NWLI 2012 Q2 10Q


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

For the Quarterly Period Ended June 30, 2012
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
 
Commission File Number: 2-17039
 
 
 
 
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
COLORADO
84-0467208
(State of Incorporation)
(I.R.S. Employer Identification Number)
 
 
850 EAST ANDERSON LANE
 
AUSTIN, TEXAS 78752-1602
(512) 836-1010
(Address of Principal Executive Offices)
(Telephone Number)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes R   No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes R   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated file" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  £     Accelerated filer  R   Non-accelerated filer  £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No R
As of August 7, 2012, the number of shares of Registrant's common stock outstanding was: Class A – 3,434,763 and  Class B - 200,000.




TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
June 30, 2012 (Unaudited) and December 31, 2011
 
 
For the Three Months Ended June 30, 2012 and 2011 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Three Months Ended June 30, 2012 and 2011 (Unaudited)
 
 
For the Six Months Ended June 30, 2011 and 2010 (Unaudited)
 
 
For the Three Months Ended June 30, 2012 and 2011 (Unaudited)
 
 
For the Six Months Ended June 30, 2012 and 2011 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
June 30,
2012
 
December 31,
2011
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $6,245,687 and $6,082,330)
$
5,738,777

 
5,641,909

Securities available for sale, at fair value (cost: $2,530,815 and $2,422,650)
2,754,759

 
2,624,953

Mortgage loans, net of allowance for possible losses ($0 and $4,571)
132,614

 
157,460

Policy loans
74,369

 
74,967

Derivatives, index options
65,555

 
30,844

Other long-term investments
43,467

 
34,472

 
 
 
 
Total investments
8,809,541

 
8,564,605

 
 
 
 
Cash and short-term investments
111,264

 
119,290

Deferred policy acquisition costs
708,220

 
722,542

Deferred sales inducements
152,360

 
155,753

Accrued investment income
90,176

 
87,875

Federal income tax receivable
—

 
—

Other assets
83,900

 
77,934

 
 
 
 
Total assets
$
9,955,461

 
9,727,999


See accompanying notes to condensed consolidated financial statements.

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
June 30,
2012
 
December 31,
2011
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
8,178,279

 
8,023,798

Traditional life and annuity contracts
138,452

 
139,657

Other policyholder liabilities
154,105

 
151,308

Deferred Federal income tax liability
44,023

 
46,481

Federal income tax payable
1,462

 
5,962

Other liabilities
107,819

 
84,008

 
 
 
 
Total liabilities
8,624,140

 
8,451,214

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,434,763 and 3,434,766 issued and outstanding in 2012 and 2011
3,435

 
3,435

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2012 and 2011
200

 
200

Additional paid-in capital
37,767

 
37,767

Accumulated other comprehensive income
64,725

 
53,176

Retained earnings
1,225,194

 
1,182,207

 
 
 
 
Total stockholders’ equity
1,331,321

 
1,276,785

 
 
 
 
Total liabilities and stockholders' equity
$
9,955,461

 
9,727,999


Note:  The Condensed Consolidated Balance Sheet at December 31, 2011, has been derived from the audited Consolidated Financial Statements as of that date.

See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands, except per share amounts)

 
2012
 
2011
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
36,653

 
32,632

Traditional life and annuity contract premiums
4,904

 
4,607

Net investment income
78,181

 
97,724

Other revenues
5,866

 
4,698

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(185
)
 
—

Portion of OTTI losses recognized in other comprehensive income
(235
)
 
—

Net OTTI losses recognized in earnings
(420
)
 
—

Other net investment gains (losses)
2,425

 
490

Total net realized investment gains (losses)
2,005

 
490

 
 
 
 
Total revenues
127,609

 
140,151

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
13,857

 
9,598

Amortization of deferred policy acquisition costs
31,349

 
38,848

Universal life and annuity contract interest
26,004

 
53,232

Other operating expenses
22,452

 
19,060

 
 
 
 
Total benefits and expenses
93,662

 
120,738

 
 
 
 
Earnings before Federal income taxes
33,947

 
19,413

 
 
 
 
