NWLI 2014 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, 2014
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, 2014, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and  Class B - 200,000.




TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
June 30, 2014 (Unaudited) and December 31, 2013
 
 
For the Three Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
For the Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
For the Three Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
For the Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
For the Six Months Ended June 30, 2014 and 2013 (Unaudited)
 
 
For the Six Months Ended June 30, 2014 and 2013 (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
June 30,
2014
 
December 31,
2013
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $6,979,345 and $6,656,144)
$
6,641,083

 
6,510,320

Securities available for sale, at fair value (cost: $2,625,676 and $2,535,264)
2,799,450

 
2,651,544

Mortgage loans, net of allowance for possible losses ($650 and $650)
152,208

 
132,765

Policy loans
64,988

 
65,969

Derivatives, index options
146,514

 
169,314

Other long-term investments
30,421

 
30,991

 
 
 
 
Total investments
9,834,664

 
9,560,903

 
 
 
 
Cash and short-term investments
133,506

 
120,859

Deferred policy acquisition costs
774,530

 
785,706

Deferred sales inducements
159,143

 
169,570

Accrued investment income
95,816

 
95,367

Federal income tax receivable
3,434

 
—

Other assets
94,988

 
98,011

 
 
 
 
Total assets
$
11,096,081

 
10,830,416


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
June 30,
2014
 
December 31,
2013
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,155,686

 
8,987,062

Traditional life reserves
137,099

 
138,072

Other policyholder liabilities
149,714

 
142,587

Deferred Federal income tax liability
30,256

 
7,199

Federal income tax payable
—

 
10,067

Other liabilities
107,429

 
97,481

 
 
 
 
Total liabilities
9,580,184

 
9,382,468

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,436,165 issued and outstanding in 2014 and 3,434,765 in 2013
3,436

 
3,435

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2014 and 2013
200

 
200

Additional paid-in capital
38,116

 
37,767

Accumulated other comprehensive income
56,670

 
38,080

Retained earnings
1,417,475

 
1,368,466

 
 
 
 
Total stockholders’ equity
1,515,897

 
1,447,948

 
 
 
 
Total liabilities and stockholders' equity
$
11,096,081

 
10,830,416


Note:  The Condensed Consolidated Balance Sheet at December 31, 2013 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 June 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
38,217

 
40,363

Traditional life premiums
5,169

 
5,218

Net investment income
155,179

 
129,687

Other revenues
5,211

 
5,990

Net realized investment gains (losses):
 

 
 

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

 
(72
)
Portion of OTTI (gains) losses recognized in other comprehensive income
—

 
(106
)
Net OTTI losses recognized in earnings
—

 
(178
)
Other net investment gains (losses)
3,065

 
1,779

Total net realized investment gains (losses)
3,065

 
1,601

 
 
 
 
Total revenues
206,841

 
182,859

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
14,796

 
18,450

Amortization of deferred policy acquisition costs
27,258

 
28,852

Universal life and annuity contract interest
102,429

 
71,438

Other operating expenses
19,500

 
24,843

 
 
 
 
Total benefits and expenses
163,983

 
143,583

 
 
 
 
Earnings before Federal income taxes
42,858

 
39,276

 
 
 
 
Federal income taxes
13,675

 
12,285

 
 
 
 
Net earnings
$
29,183

 
26,991

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
8.26

 
$
7.64

Class B
$
4.13

 
$
3.82

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
8.25

 
$
7.62

Class B
$
4.13

 
$
3.82


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 Six Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
76,222

 
78,262

Traditional life premiums
9,440

 
9,082

Net investment income
263,630

 
310,501

Other revenues
10,974

 
12,132

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(32
)
 
310

Portion of OTTI (gains) losses recognized in other comprehensive income
(3
)
 
(549
)
Net OTTI losses recognized in earnings
(35
)
 
(239
)
Other net investment gains (losses)
4,613

 
4,153

Total net realized investment gains (losses)
4,578

 
3,914

 
 
