NWLI 2013 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, 2013
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 12, 2013, 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, 2013 (Unaudited) and December 31, 2012
 
 
For the Three Months Ended September 30, 2013 and 2012 (Unaudited)
 
 
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
 
 
For the Three Months Ended September 30, 2013 and 2012 (Unaudited)
 
 
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
 
 
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
 
 
For the Nine Months Ended September 30, 2013 and 2012 (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,
2013
 
December 31,
2012
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $6,574,186 and $6,503,627)
$
6,345,116

 
5,962,120

Securities available for sale, at fair value (cost: $2,618,250 and $2,568,512)
2,752,530

 
2,826,001

Mortgage loans, net of allowance for possible losses ($650 and $650)
117,091

 
142,170

Policy loans
68,307

 
71,549

Derivatives, index options
119,276

 
57,890

Other long-term investments
31,372

 
41,439

 
 
 
 
Total investments
9,433,692

 
9,101,169

 
 
 
 
Cash and short-term investments
94,458

 
124,561

Deferred policy acquisition costs
768,309

 
705,397

Deferred sales inducements
168,206

 
152,844

Accrued investment income
96,847

 
92,665

Federal income tax receivable
8,068

 
5,655

Other assets
98,888

 
81,567

 
 
 
 
Total assets
$
10,668,468

 
10,263,858


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

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,
2013
 
December 31,
2012
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
8,797,076

 
8,430,545

Traditional life reserves
137,209

 
138,309

Other policyholder liabilities
159,822

 
148,561

Deferred Federal income tax liability
22,501

 
55,054

Federal income tax payable
—

 
—

Other liabilities
130,022

 
99,709

 
 
 
 
Total liabilities
9,246,630

 
8,872,178

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,434,763 issued and outstanding in 2013 and 2012
3,435

 
3,435

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2013 and 2012
200

 
200

Additional paid-in capital
37,767

 
37,767

Accumulated other comprehensive income
39,812

 
76,786

Retained earnings
1,340,624

 
1,273,492

 
 
 
 
Total stockholders’ equity
1,421,838

 
1,391,680

 
 
 
 
Total liabilities and stockholders' equity
$
10,668,468

 
10,263,858


Note:  The Condensed Consolidated Balance Sheet at December 31, 2012, has been derived from the audited Consolidated Financial Statements as of that date.

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


4
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands, except per share amounts)
 
2013
 
2012
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
33,523

 
36,924

Traditional life premiums
4,159

 
4,124

Net investment income
141,403

 
139,074

Other revenues
5,822

 
5,923

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
214

 
1,250

Portion of OTTI (gains) losses recognized in other comprehensive income
(227
)
 
(1,761
)
Net OTTI losses recognized in earnings
(13
)
 
(511
)
Other net investment gains (losses)
3,298

 
5,451

Total net realized investment gains (losses)
3,285

 
4,940

 
 
 
 
Total revenues
188,192

 
190,985

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
16,941

 
12,323

Amortization of deferred policy acquisition costs
24,244

 
28,403

Universal life and annuity contract interest
87,486

 
89,386

Other operating expenses
22,675

 
22,143

 
 
 
 
Total benefits and expenses
151,346

 
152,255

 
 
 
 
Earnings before Federal income taxes
36,846

 
38,730

 
 
 
 
Federal income taxes
12,064

 
14,408

 
 
 
 
Net earnings
$
24,782

 
24,322

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
7.01

 
6.88

Class B
$
3.51

 
3.44

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
7.00

 
6.88

Class B
$
3.51

 
3.44


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


5
Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands, except per share amounts)
 
 
 
 
 
2013
 
2012
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
111,785

 
109,776

Traditional life premiums
13,241

 
13,111

Net investment income
451,904

 
366,813

Other revenues
17,954

 
17,444

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
524

 
788

Portion of OTTI (gains) losses recognized in other comprehensive income
(776
)
 
(1,918
)
Net OTTI losses recognized in earnings
(252
)
 
(1,130
)
Other net investment gains (losses)
7,451

 
9,242

Total net realized investment gains (losses)
7,199

 
8,112

 
 
 
 
Total revenues
602,083

 
515,256

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
48,081

 
39,858

Amortization of deferred policy acquisition costs
83,900

 
91,463

Universal life and annuity contract interest
299,224

 
216,933

Other operating expenses
69,442

 
64,613

 
 
 
 
Total benefits and expenses
500,647

 
412,867

 
 
 
 
