholders' equity
$
9,502,142

 
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.

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)

 
2011
 
2010
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
34,550

 
32,898

Traditional life and annuity contract premiums
4,685

 
3,961

Net investment income
44,538

 
106,605

Other revenues
5,643

 
6,075

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(1,741
)
 
(538
)
Portion of OTTI losses recognized in other comprehensive income
1,719

 
123

Net OTTI losses recognized in earnings
(22
)
 
(415
)
Other net investment gains (losses)
2,960

 
2,087

Total net realized investment gains (losses)
2,938

 
1,672

 
 
 
 
Total revenues
92,354

 
151,211

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
12,363

 
13,335

Amortization of deferred policy acquisition costs
29,909

 
32,608

Universal life and annuity contract interest
1,873

 
86,792

Other operating expenses
18,948

 
(2,181
)
 
 
 
 
Total benefits and expenses
63,093

 
130,554

 
 
 
 
Earnings before Federal income taxes
29,261

 
20,657

 
 
 
 
Federal income taxes
9,996

 
7,218

 
 
 
 
Net earnings
$
19,265

 
13,439

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
5.45

 
3.81

Class B
$
2.73

 
1.90

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
5.45

 
3.81

Class B
$
2.73

 
1.90


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)

 
2011
 
2010
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
97,014

 
96,433

Traditional life and annuity premiums
13,314

 
12,475

Net investment income
275,777

 
261,740

Other revenues
20,247

 
20,394

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(1,741
)
 
(846
)
Portion of OTTI losses recognized in other comprehensive income
1,719

 
123

Net OTTI losses recognized in earnings
(22
)
 
(723
)
Other net investment gains (losses)
6,542

 
2,017

Total net realized investment gains (losses)
6,520

 
1,294

 
 
 
 
Total revenues
412,872

 
392,336

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
34,177

 
40,141

Amortization of deferred policy acquisition costs
96,246

 
74,614

Universal life and annuity contract interest
147,254

 
167,423

Other operating expenses
58,727

 
32,223

 
 
 
 
Total benefits and expenses
336,404

 
314,401

 
 
 
 
Earnings before Federal income taxes
76,468

 
77,935

 
 
 
 
Federal income taxes
25,203

 
25,276

 
 
 
 
Net earnings
$
51,265

 
52,659

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
14.51

 
14.93

Class B
$
7.25

 
7.46

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
14.49

 
14.89

Class B
$
7.25

 
7.46


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)

 
2011
 
2010
 
 
 
 
Net earnings
$
19,265

 
13,439

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
5,543

 
20,421

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

 
 
 
 
Net unrealized gains (losses) on securities
2,987

 
19,992

 
 
 
 
Foreign currency translation adjustments
(21
)
 
(43
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
236

 
289

 
 
 
 
Other comprehensive income
3,202

 
20,238

 
 
 
 
Comprehensive income
$
22,467

 
33,677


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)

 
2011
 
2010
 
 
 
 
Net earnings
$
51,265

 
52,659

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
11,318

 
49,093

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

 
 
 
 
Net unrealized gains (losses) on securities
7,040

 
48,668

 
 
 
 
Foreign currency translation adjustments
(155
)
 
(139
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
819

 
868

 
 
 
 
Other comprehensive income
7,704

 
49,397

 
 
 
 
Comprehensive income
$
58,969

 
102,056


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)

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

 
3,626

Shares exercised under stock option plan
6

 
3

 
 
 
 
       Balance at end of period
3,635

 
3,629

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,140

 
36,680

Shares exercised under stock option plan
901

 
274

 
 
 
 
       Balance at end of period
38,041

 
36,954

 
 
 
 
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
7,188

 
48,435

 
 
 
 
   Balance at end of period
69,687

 
80,074

 
 
 
 
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
163

 
30

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

 
(123
)
Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
184

 
—

 
 
 
 
   Balance at end of period
(2,366
)
 
(2,844
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
—

 
(562
)
Other-than-temporary impairments, non-credit, net of tax
(1,117
)
 
—

Change in shadow deferred policy acquisition costs
622

 
—

Recoveries, net of tax
—

 
326

 
 
 
 
  Balance at end of period
(495
)
 
(236
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,585

 
2,893

Change in translation adjustments during period
(155
)
 
(139
)
 
 
 
 
  Balance at end of period
2,430

 
2,754

 
 
 
 
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
819

 
868

 
 
 
 
  Balance at end of period
(11,144
)
 
(12,591
)
 
 
 
 
Accumulated other comprehensive income at end of period
58,112

 
67,157

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

 
1,055,987

   Net earnings
51,265

 
52,659

   Stockholder dividends
(1,271
)
 
(1,271
)
 
 
 
 
   Balance at end of period
1,177,608

 
1,107,375

 
 
 
 
Total stockholders' equity
$
1,277,396

 
$
1,215,115


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)
 
2011
 
2010
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
51,265

 
52,659

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

 
 

Universal life and annuity contract interest
147,254

 
167,423

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

(Increase) decrease in value of index options
38,774

 
63,860

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

(Decrease) increase in other policyholder liabilities
(3,142
)
 
8,104

Decrease in Federal income taxes
(4,353
)
 
(10,184
)
(Decrease) increase in other liabilities
(322
)
 
554

Other, net
—

 
(522
)
 
 
 
 
Net cash provided by operating activities
172,354

 
179,392

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities available for sale
19,248

 
28,778

Other investments
4,732

 
3,544

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
375,016

 
534,123

Securities available for sale
89,379

 
53,767

Index options
73,980

 
31,302

Purchases of:
 

 
 

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

Cost of mortgage loans acquired
(33,918
)
 
(52,882
)
Decrease (increase) in policy loans
4,225

 
(255
)
Other, net
—

 
—

 
 
 
 
Net cash used in investing activities
(662,503
)
 
(856,970
)
 
 
 
 
 
Continued on Next Page
 
 
2011
 
2010
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
1,116,161

 
1,060,960

Return of account balances on universal life and annuity contracts
(615,196
)
 
(463,191
)
Issuance of common stock under stock option plan
908

 
277

 
 
 
 
Net cash provided by financing activities
501,873

 
598,046

 
 
 
 
Effect of foreign exchange
(154
)
 
(137
)
 
 
 
 
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

 
 
 
 
Cash and short-term investments at end of period
$
91,902

 
$
29,197

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
10

 
$
30

Income taxes
$
30,209

 
$
35,600

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
12,386

 
$
17,486


See accompanying notes to condensed consolidated financial statements.



4
Table of Contents
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 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.

5
Table of Contents
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.

(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 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.

6
Table of Contents
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.
 
Three Months Ended September 30,
 
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


7
Table of Contents
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.

8
Table of Contents
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.

9
Table of Contents
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


(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.

10
Table of Contents
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