 
 
Total revenues
364,844

 
413,891

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
27,759

 
31,140

Amortization of deferred policy acquisition costs
55,837

 
59,656

Universal life and annuity contract interest
165,365

 
211,738

Other operating expenses
42,963

 
46,767

 
 
 
 
Total benefits and expenses
291,924

 
349,301

 
 
 
 
Earnings before Federal income taxes
72,920

 
64,590

 
 
 
 
Federal income taxes
23,911

 
20,967

 
 
 
 
Net earnings
$
49,009

 
43,623

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
13.86

 
$
12.34

Class B
$
6.93

 
$
6.17

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
13.86

 
$
12.32

Class B
$
6.93

 
$
6.17



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


6
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Net earnings
$
29,183

 
26,991

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
10,892

 
(33,107
)
Net unrealized liquidity gains (losses)
28

 
20

Reclassification adjustment for net amounts included in net earnings
(1,946
)
 
(1,037
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
8,974

 
(34,124
)
 
 
 
 
Foreign currency translation adjustments
(122
)
 
3

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(175
)
 
373

 
 
 
 
Other comprehensive income (loss)
8,677

 
(33,748
)
 
 
 
 
Comprehensive income (loss)
$
37,860

 
(6,757
)

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 Six Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Net earnings
$
49,009

 
43,623

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
21,894

 
(34,232
)
Net unrealized liquidity gains (losses)
51

 
158

Reclassification adjustment for net amounts included in net earnings
(2,371
)
 
(2,396
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
19,574

 
(36,470
)
 
 
 
 
Foreign currency translation adjustments
(633
)
 
593

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(351
)
 
754

 
 
 
 
Other comprehensive income (loss)
18,590

 
(35,123
)
 
 
 
 
Comprehensive income
$
67,599

 
8,500


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



8
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands)

 
2014
 
2013
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,635

 
3,635

Shares exercised under stock option plan
1

 
—

 
 
 
 
       Balance at end of period
3,636

 
3,635

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
37,767

 
37,767

Shares exercised under stock option plan
349

 
—

 
 
 
 
       Balance at end of period
38,116

 
37,767

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
46,693

 
91,972

Change in unrealized gains (losses) during period, net of tax
19,523

 
(36,628
)
 
 
 
 
   Balance at end of period
66,216

 
55,344

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(1,287
)
 
(1,426
)
Amortization
117

 
77

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

 
23

Additional credit loss on previously impaired securities
—

 
14

Change in shadow deferred policy acquisition costs
(67
)
 
(77
)
 
 
 
 
   Balance at end of period
(1,237
)
 
(1,389
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(2
)
 
(196
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Change in shadow deferred policy acquisition costs
(1
)
 
(123
)
Recoveries, net of tax
2

 
244

 
 
 
 
  Balance at end of period
(1
)
 
(75
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
3,241

 
2,589

Change in translation adjustments during period
(633
)
 
593

 
 
 
 
  Balance at end of period
2,608

 
3,182

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(10,565
)
 
(16,153
)
Amortization of net prior service cost and net loss, net of tax
(351
)
 
754

 
 
 
 
  Balance at end of period
(10,916
)
 
(15,399
)
 
 
 
 
Accumulated other comprehensive income at end of period
56,670

 
41,663

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,368,466

 
1,273,492

   Net earnings
49,009

 
43,623

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,417,475

 
1,317,115

 
 
 
 
Total stockholders' equity
$
1,515,897

 
$
1,400,180


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 Six Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
49,009

 
43,623

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

 
 

Universal life and annuity contract interest
165,365

 
211,738

Surrender charges and other policy revenues
(9,104
)
 
(7,105
)
Realized (gains) losses on investments
(4,578
)
 
(3,914
)
Accretion/amortization of discounts and premiums, investments
(465
)
 
(1,487
)
Depreciation and amortization
1,741

 
2,813

(Increase) decrease in value of derivatives
(45,799
)
 