Earnings before Federal income taxes
101,436

 
102,389

 
 
 
 
Federal income taxes
33,031

 
35,080

 
 
 
 
Net earnings
$
68,405

 
67,309

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
19.35

 
19.04

Class B
$
9.68

 
9.52

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
19.32

 
19.04

Class B
$
9.68

 
9.52



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


6
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Net earnings
$
24,782

 
24,322

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(1,833
)
 
15,202

Net unrealized liquidity gains (losses)
(92
)
 
(3
)
Reclassification adjustment for net amounts included in net earnings
(261
)
 
(1,175
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
(1
)
 
 
 
 
Net unrealized gains (losses) on securities
(2,186
)
 
14,023

 
 
 
 
Foreign currency translation adjustments
(38
)
 
22

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
373

 
(19
)
 
 
 
 
Other comprehensive income
(1,851
)
 
14,026

 
 
 
 
Comprehensive income
$
22,931

 
38,348


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


7
Table of Contents


NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)
 
 
 
 
 
2013
 
2012
 
 
 
 
Net earnings
$
68,405

 
67,309

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(36,065
)
 
28,578

Net unrealized liquidity gains (losses)
66

 
134

Reclassification adjustment for net amounts included in net earnings
(2,657
)
 
(3,873
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
(38,656
)
 
24,839

 
 
 
 
Foreign currency translation adjustments
555

 
307

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain
1,127

 
429

 
 
 
 
Other comprehensive income
(36,974
)
 
25,575

 
 
 
 
Comprehensive income
$
31,431

 
92,884



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 STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,635

 
3,635

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
3,635

 
3,635

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,767

 
37,767

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
37,767

 
37,767

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
91,972

 
69,116

Change in unrealized gains during period, net of tax
(38,860
)
 
24,705

 
 
 
 
   Balance at end of period
53,112

 
93,821

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(1,426
)
 
(2,320
)
Amortization
77

 
21

Other-than-temporary impairments, non-credit, net of tax
90

 
316

Additional credit loss on previously impaired securities
—

 
360

Change in shadow deferred policy acquisition costs
(149
)
 
(178
)
 
 
 
 
   Balance at end of period
(1,408
)
 
(1,801
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(196
)
 
(608
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Change in shadow deferred policy acquisition costs
(188
)
 
(955
)
Recoveries, net of tax
374

 
570

 
 
 
 
  Balance at end of period
(10
)
 
(993
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)

 
2013
 
2012
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,589

 
2,368

Change in translation adjustments during period
555

 
307

 
 
 
 
  Balance at end of period
3,144

 
2,675

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(16,153
)
 
(15,380
)
Amortization of net prior service cost and net gain, net of tax
1,127

 
429

 
 
 
 
  Balance at end of period
(15,026
)
 
(14,951
)
 
 
 
 
Accumulated other comprehensive income at end of period
39,812

 
78,751

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,273,492

 
1,182,207

   Net earnings
68,405

 
67,309

   Stockholder dividends
(1,273
)
 
(1,273
)
 
 
 
 
   Balance at end of period
1,340,624

 
1,248,243

 
 
 
 
Total stockholders' equity
$
1,421,838

 
$
1,368,396


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



10
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)
 
2013
 
2012
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
68,405

 
67,309

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

 
 

Universal life and annuity contract interest
299,224

 
216,933

Surrender charges and other policy revenues
(10,450
)
 
(10,854
)
Realized (gains) losses on investments
(7,199
)
 
(8,112
)
Accrual and amortization of investment income
(2,040
)
 
(1,740
)
Depreciation and amortization
3,742

 
4,246

(Increase) decrease in value of index options
(126,739
)
 
(42,328
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
(15,433
)
 
(3,604
)
(Increase) decrease in accrued investment income
(3,792
)
 
(5,852
)
(Increase) decrease in other assets
(20,271
)
 
(6,088
)
Increase (decrease) in liabilities for future policy benefits
8,960

 
8,335

Increase (decrease) in other policyholder liabilities
11,261

 
1,417

Increase (decrease) in Federal income taxes
(14,151
)
 
(14,391
)
Increase (decrease) in other liabilities
2,390

 
18,416

Other, net
—

 
—

 
 
 
 
Net cash provided by operating activities
193,907

 
223,687

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
1,980

 
—

Securities available for sale
10,246

 
7,539

Other investments
10,520

 
8,646

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
1,028,476

 
1,021,666

Securities available for sale
191,833

 
252,464

Index options
109,816

 
25,225

Purchases of:
 

