NWLI 2012 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, 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 November 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
 
 
 
 
 
 
September 30, 2012 (Unaudited) and December 31, 2011
 
 
For the Three Months Ended September 30, 2012 and 2011 (Unaudited)
 
 
For the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
 
 
For the Three Months Ended September 30, 2012 and 2011 (Unaudited)
 
 
For the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
 
 
For the Nine Months Ended September 30, 2012 and 2011 (Unaudited)
 
 
For the Nine Months Ended September 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
September 30,
2012
 
December 31,
2011
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $6,414,860 and $6,082,330)
$
5,849,916

 
5,641,909

Securities available for sale, at fair value (cost: $2,560,225 and $2,422,650)
2,821,367

 
2,624,953

Mortgage loans, net of allowance for possible losses ($0 and $4,571)
135,776

 
157,460

Policy loans
74,138

 
74,967

Derivatives, index options
87,833

 
30,844

Other long-term investments
41,346

 
34,472

 
 
 
 
Total investments
9,010,376

 
8,564,605

 
 
 
 
Cash and short-term investments
127,945

 
119,290

Deferred policy acquisition costs
698,283

 
722,542

Deferred sales inducements
150,939

 
155,753

Accrued investment income
93,727

 
87,875

Federal income tax receivable
1,368

 
—

Other assets
83,456

 
77,934

 
 
 
 
Total assets
$
10,166,094

 
9,727,999


See accompanying notes to condensed consolidated financial statements (unaudited).

3
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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
September 30,
2012
 
December 31,
2011
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
8,329,743

 
8,023,798

Traditional life reserves
137,857

 
139,657

Other policyholder liabilities
152,725

 
151,308

Deferred Federal income tax liability
52,795

 
46,481

Federal income tax payable
—

 
5,962

Other liabilities
124,578

 
84,008

 
 
 
 
Total liabilities
8,797,698

 
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
78,751

 
53,176

Retained earnings
1,248,243

 
1,182,207

 
 
 
 
Total stockholders’ equity
1,368,396

 
1,276,785

 
 
 
 
Total liabilities and stockholders' equity
$
10,166,094

 
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 (unaudited).


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

 
2012
 
2011
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
36,924

 
34,550

Traditional life premiums
4,124

 
4,685

Net investment income
139,074

 
44,538

Other revenues
5,923

 
5,643

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
1,250

 
(1,741
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(1,761
)
 
1,719

Net OTTI losses recognized in earnings
(511
)
 
(22
)
Other net investment gains (losses)
5,451

 
2,960

Total net realized investment gains (losses)
4,940

 
2,938

 
 
 
 
Total revenues
190,985

 
92,354

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
12,323

 
12,363

Amortization of deferred policy acquisition costs
28,403

 
29,909

Universal life and annuity contract interest
89,386

 
1,873

Other operating expenses
22,143

 
18,948

 
 
 
 
Total benefits and expenses
152,255

 
63,093

 
 
 
 
Earnings before Federal income taxes
38,730

 
29,261

 
 
 
 
Federal income taxes
14,408

 
9,996

 
 
 
 
Net earnings
$
24,322

 
19,265

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
6.88

 
5.45

Class B
$
3.44

 
2.73

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
6.88

 
5.45

Class B
$
3.44

 
2.73


See accompanying notes to condensed consolidated financial statements (unaudited).


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

 
2012
 
2011
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
109,776

 
97,014

Traditional life premiums
13,111

 
13,314

Net investment income
366,813

 
275,777

Other revenues
17,444

 
20,247

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
788

 
(1,741
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(1,918
)
 
1,719

Net OTTI losses recognized in earnings
(1,130
)
 
(22
)
Other net investment gains (losses)
9,242

 
6,542

Total net realized investment gains (losses)
8,112

 
6,520

 
 
 
 
Total revenues
515,256

 
412,872

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
39,858

 
34,177

Amortization of deferred policy acquisition costs
91,463

 
96,246

Universal life and annuity contract interest
216,933

 
147,254

Other operating expenses
64,613

 
58,727

 
 
 
 
Total benefits and expenses
412,867

 
336,404

 
 
 
 
Earnings before Federal income taxes
102,389

 
76,468

 
 
 
 
Federal income taxes
35,080

 
25,203

 
 
 
 
Net earnings
$
67,309

 
51,265

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
19.04

 
14.51

Class B
$
9.52

 
7.25

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
19.04

 
14.49

Class B
$
9.52

 
7.25


See accompanying notes to condensed consolidated financial statements (unaudited).