(91,124
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
(6,062
)
 
(4,984
)
(Increase) decrease in accrued investment income
(449
)
 
(2,224
)
(Increase) decrease in other assets
(1,635
)
 
(2,594
)
Increase (decrease) in liabilities for future policy benefits
1,344

 
5,349

Increase (decrease) in other policyholder liabilities
7,127

 
16,669

Increase (decrease) in Federal income taxes
(984
)
 
(563
)
Increase (decrease) in other liabilities
(2,806
)
 
87

Other, net
(1
)
 
—

 
 
 
 
Net cash provided by operating activities
152,703

 
166,284

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
1,980

Securities available for sale
5,334

 
9,670

Other investments
1,016

 
9,945

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
360,420

 
710,366

Securities available for sale
102,813

 
128,127

Derivatives, index options
105,268

 
54,640

Purchases of:
 

 
 

Securities held to maturity
(477,353
)
 
(970,658
)
Securities available for sale
(195,023
)
 
(191,387
)
Derivatives, index options
(33,610
)
 
(28,498
)
Other investments
(296
)
 
(15
)
Principal payments on mortgage loans
10,240

 
25,490

Cost of mortgage loans acquired
(29,611
)
 
(2,419
)
Decrease (increase) in policy loans
981

 
754

Other, net
2

 
(4
)
 
 
 
 
Net cash used in investing activities
(149,819
)
 
(252,009
)
 
 
 
 
 
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 Six Months Ended June 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
460,611

 
477,776

Return of account balances on universal life and annuity contracts
(450,565
)
 
(448,973
)
Issuance of common stock under stock option plan
350

 
—

 
 
 
 
Net cash provided by (used in) financing activities
10,396

 
28,803

 
 
 
 
Effect of foreign exchange
(633
)
 
593

 
 
 
 
Net increase (decrease) in cash and short-term investments
12,647

 
(56,329
)
Cash and short-term investments at beginning of period
120,859

 
124,561

 
 
 
 
Cash and short-term investments at end of period
$
133,506

 
$
68,232

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
20

 
$
30

Income taxes
$
24,416

 
$
22,695

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(4,851
)
 
$
1,429


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 June 30, 2014, and the results of its operations and its cash flows for the three and six months ended June 30, 2014 and 2013. The results of operations for the six months ended June 30, 2014 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, 2013 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, 2013 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 table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2014 and 2013.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
2,993

 
1,720

 
3,682

 
3,834

Net OTTI losses recognized in earnings
 
—

 
(125
)
 
(35
)
 
(148
)
Earnings before Federal income taxes
 
2,993

 
1,595

 
3,647

 
3,686

Federal income taxes
 
1,047

 
558

 
1,276

 
1,290

 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,946

 
1,037

 
2,371

 
2,396



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

(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 regarding the statement of income amounts affected by the reclassification. This information is provided in Note 1 of the condensed consolidated financial statements. Implementation of the new guidance did not have an impact on the Company's condensed consolidated financial statements and results of operations.

In July 2013, the FASB issued guidance to amend the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance states that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as reduction to deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective for annual reporting periods beginning on or after December 15, 2013 and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2014 and the adoption did not have an effect on the deferred tax asset or liability classification on the Company's balance sheet and did not result in any additional disclosures to the financial statements.

In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company’s current employee share-based plans do not require performance targets and the adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operations.
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.


(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 2014 is $112.3 million. The Company did not declare or pay cash dividends on common stocks during the six months ended June 30, 2014 and 2013.


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

(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income by the weighted-average basic common shares outstanding during the period. Diluted earnings per share assumes the issuance of common shares applicable to stock options in the denominator.
 
