NWLI 2014 Q3 10Q


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

For the Quarterly Period Ended September 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 x   No o
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 x   No o

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  o     Accelerated filer  x   Non-accelerated filer  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
As of November 6, 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
 
 
 
 
 
 
September 30, 2014 (Unaudited) and December 31, 2013
 
 
For the Three Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
For the Three Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
For the Nine Months Ended September 30, 2014 and 2013 (Unaudited)
 
 
For the Nine Months Ended September 30, 2014 and 2013 (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,
2014
 
December 31,
2013
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,195,441 and $6,656,144)
$
6,898,038

 
6,510,320

Securities available for sale, at fair value (cost: $2,576,805 and $2,535,264)
2,724,880

 
2,651,544

Mortgage loans, net of allowance for possible losses ($650 and $650)
152,740

 
132,765

Policy loans
63,746

 
65,969

Derivatives, index options
109,812

 
169,314

Other long-term investments
29,006

 
30,991

 
 
 
 
Total investments
9,978,222

 
9,560,903

 
 
 
 
Cash and short-term investments
121,482

 
120,859

Deferred policy acquisition costs
795,452

 
785,706

Deferred sales inducements
160,614

 
169,570

Accrued investment income
100,256

 
95,367

Federal income tax receivable
5,650

 
—

Other assets
97,400

 
98,011

 
 
 
 
Total assets
$
11,259,076

 
10,830,416


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

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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,
2014
 
December 31,
2013
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,267,144

 
8,987,062

Traditional life reserves
137,501

 
138,072

Other policyholder liabilities
142,175

 
142,587

Deferred Federal income tax liability
36,421

 
7,199

Federal income tax payable
—

 
10,067

Other liabilities
141,697

 
97,481

 
 
 
 
Total liabilities
9,724,938

 
9,382,468

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $1 par value; 7,500,000 shares authorized; 3,436,166 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
47,717

 
38,080

Retained earnings
1,444,669

 
1,368,466

 
 
 
 
Total stockholders’ equity
1,534,138

 
1,447,948

 
 
 
 
Total liabilities and stockholders' equity
$
11,259,076

 
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).


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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
36,602

 
33,523

Traditional life premiums
4,506

 
4,159

Net investment income
110,966

 
141,403

Other revenues
5,377

 
5,822

Net realized investment gains (losses):
 

 
 

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

 
214

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

 
(227
)
Net OTTI losses recognized in earnings
—

 
(13
)
Other net investment gains (losses)
2,169

 
3,298

Total net realized investment gains (losses)
2,169

 
3,285

 
 
 
 
Total revenues
159,620

 
188,192

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
13,163

 
16,941

Amortization of deferred policy acquisition costs
23,467

 
24,244

Universal life and annuity contract interest
59,211

 
87,486

Other operating expenses
20,451

 
22,675

 
 
 
 
Total benefits and expenses
116,292

 
151,346

 
 
 
 
Earnings before Federal income taxes
43,328

 
36,846

 
 
 
 
Federal income taxes
14,862

 
12,064

 
 
 
 
Net earnings
$
28,466

 
24,782

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
8.05

 
$
7.01

Class B
$
4.03

 
$
3.51

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
8.05

 
$
7.00

Class B
$
4.03

 
$
3.51


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, 2014 and 2013
(Unaudited)
(In thousands, except per share amounts)
 
2014
 
2013
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
112,824

 
111,785

Traditional life premiums
13,946

 
13,241

Net investment income
374,596

 
451,904

Other revenues
16,351

 
17,954

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(32
)
 
524

Portion of OTTI (gains) losses recognized in other comprehensive income
(3
)
 
(776
)
Net OTTI losses recognized in earnings
(35
)
 
(252
)
Other net investment gains (losses)
6,782

 
7,451

Total net realized investment gains (losses)
6,747

 
7,199

 
 
 
 
Total revenues
524,464

 
602,083

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
40,922

 
48,081

Amortization of deferred policy acquisition costs
79,304

 
83,900

Universal life and annuity contract interest
224,576

 
299,224

Other operating expenses
63,414

 
69,442

 
 
 
 