 
 

Securities held to maturity
(1,380,732
)
 
(1,208,044
)
Securities available for sale
(247,375
)
 
(388,228
)
Index options
(45,629
)
 
(42,184
)
Other investments
(15
)
 
(5,036
)
Principal payments on mortgage loans
30,649

 
38,783

Cost of mortgage loans acquired
(5,271
)
 
(16,728
)
Decrease (increase) in policy loans
3,242

 
829

Other, net
(2
)
 
(2
)
 
 
 
 
Net cash used in investing activities
(292,262
)
 
(305,070
)
 
 
 
 
 
Continued on Next Page
 

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Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
(In thousands)
 
2013
 
2012
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
732,745

 
715,037

Return of account balances on universal life and annuity contracts
(665,048
)
 
(625,306
)
Issuance of common stock under stock option plan
—

 
—

 
 
 
 
Net cash provided by financing activities
67,697

 
89,731

 
 
 
 
Effect of foreign exchange
555

 
307

 
 
 
 
Net increase (decrease) in cash and short-term investments
(30,103
)
 
8,655

Cash and short-term investments at beginning of period
124,561

 
119,290

 
 
 
 
Cash and short-term investments at end of period
$
94,458

 
$
127,945

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
40

 
$
30

Income taxes
$
48,658

 
$
49,540

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
1,261

 
$
2,965


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



12
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, 2013, and the results of its operations and its cash flows for the three and nine months ended September 30, 2013 and 2012. The results of operations for the nine months ended September 30, 2013 and 2012 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, 2012 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, 2012 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.

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 February 2013, the Financial Accounting Standards Board ("FASB") issued new guidance related to the presentation of amounts reclassified out of accumulated other comprehensive income. The new guidance requires disclosure on the statement of income amounts reclassified. As the Company already reports reclassifications on its Income Statement and Statement of Comprehensive Income, the new guidance will not have a significant impact on the Company's consolidated financial statements and results of operations.

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 qualifies for deferral.  The new guidance specifies the acquisition costs which are capitalizable and those which must be expensed.  The effective date was for interim and annual periods ended after December 15, 2011.  The adoption of this guidance was effective January 1, 2012 for the Company. See Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements for additional disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Pubic Accountants ("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 as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The restrictions are based on the greater of statutory earnings from operations excluding capital gains or 10% of statutory capital and surplus of the Company.  The maximum dividend payment which may be made without prior approval in 2013 is $100.5 million. The Company did declare a cash dividend on August 16, 2013 payable December 4, 2013 to stockholders on record as of October 31, 2013. 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 2012.

(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,
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
24,782

 
 
 
24,322

 
 
Dividends - Class A shares
(1,237
)
 
 
 
(1,237
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
23,509

 
 
 
23,049

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,237

 
36

 
1,237

 
36

Allocation of undistributed income
22,844

 
665

 
22,397

 
652

 
 
 
 
 
 
 
 
Net income
$
24,081

 
701

 
23,634

 
688

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
4

 
—

 
—

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,439

 
200

 
3,435

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
7.01

 
3.51

 
6.88

 
3.44

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
7.00

 
3.51

 
6.88

 
3.44


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


 
Nine Months Ended September 30,
 
2013
 
2012
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
68,405

 
 
 
67,309

 
 
Dividends - Class A shares
(1,237
)
 
 
 
(1,237
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
67,132

 
 
 
66,036

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,237

 
36

 
1,237

 
36

Allocation of undistributed income
65,233

 
1,899

 
64,168

 
1,868

 
 
 
 
 
 
 
 
Net income
$
66,470

 
1,935

 
65,405

 
1,904

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
5

 
—

 
—

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,440

 
200

 
3,435

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
19.35

 
9.68

 
19.04

 
9.52

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
19.32

 
9.68

 
19.04

 
9.52




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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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
48

 
44

 
142

 
131

Interest cost
218

 
232

 
654

 
696

Expected return on plan assets
(284
)
 
(268
)
 
(850
)
 
(803
)
Amortization of prior service cost
1

 
1

 
3

 
3

Amortization of net loss
203

 
196

 
609

 
589

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
186

 
205

 
558

 
616


The service costs shown in the above table represent plan expenses expected to be paid out of plan assets. Under clarification provided by the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The Company's minimum required contribution for the 2013 plan year is $0.7 million of which it expects to contribute approximately $0.4 million during 2013 with the remainder to be contributed in 2014. In addition, the Company had a remaining contribution payable for the 2012 plan year of $0.1 million which it paid during the first quarter of 2013. As of September 30, 2013, the Company had contributed a total of $0.3 million to the plan for the 2013 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.