Federal income taxes
10,701

 
5,623

 
 
 
 
Net earnings
$
23,246

 
13,790

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
6.58

 
3.90

Class B
$
3.29

 
1.95

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
6.58

 
3.90

Class B
$
3.29

 
1.95


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands, except per share amounts)

 
2012
 
2011
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
72,852

 
62,464

Traditional life and annuity premiums
8,987

 
8,629

Net investment income
227,739

 
231,239

Other revenues
11,521

 
14,604

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) losses
(462
)
 
—

Portion of OTTI losses recognized in other comprehensive income
(157
)
 
—

Net OTTI losses recognized in earnings
(619
)
 
—

Other net investment gains (losses)
3,791

 
3,582

Total net realized investment gains (losses)
3,172

 
3,582

 
 
 
 
Total revenues
324,271

 
320,518

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
27,535

 
21,814

Amortization of deferred policy acquisition costs
63,060

 
66,337

Universal life and annuity contract interest
127,547

 
145,381

Other operating expenses
42,470

 
39,778

 
 
 
 
Total benefits and expenses
260,612

 
273,310

 
 
 
 
Earnings before Federal income taxes
63,659

 
47,208

 
 
 
 
Federal income taxes
20,672

 
15,207

 
 
 
 
Net earnings
$
42,987

 
32,001

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
12.16

 
9.06

Class B
$
6.08

 
4.53

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
12.16

 
9.04

Class B
$
6.08

 
4.53


See accompanying notes to condensed consolidated financial statements.



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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)

 
2012
 
2011
 
 
 
 
Net earnings
$
23,246

 
13,790

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
5,624

 
5,769

Net unrealized liquidity gains (losses)
161

 
149

Reclassification adjustment for net amounts included in net earnings
(1,658
)
 
(194
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
14

 
 
 
 
Net unrealized gains (losses) on securities
4,127

 
5,738

 
 
 
 
Foreign currency translation adjustments
(101
)
 
(59
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
225

 
292

 
 
 
 
Other comprehensive income
4,251

 
5,971

 
 
 
 
Comprehensive income
$
27,497

 
19,761


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)

 
2012
 
2011
 
 
 
 
Net earnings
$
42,987

 
32,001

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
13,376

 
5,775

Net unrealized liquidity gains (losses)
137

 
350

Reclassification adjustment for net amounts included in net earnings
(2,698
)
 
(2,079
)
Amortization of net unrealized (gains) losses related to transferred securities
1

 
7

 
 
 
 
Net unrealized gains (losses) on securities
10,816

 
4,053

 
 
 
 
Foreign currency translation adjustments
285

 
(134
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
448

 
582

 
 
 
 
Other comprehensive income
11,549

 
4,501

 
 
 
 
Comprehensive income
$
54,536

 
36,502


See accompanying notes to condensed consolidated financial statements.


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)

 
2012
 
2011
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,635

 
3,629

Shares exercised under stock option plan
—

 
6

 
 
 
 
       Balance at end of period
3,635

 
3,635

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,767

 
37,140

Shares exercised under stock option plan
—

 
1,211

 
 
 
 
       Balance at end of period
37,767

 
38,351

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
69,116

 
62,499

Change in unrealized gains during period, net of tax
10,679

 
3,703

 
 
 
 
   Balance at end of period
79,795

 
66,202

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(2,320
)
 
(2,713
)
Cumulative effect of change in accounting principal
—

 
—

Amortization
15

 
165

Other-than-temporary impairments, non-credit, net of tax
92

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
30

 
185

 
 
 
 
   Balance at end of period
(2,183
)
 
(2,363
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(608
)
 
—

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

 
—

Change in shadow deferred policy acquisition costs
—

 


Recoveries, net of tax
—

 
—

 
 
 
 
  Balance at end of period
(608
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)

 
2012
 
2011
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,368

 
2,585

Change in translation adjustments during period
285

 
(134
)
 
 
 
 
  Balance at end of period
2,653

 
2,451

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(15,380
)
 
(11,963
)
Amortization of net prior service cost and net gain, net of tax
448

 
582

 
 
 
 
  Balance at end of period
(14,932
)
 
(11,381
)
 
 
 
 
Accumulated other comprehensive income at end of period
64,725

 
54,909

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,182,207

 
1,127,614

   Net earnings
42,987

 
32,001

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,225,194

 
1,159,615

 
 
 
 
Total stockholders' equity
$
1,331,321

 
$
1,256,510


See accompanying notes to condensed consolidated financial statements.