Total benefits and expenses
408,216

 
500,647

 
 
 
 
Earnings before Federal income taxes
116,248

 
101,436

 
 
 
 
Federal income taxes
38,773

 
33,031

 
 
 
 
Net earnings
$
77,475

 
68,405

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
21.92

 
$
19.35

Class B
$
10.95

 
$
9.68

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
21.91

 
$
19.32

Class B
$
10.95

 
$
9.68



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 (LOSS)
For the Three Months Ended September 30, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Net earnings
$
28,466

 
24,782

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(7,793
)
 
(1,833
)
Net unrealized liquidity gains (losses)
(23
)
 
(92
)
Reclassification adjustment for net amounts included in net earnings
(958
)
 
(261
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
(8,774
)
 
(2,186
)
 
 
 
 
Foreign currency translation adjustments
(3
)
 
(38
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(176
)
 
373

 
 
 
 
Other comprehensive income (loss)
(8,953
)
 
(1,851
)
 
 
 
 
Comprehensive income (loss)
$
19,513

 
22,931


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, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Net earnings
$
77,475

 
68,405

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
14,101

 
(36,065
)
Net unrealized liquidity gains (losses)
28

 
66

Reclassification adjustment for net amounts included in net earnings
(3,329
)
 
(2,657
)
Amortization of net unrealized (gains) losses related to transferred securities
—

 
—

 
 
 
 
Net unrealized gains (losses) on securities
10,800

 
(38,656
)
 
 
 
 
Foreign currency translation adjustments
(636
)
 
555

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(527
)
 
1,127

 
 
 
 
Other comprehensive income (loss)
9,637

 
(36,974
)
 
 
 
 
Comprehensive income
$
87,112

 
31,431


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, 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
10,772

 
(38,860
)
 
 
 
 
   Balance at end of period
57,465

 
53,112

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(1,287
)
 
(1,426
)
Amortization
80

 
77

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

 
90

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(53
)
 
(149
)
 
 
 
 
   Balance at end of period
(1,260
)
 
(1,408
)
 
 
 
 
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
)
 
(188
)
Recoveries, net of tax
2

 
374

 
 
 
 
  Balance at end of period
(1
)
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Nine Months Ended September 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
(636
)
 
555

 
 
 
 
  Balance at end of period
2,605

 
3,144

 
 
 
 
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
(527
)
 
1,127

 
 
 
 
  Balance at end of period
(11,092
)
 
(15,026
)
 
 
 
 
Accumulated other comprehensive income at end of period
47,717

 
39,812

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

 
1,273,492

   Net earnings
77,475

 
68,405

   Stockholder dividends
(1,272
)
 
(1,273
)
 
 
 
 
   Balance at end of period
1,444,669

 
1,340,624

 
 
 
 
Total stockholders' equity
$
1,534,138

 
$
1,421,838


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, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
77,475

 
68,405

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

 
 

Universal life and annuity contract interest
224,576

 
299,224

Surrender charges and other policy revenues
(9,531
)
 
(10,450
)
Realized (gains) losses on investments
(7,225
)
 
(7,199
)
Accretion/amortization of discounts and premiums, investments
(831
)
 
(2,040
)
Depreciation and amortization
2,522

 
3,742

(Increase) decrease in value of derivatives
(49,278
)
 
(126,739
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
(16,197
)
 
(15,433
)
(Increase) decrease in accrued investment income
(4,889
)
 
(3,792
)
(Increase) decrease in other assets
28

 
(20,271
)
Increase (decrease) in liabilities for future policy benefits
3,956

 
8,960

Increase (decrease) in other policyholder liabilities
(412
)
 
11,261

Increase (decrease) in Federal income taxes
7,691

 
(14,151
)
Increase (decrease) in other liabilities
1,848

 
2,390

Other, net
1

 
—

 
 
 
 
Net cash provided by operating activities
229,734

 
193,907

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
1,980

Securities available for sale
19,511

 
10,246

Other investments
3,247

 
10,520

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
591,536

 
1,028,476

Securities available for sale
213,260

 
191,833

Derivatives, index options
164,059

 
109,816

Purchases of:
 

 
 