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


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.

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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
44

 
42

 
133

 
126

Interest cost
201

 
228

 
601

 
684

Amortization of prior service cost
15

 
14

 
44

 
44

Amortization of net loss
293

 
286

 
880

 
857

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
553

 
570

 
1,658

 
1,711


The Company expects to contribute $2.0 million to these plans in 2013.  As of September 30, 2013, 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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
29

 
32

 
88

 
97

Amortization of prior service cost
26

 
25

 
77

 
77

Amortization of net loss
9

 
11

 
25

 
31

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
64

 
68

 
190

 
205


The Company expects to contribute minimal amounts to the plan in 2013.


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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, 2013 and September 30, 2012 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013
 
 
 
 
 
 
 
 
 
Selected Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
50,067

 
235,922

 
650,526

 
—

 
936,515

Total segment assets
559,824

 
1,161,517

 
8,487,915

 
253,097

 
10,462,353

Future policy benefits
485,754

 
899,090

 
7,549,441

 
—

 
8,934,285

Other policyholder liabilities
13,177

 
16,778

 
129,867

 
—

 
159,822

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

September 30, 2013
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
3,944

 
28,865

 
4,873

 
—

 
37,682

Net investment income
6,928

 
10,957

 
118,521

 
4,997

 
141,403

Other revenues
12

 
60

 
22

 
5,728

 
5,822

 
 
 
 
 
 
 
 
 
 
Total revenues
10,884

 
39,882

 
123,416

 
10,725

 
184,907

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,003

 
11,040

 
1,898

 
—

 
16,941

Amortization of deferred acquisition costs
1,015

 
3,287

 
19,942

 
—

 
24,244

Universal life and annuity contract interest
2,261

 
8,525

 
76,700

 
—

 
87,486

Other operating expenses
2,782

 
5,987

 
8,565

 
5,341

 
22,675

Federal income taxes (benefit)
268

 
3,596

 
5,298

 
1,751

 
10,913

 
 
 
 
 
 
 
 
 
 
Total expenses
10,329

 
32,435

 
112,403

 
7,092

 
162,259

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
555

 
7,447

 
11,013

 
3,633

 
22,648



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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, 2013
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
22,967

 
87,061

 
14,998

 
—

 
125,026

Net investment income
22,943

 
43,224

 
371,704

 
14,033

 
451,904

Other revenues
21

 
211

 
52

 
17,670

 
17,954

 
 
 
 
 
 
 
 
 
 
Total revenues
45,931

 
130,496

 
386,754

 
31,703

 
594,884

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
8,129

 
17,910

 
22,042

 
—

 
48,081

Amortization of deferred acquisition costs
5,260

 
17,000

 
61,640

 
—

 
83,900

Universal life and annuity contract interest
17,320

 
39,760

 
242,144

 
—

 
299,224

Other operating expenses
11,496

 
18,820

 
23,117

 
16,009

 
69,442

Federal income taxes (benefit)
1,206

 
11,982

 
12,242

 
5,081

 
30,511

 
 
 
 
 
 
 
 
 
 
Total expenses
43,411

 
105,472

 
361,185

 
21,090

 
531,158

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,520

 
25,024

 
25,569

 
10,613

 
63,726


19
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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, 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



20
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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



21
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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,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
37,682

 
41,048

 
125,026

 
122,887

Net investment income
141,403

 
139,074

 
451,904

 
366,813

Other revenues
5,822

 
5,923

 
17,954

 
17,444

Realized gains (losses) on investments
3,285

 
4,940

 
7,199

 
8,112

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
188,192

 
190,985

 
602,083

 
515,256


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
10,913

 
12,679

 
30,511

 
32,241

Taxes on realized gains (losses) on investments
1,151

 
1,729

 
2,520

 
2,839

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
12,064

 
14,408

 
33,031

 
35,080



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
 
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
 
 
Total segment earnings
$
22,648

 
21,111

 
63,726

 
62,036

Realized gains (losses) on investments, net of taxes
2,134

 
3,211

 
4,679

 
5,273

 
 
 
 
 
 
 
 
Total condensed consolidated net earnings
$
24,782

 
24,322

 
68,405

 
67,309




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


 
September 30,
 
2013
 
2012