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

 
2012
 
2011
 
 
 
 
Net earnings
$
24,322

 
19,265

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
15,202

 
5,543

Net unrealized liquidity gains (losses)
(3
)
 
(498
)
Reclassification adjustment for net amounts included in net earnings
(1,175
)
 
(2,069
)
Amortization of net unrealized (gains) losses related to transferred securities
(1
)
 
11

 
 
 
 
Net unrealized gains (losses) on securities
14,023

 
2,987

 
 
 
 
Foreign currency translation adjustments
22

 
(21
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(19
)
 
236

 
 
 
 
Other comprehensive income
14,026

 
3,202

 
 
 
 
Comprehensive income
$
38,348

 
22,467


See accompanying notes to condensed consolidated financial statements (unaudited).


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

 
2012
 
2011
 
 
 
 
Net earnings
$
67,309

 
51,265

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains arising during period
28,578

 
11,318

Net unrealized liquidity gains (losses)
134

 
(148
)
Reclassification adjustment for net amounts included in net earnings
(3,873
)
 
(4,148
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
18

 
 
 
 
Net unrealized gains (losses) on securities
24,839

 
7,040

 
 
 
 
Foreign currency translation adjustments
307

 
(155
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
429

 
819

 
 
 
 
Other comprehensive income
25,575

 
7,704

 
 
 
 
Comprehensive income
$
92,884

 
58,969


See accompanying notes to condensed consolidated financial statements (unaudited).


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 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
—

 
901

 
 
 
 
       Balance at end of period
37,767

 
38,041

 
 
 
 
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
24,705

 
7,188

 
 
 
 
   Balance at end of period
93,821

 
69,687

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

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

 
—

Amortization
21

 
163

Other-than-temporary impairments, non-credit, net of tax
316

 
—

Additional credit loss on previously impaired securities
360

 
—

Change in shadow deferred policy acquisition costs
(178
)
 
184

 
 
 
 
   Balance at end of period
(1,801
)
 
(2,366
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(608
)
 
—

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

 
(1,117
)
Change in shadow deferred policy acquisition costs
(955
)
 
622

Recoveries, net of tax
570

 
—

 
 
 
 
  Balance at end of period
(993
)
 
(495
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Nine Months Ended September 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
307

 
(155
)
 
 
 
 
  Balance at end of period
2,675

 
2,430

 
 
 
 
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
429

 
819

 
 
 
 
  Balance at end of period
(14,951
)
 
(11,144
)
 
 
 
 
Accumulated other comprehensive income at end of period
78,751

 
58,112

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

 
1,127,614

   Net earnings
67,309

 
51,265

   Stockholder dividends
(1,273
)
 
(1,271
)
 
 
 
 
   Balance at end of period
1,248,243

 
1,177,608

 
 
 
 
Total stockholders' equity
$
1,368,396

 
$
1,277,396


See accompanying notes to condensed consolidated financial statements (unaudited).



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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)
(In thousands)
 
2012
 
2011
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
67,309

 
51,265

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

 
 

Universal life and annuity contract interest
216,933

 
147,254

Surrender charges and other policy revenues
(10,854
)
 
(1,340
)
Realized (gains) losses on investments
(8,112
)
 
(6,520
)
Accrual and amortization of investment income
(1,740
)
 
(2,140
)
Depreciation and amortization
4,246

 
4,019

(Increase) decrease in value of index options
(42,328
)
 
38,774

(Increase) decrease in deferred policy acquisition and sales inducement costs
(3,604
)
 
(52,324
)
(Increase) decrease in accrued investment income
(5,852
)
 
(10,052
)
(Increase) decrease in other assets
(6,088
)
 
(6,015
)
Increase (decrease) in liabilities for future policy benefits
8,335

 
17,250

Increase (decrease) in other policyholder liabilities
1,417

 
(3,142
)
Increase (decrease) in Federal income taxes
(14,391
)
 
(4,353
)
Increase (decrease) in other liabilities
18,416

 
(322
)
Other, net
—

 
—

 
 
 
 
Net cash provided by operating activities
223,687

 
172,354

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities available for sale
7,539

 
19,248

Other investments
8,646

 
4,732

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
1,021,666

 
375,016

Securities available for sale
252,464

 
89,379

Index options
25,225

 
73,980

Purchases of:
 