Three Months Ended June 30,
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
29,183

 
 
 
26,991

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
29,183

 
 
 
26,991

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
28,358

 
825

 
26,227

 
764

 
 
 
 
 
 
 
 
Net income
$
28,358

 
825

 
26,227

 
764

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
2

 
—

 
7

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,437

 
200

 
3,442

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
8.26

 
4.13

 
7.64

 
3.82

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
8.25

 
4.13

 
7.62

 
3.82


Stock options that were outstanding during the three months ended June 30, 2014 and 2013, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 22,300 and 32,000, respectively.

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

 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
49,009

 
 
 
43,623

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
49,009

 
 
 
43,623

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
47,623

 
1,386

 
42,389

 
1,234

 
 
 
 
 
 
 
 
Net income
$
47,623

 
1,386

 
42,389

 
1,234

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
2

 
—

 
6

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,437

 
200

 
3,441

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
13.86

 
6.93

 
12.34

 
6.17

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
13.86

 
6.93

 
12.32

 
6.17


Stock options that were outstanding during the six months ended June 30, 2014 and 2013, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 22,300 and 32,000, respectively.

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
42

 
47

 
84

 
95

Interest cost
239

 
218

 
479

 
436

Expected return on plan assets
(319
)
 
(283
)
 
(639
)
 
(567
)
Amortization of prior service cost
1

 
1

 
2

 
2

Amortization of net loss
106

 
203

 
211

 
406

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
69

 
186

 
137

 
372


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 2014 plan year is $0.7 million. In addition, the Company had a remaining contribution payable for the 2013 plan year of $0.1 million as of June 30, 2014 which it will pay during the remainder of 2014. As of June 30, 2014, the Company had contributed a total of $0.3 million to the plan for the 2014 and 2013 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
74

 
45

 
147

 
89

Interest cost
251

 
200

 
502

 
400

Amortization of prior service cost
14

 
14

 
29

 
29

Amortization of net loss
324

 
293

 
647

 
587

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
663

 
552

 
1,325

 
1,105


The Company expects to contribute $2.0 million to these plans in 2014.  As of June 30, 2014, 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
27

 
30

 
55

 
59

Amortization of prior service cost
26

 
25

 
52

 
51

Amortization of net loss
(1
)
 
8

 
(2
)
 
16

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
52

 
63

 
105

 
126


The Company expects to contribute minimal amounts to the plan in 2014.


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, 2014 and June 30, 2013 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2014
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
57,354

 
238,211

 
638,108

 
—

 
933,673

Total segment assets
670,565

 
1,229,589

 
8,749,666

 
274,434

 
10,924,254

Future policy benefits
581,946

 
934,791

 
7,776,048

 
—

 
9,292,785

Other policyholder liabilities
13,259

 
12,399

 
124,056

 
—

 
149,714

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2014
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
7,065

 
29,663

 
6,658

 
—

 
43,386

Net investment income
10,902

 
16,911

 
122,666

 
4,700

 
155,179

Other revenues
3

 
60

 
3

 
5,145

 
5,211

 
 
 
 
 
 
 
 
 
 
Total revenues
17,970

 
46,634

 
129,327

 
9,845

 
203,776

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
1,423

 
1,668

 
11,705

 
—

 
14,796

Amortization of deferred acquisition costs
1,780

 
8,808

 
16,670

 
—

 
27,258

Universal life and annuity contract interest
8,158

 
15,659

 
78,612

 
—

 
102,429

Other operating expenses
3,992

 
4,835

 
5,824

 
4,849

 
19,500

Federal income taxes (benefit)
851

 
4,963

 
5,227

 
1,561

 
12,602

 
 
 
 
 
 
 
 
 
 
Total expenses
16,204

 
35,933

 
118,038

 
6,410

 
176,585

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,766

 
10,701

 
11,289

 
3,435

 
27,191



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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, 2014
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
15,230

 
58,771

 
11,661

 
—

 
85,662

Net investment income
17,185

 
27,629

 
209,283

 
9,533

 
263,630

Other revenues
21

 
301

 
40

 
10,612

 
10,974

 
 