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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)
 
2012
 
2011
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
42,987

 
32,001

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

 
 

Universal life and annuity contract interest
127,547

 
145,381

Surrender charges and other policy revenues
(7,009
)
 
(15,280
)
Realized (gains) losses on investments
(7,743
)
 
(3,582
)
Accrual and amortization of investment income
(1,400
)
 
(1,369
)
Depreciation and amortization
1,113

 
390

(Increase) decrease in value of index options
(9,959
)
 
(22,750
)
Decrease (increase) in deferred policy acquisition and sales inducement costs
3,664

 
(26,674
)
Increase in accrued investment income
(2,301
)
 
(5,967
)
Increase in other assets
(2,232
)
 
(2,756
)
Increase in liabilities for future policy benefits
3,602

 
7,775

(Decrease) increase in other policyholder liabilities
2,797

 
(5,774
)
Decrease in Federal income taxes
(12,757
)
 
(8,555
)
(Decrease) increase in other liabilities
3,385

 
(2,390
)
Other, net
128

 
—

 
 
 
 
Net cash provided by operating activities
141,822

 
90,450

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities available for sale
(367
)
 
11,196

Other investments
3,492

 
3,348

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
696,502

 
221,449

Securities available for sale
177,601

 
52,482

Index options
941

 
34,615

Purchases of:
 

 
 

Securities held to maturity
(785,820
)
 
(530,454
)
Securities available for sale
(271,552
)
 
(143,859
)
Index options
(26,153
)
 
(29,279
)
Other investments
(4,263
)
 
(7,779
)
Principal payments on mortgage loans
38,154

 
8,961

Cost of mortgage loans acquired
(8,403
)
 
(28,476
)
Decrease (increase) in policy loans
598

 
2,705

Other, net
—

 
—

 
 
 
 
Net cash used in investing activities
(179,270
)
 
(405,091
)
 
 
 
 
 
Continued on Next Page
 

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 2012 and 2011
(Unaudited)
(In thousands)
 
2012
 
2011
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
454,963

 
719,078

Return of account balances on universal life and annuity contracts
(425,827
)
 
(405,185
)
Issuance of common stock under stock option plan
—

 
1,217

 
 
 
 
Net cash provided by financing activities
29,136

 
315,110

 
 
 
 
Effect of foreign exchange
286

 
(134
)
 
 
 
 
Net increase (decrease) in cash and short-term investments
(8,026
)
 
335

Cash and short-term investments at beginning of period
119,290

 
80,332

 
 
 
 
Cash and short-term investments at end of period
$
111,264

 
$
80,667

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
20

 
$
10

Income taxes
$
33,495

 
$
24,211

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
158

 
$
5,225


See accompanying notes to condensed consolidated financial statements.



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


(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of National Western Life Insurance Company and its subsidiaries (“Company” or "National Western") as of June 30, 2012, and the results of its operations and its cash flows for the three and six months ending June 30, 2012 and 2011. The results of operations for the six months ended June 30, 2012 and 2011 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, 2011 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, 2011 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 implemented 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 was completed in the fourth quarter of 2011.  As the Company applied these new systems to a line of business, current reserving assumptions were reviewed and updated as appropriate. In different reporting periods during this time period, certain corrections were made to reserve and Deferred Policy Acquisition Costs balances as a result of the implementation of the new reserving system.  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. None of these corrections occurred in 2012.

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


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

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

During July 2010, the Financial Accounting Standards Board ("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 was for interim and annual periods ending after December 15, 2010.  The adoption of this guidance was effective December 31, 2010.  See Note 3, Investments, of the accompanying condensed consolidated financial statements for additional disclosures.