 
 

Securities held to maturity
(1,208,044
)
 
(884,205
)
Securities available for sale
(388,228
)
 
(263,937
)
Index options
(42,184
)
 
(50,239
)
Other investments
(5,036
)
 
(10,361
)
Principal payments on mortgage loans
38,783

 
13,577

Cost of mortgage loans acquired
(16,728
)
 
(33,918
)
Decrease (increase) in policy loans
829

 
4,225

Other, net
(2
)
 
—

 
 
 
 
Net cash used in investing activities
(305,070
)
 
(662,503
)
 
 
 
 
 
Continued on Next Page
 

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

 
 

Deposits to account balances for universal life and annuity contracts
715,037

 
1,116,161

Return of account balances on universal life and annuity contracts
(625,306
)
 
(615,196
)
Issuance of common stock under stock option plan
—

 
908

 
 
 
 
Net cash provided by financing activities
89,731

 
501,873

 
 
 
 
Effect of foreign exchange
307

 
(154
)
 
 
 
 
Net increase (decrease) in cash and short-term investments
8,655

 
11,570

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

 
80,332

 
 
 
 
Cash and short-term investments at end of period
$
127,945

 
$
91,902

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
30

 
$
10

Income taxes
$
49,540

 
$
30,209

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
2,965

 
$
12,386


See accompanying notes to condensed consolidated financial statements (unaudited).



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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” or "National Western") as of September 30, 2012, and the results of its operations and its cash flows for the three and nine months ended September 30, 2012 and 2011. The results of operations for the nine months ended September 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 unaudited 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 9, Investments, of the accompanying condensed consolidated financial statements for additional disclosures. The adoption of this guidance will not have a significant impact on the condensed consolidated financial statements.

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 adopted 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 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 No. 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 No. 2011-05, Presentation of Comprehensive Income.  One of ASU No. 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 No. 2011-12. ASUs No. 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 the 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.



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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 pay cash dividends on common stock during the nine months ended September 30, 2012 and 2011. However, the Company did declare a cash dividend on August 17, 2012 payable December 3, 2012 to stockholders on record as of October 29, 2012. 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 common stock was declared in August and paid in December of 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 September 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
$
24,322

 
 
 
19,265

 
 
Dividends - Class A shares
(1,237
)
 
 
 
(1,235
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
23,049

 
 
 
17,994

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,237

 
36

 
1,235

 
36

Allocation of undistributed income
22,397

 
652

 
17,485

 
509

 
 
 
 
 
 
 
 
Net income
$
23,634

 
688

 
18,720

 
545

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
—

 
—

 
1

 
—

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

 
200

 
3,436

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
6.88

 
3.44

 
5.45

 
2.73

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
6.88

 
3.44

 
5.45

 
2.73



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

 
Nine Months Ended September 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
$
67,309

 
 
 
51,265

 
 
Dividends - Class A shares
(1,237
)
 
 
 
(1,235
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
66,036

 
 
 
49,994

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,237

 
36

 
1,235

 
36

Allocation of undistributed income
64,168

 
1,868

 
48,580

 
1,414

 
 
 
 
 
 
 
 
Net income
$
65,405

 
1,904

 
49,815

 
1,450

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,433

 
200

Effect of dilutive stock options
—

 
—

 
4

 
—

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

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
19.04

 
9.52

 
14.51

 
7.25

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
19.04

 
9.52

 
14.49

 
7.25


For the three and nine month per share calculations as of September 30, 2012, the exercise price of all outstanding stock options was 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.

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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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
44

 
—

 
131

 
—

Interest cost
232

 
258

 
696

 
776

Expected return on plan assets
(268
)
 
(259
)
 
(803
)
 
(777
)
Amortization of prior service cost
1

 
1

 
3

 
3

Amortization of net loss
196

 
126

 
589

 
374

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
205

 
126

 
616

 
376


The Company's minimum required contribution for the 2012 plan year is slightly over $1.1 million of which it expects to contribute just under $0.5 million during 2012 with the remainder to be contributed in 2013. The Company's minimum required contribution was reduced during the third quarter of 2012 as a result of the Moving Ahead for Progress in the 21st Century Act (MAP-21) which was enacted. In addition, the Company has contributions for the 2011 plan year payable during 2012 of $0.4 million. As of September 30, 2012, the Company has contributed $0.7 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
42