Securities held to maturity
(933,997
)
 
(1,380,732
)
Securities available for sale
(275,751
)
 
(247,375
)
Derivatives, index options
(53,174
)
 
(45,629
)
Other investments
(376
)
 
(15
)
Principal payments on mortgage loans
14,112

 
30,649

Cost of mortgage loans acquired
(33,985
)
 
(5,271
)
Decrease (increase) in policy loans
2,223

 
3,242

Other, net
(1
)
 
(2
)
 
 
 
 
Net cash used in investing activities
(289,336
)
 
(292,262
)
 
 
 
 
 
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, 2014 and 2013
(Unaudited)
(In thousands)
 
2014
 
2013
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
715,705

 
732,745

Return of account balances on universal life and annuity contracts
(655,195
)
 
(665,048
)
Issuance of common stock under stock option plan
350

 
—

 
 
 
 
Net cash provided by (used in) financing activities
60,860

 
67,697

 
 
 
 
Effect of foreign exchange
(635
)
 
555

 
 
 
 
Net increase (decrease) in cash and short-term investments
623

 
(30,103
)
Cash and short-term investments at beginning of period
120,859

 
124,561

 
 
 
 
Cash and short-term investments at end of period
$
121,482

 
$
94,458

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
30

 
$
40

Income taxes
$
30,515

 
$
48,658

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(6,066
)
 
$
1,261


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



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


(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of National Western Life Insurance Company and its subsidiaries (“Company” or "National Western") as of September 30, 2014, and the results of its operations and its cash flows for the three and nine months ended September 30, 2014 and 2013. The results of operations for the nine months ended September 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 nine months ended September 30, 2014 and 2013.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
1,474

 
413

 
5,156

 
4,247

Net OTTI losses recognized in earnings
 
—

 
(12
)
 
(35
)
 
(160
)
Earnings before Federal income taxes
 
1,474

 
401

 
5,121

 
4,087

Federal income taxes
 
516

 
140

 
1,792

 
1,430

 
 
 
 
 
 
 
 
 
Net earnings
 
$
958

 
261

 
3,329

 
2,657



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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 2015 is $112.3 million.

The Company did declare a cash dividend on August 22, 2014 payable December 4, 2014 to stockholders on record as of October 31, 2014. 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, 2013 and paid in December of 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 September 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
$
28,466

 
 
 
24,782

 
 
Dividends - Class A shares
(1,236
)
 
 
 
(1,237
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
27,194

 
 
 
23,509

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,236

 
36

 
1,237

 
36

Allocation of undistributed income
26,425

 
769

 
22,844

 
665

 
 
 
 
 
 
 
 
Net income
$
27,661

 
805

 
24,081

 
701

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings per share - weighted-average shares
3,436

 
200

 
3,435

 
200

Effect of dilutive stock options
2

 
—

 
4

 
—

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,438

 
200

 
3,439

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
8.05

 
4.03

 
7.01

 
3.51

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
8.05

 
4.03

 
7.00

 
3.51


Stock options that were outstanding during the three months ended September 30, 2014 and 2013, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 22,200 and 23,000, respectively.

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

 
 
 
 
 
 
 
 
 
Nine Months Ended September 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
$
77,475

 
 
 
68,405

 
 
Dividends - Class A shares
(1,236
)
 
 
 
(1,237
)
 
 
Dividends - Class B shares
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
Undistributed income
$
76,203

 
 
 
67,132

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
1,236

 
36

 
1,237

 
36

Allocation of undistributed income
74,048

 
2,155

 
65,233

 
1,899

 
 
 
 
 
 
 
 
Net income
$
75,284

 
2,191

 
66,470

 
1,935

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
2

 
—

 
5

 
—

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

 
200

 
3,440

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
21.92

 
10.95

 
19.35

 
9.68

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
21.91

 
10.95

 
19.32

 
9.68


Stock options that were outstanding during the nine months ended September 30, 2014 and 2013, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 22,200 and 23,000, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
42

 
48

 
126

 
142

Interest cost
239

 
218

 
718

 
654

Expected return on plan assets
(320
)
 
(284
)
 
(959
)
 