During October 2010, the FASB issued new guidance 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 qualify 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 ending after December 15, 2011.  The Company has evaluated the impact of this guidance on the condensed consolidated financial statements. Based on evaluation of actual expenses from 2011 the Company determined that $2.5 million of capitalized expenses during 2011 would not have been deferrable under the new guidance. The change would have reduced 2011 pretax operating income by 3.0%. Thus, management prospectively adapted the guidance and has concluded the new guidance does not have a significant impact on the condensed consolidated financial statements.

During January 2011, the FASB issued new guidance which defers the effective date of disclosures about troubled debt restructurings in Accounting Standards Update No. 2010-20.  The new anticipated effective date is for interim and annual periods ending after June 15, 2011.  The adoption of this guidance will not have a significant impact on the condensed consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,”. ASU No. 2011-04 does not extend the use of the existing concepts or guidance regarding fair value. The guidance emphasizes using the same meaning and disclosures of fair value within the financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The guidance requires disclosure of additional information about transfers between Level 1 and Level 2 of the fair value hierarchy, additional disclosures for Level 3 fair value measurement, including quantitative and qualitative information about significant unobservable inputs and discussions about the sensitivity of these unobservable inputs and a description of the Company's valuation process. ASU No. 2011-04 is effective for annual reporting periods beginning after December 15, 2011. The Company has included the additional disclosures in the notes to the condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”).  ASU No. 2011-05 provides that entities must present the components of net income, the components of comprehensive income and the total of comprehensive income for all periods presented.   ASU No. 2011-05 is effective for interim or annual periods beginning on or after December 15, 2011.  The provisions of ASU No. 2011-05 relate only to the presentation of other comprehensive income and, accordingly, its adoption did not have an impact on the Company's condensed consolidated financial position or the results of its operations.  This guidance was amended by ASU No. 2011-12 below.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain provisions of ASU 2011-05, Presentation of Comprehensive Income.  One of ASU 2011-05's provisions requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. This requirement is indefinitely deferred by ASU 2011-12. ASUs 2011-05 and 2011-12 are effective for fiscal years, and interim periods beginning after December 15, 2011. The guidance did not have a significant impact on condensed consolidated financial statements and current disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Pubic Accounts ("AICPA"), and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future condensed consolidated financial statements.



14
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(3)
 STOCKHOLDERS' EQUITY

The Company is restricted by state insurance laws from the Colorado Division of Insurance as to dividend amounts which may be paid to stockholders without prior approval. 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 2012 is $91.9 million. The Company did not declare or pay cash dividends on common stock during the six months ended June 30, 2012 and 2011.

(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 June 30,
 
2012
 
2011
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
23,246

 
 
 
13,790

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
23,246

 
 
 
13,790

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
22,589

 
658

 
13,400

 
390

 
 
 
 
 
 
 
 
Net income
$
22,589

 
658

 
13,400

 
390

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,435

 
200

 
3,434

 
200

Effect of dilutive stock options
—

 
—

 
3

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,435

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
6.58

 
3.29

 
3.90

 
1.95

 


 


 


 


Diluted Earnings Per Share
$
6.58

 
3.29

 
3.90

 
1.95



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

 
Six Months Ended June 30,
 
2012
 
2011
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
42,987

 
 
 
32,001

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
42,987

 
 
 
32,001

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
41,771

 
1,216

 
31,096

 
905

 
 
 
 
 
 
 
 
Net income
$
41,771

 
1,216

 
31,096

 
905

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,435

 
200

 
3,432

 
200

Effect of dilutive stock options
—

 
—

 
6

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,435

 
200

 
3,438

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
12.16

 
6.08

 
9.06

 
4.53

 


 


 


 


Diluted Earnings Per Share
$
12.16

 
6.08

 
9.04

 
4.53


For the three and six month per share calculations as of June 30, 2012, the exercise price of all outstanding stock options is above the market price of the Company's Class A common shares as of that date. Accordingly, there is no dilutive impact for stock options upon earnings per share during these periods.