 
9

 
126

 
36

Interest cost
228

 
190

 
684

 
722

Amortization of prior service cost
14

 
92

 
44

 
350

Amortization of net loss
286

 
118

 
857

 
447

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
570

 
409

 
1,711

 
1,555


The Company expects to contribute $2.0 million to these plans in 2012.  As of September 30, 2012, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
32

 
38

 
97

 
113

Amortization of prior service cost
25

 
28

 
77

 
85

Amortization of net loss
11

 
—

 
31

 
—

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
68

 
66

 
205

 
198


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


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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 September 30, 2012 and 2011 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
38,052

 
224,814

 
586,356

 
—

 
849,222

Total segment assets
450,649

 
1,111,039

 
8,302,668

 
239,259

 
10,103,615

Future policy benefits
380,752

 
821,178

 
7,265,670

 
—

 
8,467,600

Other policyholder liabilities
13,401

 
11,536

 
127,788

 
—

 
152,725

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

September 30, 2012
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
7,680

 
28,453

 
4,915

 
—

 
41,048

Net investment income
6,037

 
12,255

 
115,781

 
5,001

 
139,074

Other revenues
(46
)
 
32

 
213

 
5,724

 
5,923

 
 
 
 
 
 
 
 
 
 
Total revenues
13,671

 
40,740

 
120,909

 
10,725

 
186,045

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,482

 
4,827

 
3,014

 
—

 
12,323

Amortization of deferred acquisition costs
437

 
2,083

 
25,883

 
—

 
28,403

Universal life and annuity contract interest
2,976

 
9,602

 
76,808

 
—

 
89,386

Other operating expenses
3,313

 
7,069

 
7,332

 
4,429

 
22,143

Federal income taxes (benefit)
865

 
6,271

 
3,215

 
2,328

 
12,679

 
 
 
 
 
 
 
 
 
 
Total expenses
12,073

 
29,852

 
116,252

 
6,757

 
164,934

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,598

 
10,888

 
4,657

 
3,968

 
21,111



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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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
22,499

 
83,999

 
16,389

 
—

 
122,887

Net investment income
15,846

 
34,967

 
302,045

 
13,955

 
366,813

Other revenues
6

 
378

 
14

 
17,046

 
17,444

 
 
 
 
 
 
 
 
 
 
Total revenues
38,351

 
119,344

 
318,448

 
31,001

 
507,144

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
7,750

 
14,622

 
17,486

 
—

 
39,858

Amortization of deferred acquisition costs
4,896

 
15,448

 
71,119

 
—

 
91,463

Universal life and annuity contract interest
11,419

 
30,845

 
174,669

 
—

 
216,933

Other operating expenses
10,659

 
19,605

 
19,104

 
15,245

 
64,613

Federal income taxes (benefit)
1,241

 
13,277

 
12,335

 
5,388

 
32,241

 
 
 
 
 
 
 
 
 
 
Total expenses
35,965

 
93,797

 
294,713

 
20,633

 
445,108

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,386

 
25,547

 
23,735

 
10,368

 
62,036


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

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated 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 Consolidated 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



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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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
September 30, 2011
 
 
 
 
 
 
 
 
 
Condensed Consolidated 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 (benefit)
108

 
8,417

 
9,722

 
4,674

 
22,921

 
 
 
 
 
 
 
 
 
 
Total expenses
31,916

 
84,433

 
222,862

 
20,114

 
359,325

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
222

 
17,270

 
19,946

 
9,589

 
47,027



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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 September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
41,048

 
39,235

 
122,887

 
110,328

Net investment income
139,074

 
44,538

 
366,813

 
275,777

Other revenues
5,923

 
5,643

 
17,444

 
20,247

Realized gains (losses) on investments
4,940

 
2,938

 
8,112

 
6,520

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
190,985

 
92,354

 
515,256

 
412,872


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
12,679

 
8,968

 
32,241

 
22,921

Taxes on realized gains (losses) on investments
1,729

 
1,028

 
2,839

 
2,282

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
14,408

 
9,996

 
35,080

 
25,203



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
21,111

 
17,355

 
62,036

 
47,027

Realized gains (losses) on investments, net of taxes
3,211

 
1,910

 
5,273

 
4,238

 
 
 
 
 
 
 
 
Total condensed consolidated net earnings
$
24,322

 
19,265

 
67,309

 
51,265




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

 
September 30,
 
2012
 
2011
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
10,103,615