 
 
 
 
 
 
 
 
Total revenues
32,436

 
86,701

 
220,984

 
20,145

 
360,266

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,915

 
6,703

 
17,141

 
—

 
27,759

Amortization of deferred acquisition costs
4,180

 
15,553

 
36,104

 
—

 
55,837

Universal life and annuity contract interest
13,263

 
25,864

 
126,238

 
—

 
165,365

Other operating expenses
8,271

 
11,860

 
12,920

 
9,912

 
42,963

Federal income taxes (benefit)
916

 
8,722

 
9,329

 
3,342

 
22,309

 
 
 
 
 
 
 
 
 
 
Total expenses
30,545

 
68,702

 
201,732

 
13,254

 
314,233

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,891

 
17,999

 
19,252

 
6,891

 
46,033


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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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
45,391

 
231,684

 
643,014

 
—

 
920,089

Total segment assets
522,003

 
1,134,181

 
8,420,780

 
253,831

 
10,330,795

Future policy benefits
454,359

 
875,672

 
7,477,608

 
—

 
8,807,639

Other policyholder liabilities
13,109

 
14,734

 
137,387

 
—

 
165,230

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

June 30, 2013
 

 
 

 
 

 
 

 
 

Condensed Consolidated Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
9,413

 
30,177

 
5,991

 
—

 
45,581

Net investment income
8,242

 
13,637

 
102,805

 
5,003

 
129,687

Other revenues
(3
)
 
108

 
(9
)
 
5,894

 
5,990

 
 
 
 
 
 
 
 
 
 
Total revenues
17,652

 
43,922

 
108,787

 
10,897

 
181,258

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
1,096

 
3,225

 
14,129

 
—

 
18,450

Amortization of deferred acquisition costs
2,210

 
7,926

 
18,716

 
—

 
28,852

Universal life and annuity contract interest
7,868

 
9,244

 
54,326

 
—

 
71,438

Other operating expenses
4,947

 
6,125

 
8,466

 
5,305

 
24,843

Federal income taxes (benefit)
468

 
5,456

 
4,087

 
1,714

 
11,725

 
 
 
 
 
 
 
 
 
 
Total expenses
16,589

 
31,976

 
99,724

 
7,019

 
155,308

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,063

 
11,946

 
9,063

 
3,878

 
25,950



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, 2013
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
19,023

 
58,196

 
10,125

 
—

 
87,344

Net investment income
16,015

 
32,267

 
253,183

 
9,036

 
310,501

Other revenues
9

 
151

 
30

 
11,942

 
12,132

 
 
 
 
 
 
 
 
 
 
Total revenues
35,047

 
90,614

 
263,338

 
20,978

 
409,977

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,126

 
6,870

 
20,144

 
—

 
31,140

Amortization of deferred acquisition costs
4,245

 
13,713

 
41,698

 
—

 
59,656

Universal life and annuity contract interest
15,059

 
31,235

 
165,444

 
—

 
211,738

Other operating expenses
8,714

 
12,833

 
14,552

 
10,668

 
46,767

Federal income taxes (benefit)
938

 
8,386

 
6,944

 
3,329

 
19,597

 
 
 
 
 
 
 
 
 
 
Total expenses
33,082

 
73,037

 
248,782

 
13,997

 
368,898

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,965

 
17,577

 
14,556

 
6,981

 
41,079



22
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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 June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
43,386

 
45,581

 
85,662

 
87,344

Net investment income
155,179

 
129,687

 
263,630

 
310,501

Other revenues
5,211

 
5,990

 
10,974

 
12,132

Realized gains (losses) on investments
3,065

 
1,601

 
4,578

 
3,914

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
206,841

 
182,859

 
364,844

 
413,891


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
12,602

 
11,725

 
22,309

 
19,597

Taxes on realized gains (losses) on investments
1,073

 
560

 
1,602

 
1,370

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
13,675

 
12,285

 
23,911