(850
)
Amortization of prior service cost
1

 
1

 
3

 
3

Amortization of net loss
106

 
203

 
317

 
609

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
68

 
186

 
205

 
558


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 $0.0 million. In addition, the Company had a remaining contribution payable for the 2013 plan year of $0.0 million as of September 30, 2014. As of September 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
74

 
44

 
222

 
133

Interest cost
250

 
201

 
752

 
601

Amortization of prior service cost
15

 
15

 
44

 
44

Amortization of net loss
323

 
293

 
970

 
880

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
662

 
553

 
1,988

 
1,658


The Company expects to contribute $2.0 million to these plans in 2014.  As of September 30, 2014, 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,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
28

 
29

 
83

 
88

Amortization of prior service cost
26

 
26

 
78

 
77

Amortization of net loss
(1
)
 
9

 
(3
)
 
25

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
53

 
64

 
158

 
190


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


18
Table of Contents

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

(6)
SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information for the quarters ended September 30, 2014 and September 30, 2013 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
61,087

 
242,124

 
652,855

 
—

 
956,066

Total segment assets
705,156

 
1,223,571

 
8,871,276

 
251,905

 
11,051,908

Future policy benefits
611,550

 
944,505

 
7,848,590

 
—

 
9,404,645

Other policyholder liabilities
12,742

 
12,226

 
117,207

 
—

 
142,175

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

September 30, 2014
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
6,847

 
29,135

 
5,126

 
—

 
41,108

Net investment income
6,859

 
8,273

 
90,835

 
4,999

 
110,966

Other revenues
19

 
20

 
23

 
5,315

 
5,377

 
 
 
 
 
 
 
 
 
 
Total revenues
13,725

 
37,428

 
95,984

 
10,314

 
157,451

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,353

 
9,672

 
138

 
—

 
13,163

Amortization of deferred acquisition costs
1,166

 
2,525

 
19,776

 
—

 
23,467

Universal life and annuity contract interest
5,803

 
6,956

 
46,452

 
—

 
59,211

Other operating expenses
2,314

 
6,307

 
7,045

 
4,785

 
20,451

Federal income taxes (benefit)
379

 
4,143

 
7,681

 
1,899

 
14,102

 
 
 
 
 
 
 
 
 
 
Total expenses
13,015

 
29,603

 
81,092

 
6,684

 
130,394

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
710

 
7,825

 
14,892

 
3,630

 
27,057



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

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
22,077

 
87,906

 
16,787

 
—

 
126,770

Net investment income
24,044

 
35,902

 
300,118

 
14,532

 
374,596

Other revenues
40

 
321

 
63

 
15,927

 
16,351

 
 
 
 
 
 
 
 
 
 
Total revenues
46,161

 
124,129

 
316,968

 
30,459

 
517,717

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
7,268

 
16,375

 
17,279

 
—

 
40,922

Amortization of deferred acquisition costs
5,346

 
18,078

 
55,880

 
—

 
79,304

Universal life and annuity contract interest
19,066

 
32,820

 
172,690

 
—

 
224,576

Other operating expenses
10,585

 
18,167

 
19,965

 
14,697

 
63,414

Federal income taxes (benefit)
1,295

 
12,865

 
17,010

 
5,241

 
36,411

 
 
 
 
 
 
 
 
 
 
Total expenses
43,560

 
98,305

 
282,824

 
19,938

 
444,627

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,601

 
25,824

 
34,144

 
10,521

 
73,090


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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, 2013
 
 
 
 
 
 
 
 
 
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



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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
41,108

 
37,682

 
126,770

 
125,026

Net investment income
110,966

 
141,403

 
374,596

 
451,904

Other revenues
5,377

 
5,822

 
16,351

 
17,954

Realized gains (losses) on investments
2,169

 
3,285

 
6,747

 
7,199

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
159,620

 
188,192

 
524,464

 
602,083


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
14,102

 
10,913

 
36,411

 
30,511

Taxes on realized gains (losses) on investments
760

 
1,151

 
2,362

 
2,520

 
 
 
 
 
 
 
 
Total condensed consolidated Federal income taxes
$
14,862