16
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(5)
 PENSION AND OTHER POSTRETIREMENT PLANS

(A)
Defined Benefit Pension Plans

The Company sponsors a qualified defined benefit pension plan covering substantially all employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company's Board of Directors approved an amendment to freeze the Pension Plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. Going forward future pension expense is projected to be minimal. Fair values of plan assets and liabilities are measured as of the prior December 31 for each respective year. The following table summarizes the components of net periodic benefit cost.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
44

 
—

 
87

 
—

Interest cost
232

 
258

 
464

 
517

Expected return on plan assets
(267
)
 
(259
)
 
(535
)
 
(518
)
Amortization of prior service cost
1

 
1

 
2

 
2

Amortization of net loss
196

 
126

 
393

 
250

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
206

 
126

 
411

 
251


The Company's minimum required contribution for the 2012 plan year is $1.1 million of which it expects to contribute $0.5 million during 2012 with the remainder to be contributed in 2013. In addition, the Company has contributions for the 2011 plan year payable during 2012 of $0.4 million. As of June 30, 2012, the Company has contributed $0.3 million to the plan for the 2011 and 2012 plan years.

The Company also sponsors a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. The pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension obligations under the plan. However, the Company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with the Company beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the Chairman of the Company. As previously mentioned, these additional obligations are a liability to the Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the Chairman and the President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, the Company established a second non-qualified defined benefit plan for the benefit of the Chairman of the Company. This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified defined benefit plan, while complying with the requirements of the Act.

Effective November 1, 2005, the Company established a third non-qualified defined benefit plan for the benefit of the President of the Company. This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified defined benefit plan as previously discussed, while complying with the requirements of the Act.

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


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
42

 
13

 
84

 
26

Interest cost
228

 
266

 
456

 
532

Amortization of prior service cost
15

 
129

 
30

 
258

Amortization of net loss
286

 
165

 
571

 
329

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
571

 
573

 
1,141

 
1,145


The Company expects to contribute $2.0 million to these plans in 2012.  As of June 30, 2012, the Company has contributed $0.9 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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
32

 
38

 
65

 
76

Amortization of prior service cost
$
26

 
29

 
52

 
57

Amortization of net loss
10

 
—

 
20

 
—

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
68

 
67

 
137

 
133


The Company expects to contribute minimal amounts to the plan in 2012.


18
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6)
SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information for the quarters ended June 30, 2012 and 2011 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
35,681

 
229,034

 
595,865

 
—

 
860,580

Total segment assets
430,613

 
1,062,917

 
8,149,053

 
228,674

 
9,871,257

Future policy benefits
367,968

 
795,992

 
7,152,771

 
—

 
8,316,731

Other policyholder liabilities
11,899

 
13,710

 
128,496

 


 
154,105

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2012
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
4,280

 
32,115

 
5,162

 
—

 
41,557

Net investment income
3,991

 
7,315

 
61,875

 
5,000

 
78,181

Other revenues
45

 
314

 
(260
)
 
5,767

 
5,866

 
 
 
 
 
 
 
 
 
 
Total revenues
8,316

 
39,744

 
66,777

 
10,767

 
125,604

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
1,620

 
6,315

 
5,922

 
—

 
13,857

Amortization of deferred acquisition costs
2,068

 
7,757

 
21,524

 
—

 
31,349

Universal life and annuity contract interest
1,230

 
6,431

 
18,343

 
—

 
26,004

Other operating expenses
2,578

 
6,718

 
7,744

 
5,412

 
22,452

Federal income taxes (benefit)
261

 
3,943

 
4,110

 
1,685

 
9,999

 
 
 
 
 
 
 
 
 
 
Total expenses
7,757

 
31,164

 
57,643

 
7,097

 
103,661

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
559

 
8,580

 
9,134

 
3,670

 
21,943



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

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
14,819

 
55,546

 
11,474

 
—

 
81,839

Net investment income
9,809

 
22,712

 
186,264

 
8,954

 
227,739

Other revenues
52

 
346

 
(199
)
 
11,322

 
11,521

 
 
 
 
 
 
 
 
 
 
Total revenues
24,680

 
78,604

 
197,539

 
20,276

 
321,099

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,268

 
9,795

 
14,472

 
—

 
27,535

Amortization of deferred acquisition costs
4,459

 
13,365

 
45,236

 
—

 
63,060

Universal life and annuity contract interest
8,443

 
21,243

 
97,861

 
—

 
127,547

Other operating expenses
7,346

 
12,536

 
11,772

 
10,816

 
42,470

Federal income taxes
376

 
7,006

 
9,120

 
3,060

 
19,562

 
 
 
 
 
 
 
 
 
 
Total expenses
23,892

 
63,945

 
178,461

 
13,876

 
280,174

 
 
 
 
 
 
 
 
 
 
Segment earnings
$
788

 
14,659

 
19,078

 
6,400

 
40,925


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

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

 
227,166

 
580,224

 
—

 
848,503

Total segment assets
398,712

 
1,035,273

 
7,555,300

 
219,328

 
9,208,613

Future policy benefits
331,037

 
747,058

 
6,621,456

 
—

 
7,699,551

Other policyholder liabilities
12,206

 
16,999

 
116,548

 
—

 
145,753

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

June 30, 2011
 

 
 

 
 

 
 

 
 

Condensed Consolidated Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
6,617

 
25,616

 
5,006

 
—

 
37,239

Net investment income
4,485

 
9,532

 
78,830

 
4,877

 
97,724

Other revenues
(2
)
 
342

 
(1,070
)
 
5,428

 
4,698

 
 
 
 
 
 
 
 
 
 
Total revenues
11,100

 
35,490

 
82,766

 
10,305

 
139,661

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
(810
)
 
4,199

 
6,209

 
—

 
9,598

Amortization of deferred acquisition costs
2,771

 
7,927

 
28,150

 
—

 
38,848

Universal life and annuity contract interest
1,849

 
8,507

 
42,876

 
—

 
53,232

Other operating expenses
3,361

 
4,273

 
6,320

 
5,106

 
19,060

Federal income taxes (benefit)
1,339

 
3,273

 
(751
)
 
1,590

 
5,451

 
 
 
 
 
 
 
 
 
 
Total expenses
8,510

 
28,179

 
82,804

 
6,696

 
126,189

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,590

 
7,311

 
(38
)
 
3,609

 
13,472



21
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 
50,176

 
8,268

 
—

 
71,093

Net investment income
9,481

 
22,553

 
191,942

 
7,263

 
231,239

Other revenues
5

 
366

 
2,991

 
11,242

 
14,604

 
 
 
 
 
 
 
 
 
 
Total revenues
22,135

 
73,095

 
203,201

 
18,505

 
316,936

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,424

 
9,161

 
8,229

 
—

 
21,814

Amortization of deferred acquisition costs
5,654

 
16,125

 
44,558

 
—

 
66,337

Universal life and annuity contract interest
4,487

 
21,426

 
119,468

 
—

 
145,381

Other operating expenses
7,027

 
11,199

 
11,223

 
10,329

 
39,778

Federal income taxes (benefit)
174

 
4,856

 
6,308

 
2,615

 
13,953

 
 
 
 
 
 
 
 
 
 
Total expenses
21,766

 
62,767

 
189,786

 
12,944

 
287,263

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
369

 
10,328

 
13,415

 
5,561

 
29,673



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

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
41,557

 
37,239

 
81,839

 
71,093

Net investment income
78,181

 
97,724

 
227,739

 
231,239

Other revenues
5,866

 
4,698

 
11,521

 
14,604

Realized gains (losses) on investments
2,005

 
490

 
3,172

 
3,582

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
127,609

 
140,151

 
324,271

 
320,518


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
9,999

 
5,451

 
19,562

 
13,953

Taxes on realized gains (losses) on investments
702

 
172

 
1,110

 
1,254

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
10,701

 
5,623

 
20,672

 
15,207



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
21,943

 
13,472

 
40,925

 
29,673

Realized gains (losses) on investments, net of taxes
1,303

 
318

 
2,062

 
2,328

 
 
 
 
 
 
 
 
Total condensed consolidated net earnings
$
23,246

 
13,790

 
42,987

 
32,001




23
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
June 30,
 
2012
 
2011
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
9,871,257

 
9,208,613

Other unallocated assets
84,204

 
53,817