NWLI 2015 Q2 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 June 30, 2015
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 August 6, 2015, 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, 2015 (Unaudited) and December 31, 2014
 
 
For the Three Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
For the Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
For the Three Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
For the Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
For the Six Months Ended June 30, 2015 and 2014 (Unaudited)
 
 
For the Six Months Ended June 30, 2015 and 2014 (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,
2015
 
December 31,
2014
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,370,596 and $7,175,443)
$
7,121,439

 
6,841,543

Securities available for sale, at fair value (cost: $2,740,993 and $2,590,074)
2,840,589

 
2,728,680

Mortgage loans, net of allowance for possible losses ($650 and $650)
132,261

 
149,503

Policy loans
61,933

 
63,645

Derivatives, index options
72,527

 
114,287

Other long-term investments
28,961

 
28,774

 
 
 
 
Total investments
10,257,710

 
9,926,432

 
 
 
 
Cash and cash equivalents
71,710

 
277,078

Deferred policy acquisition costs
826,083

 
802,919

Deferred sales inducements
156,371

 
159,766

Accrued investment income
99,438

 
96,127

Federal income tax receivable
7,546

 
—

Other assets
96,436

 
89,570

 
 
 
 
Total assets
$
11,515,294

 
11,351,892


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,
2015
 
December 31,
2014
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,484,080

 
9,384,297

Traditional life reserves
137,451

 
138,225

Other policyholder liabilities
143,781

 
139,222

Deferred Federal income tax liability
40,001

 
31,675

Federal income tax payable
—

 
3,336

Other liabilities
117,853

 
98,817

 
 
 
 
Total liabilities
9,923,166

 
9,795,572

 
 
 
 
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 2015 and 2014
3,436

 
3,436

Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2015 and 2014
200

 
200

Additional paid-in capital
38,116

 
38,116

Accumulated other comprehensive income
27,410

 
41,786

Retained earnings
1,522,966

 
1,472,782

 
 
 
 
Total stockholders’ equity
1,592,128

 
1,556,320

 
 
 
 
Total liabilities and stockholders' equity
$
11,515,294

 
11,351,892


Note:  The Condensed Consolidated Balance Sheet at December 31, 2014 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, 2015 and 2014
(Unaudited)
(In thousands, except per share amounts)
 
2015
 
2014
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
38,345

 
38,217

Traditional life premiums
5,162

 
5,169

Net investment income
102,259

 
155,179

Other revenues
5,194

 
5,211

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(2
)
 
—

Portion of OTTI (gains) losses recognized in other comprehensive income
(105
)
 
—

Net OTTI losses recognized in earnings
(107
)
 
—

Other net investment gains (losses)
4,365

 
3,065

Total net realized investment gains (losses)
4,258

 
3,065

 
 
 
 
Total revenues
155,218

 
206,841

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
16,120

 
14,796

Amortization of deferred policy acquisition costs
28,070

 
27,258

Universal life and annuity contract interest
49,431

 
102,429

Other operating expenses
18,802

 
19,500

 
 
 
 
Total benefits and expenses
112,423

 
163,983

 
 
 
 
Earnings before Federal income taxes
42,795

 
42,858

 
 
 
 
Federal income taxes
13,937

 
13,675

 
 
 
 
Net earnings
$
28,858

 
29,183

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
8.16

 
$
8.26

Class B
$
4.08

 
$
4.13

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
8.16

 
$
8.25

Class B
$
4.08

 
$
4.13


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, 2015 and 2014
(Unaudited)
(In thousands, except per share amounts)
 
2015
 
2014
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
75,658

 
76,222

Traditional life premiums
9,509

 
9,440

Net investment income
202,182

 
263,630

Other revenues
10,523

 
10,974

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
158

 
(32
)
Portion of OTTI (gains) losses recognized in other comprehensive income
(265
)
 
(3
)
Net OTTI losses recognized in earnings
(107
)
 
(35
)
Other net investment gains (losses)
5,343

 
4,613

Total net realized investment gains (losses)
5,236

 
4,578

 
 
 
 
Total revenues
303,108

 
364,844

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
35,386

 
27,759

Amortization of deferred policy acquisition costs
55,722

 
55,837

Universal life and annuity contract interest
98,470

 
165,365

Other operating expenses
39,312

 
42,963

 
 
 
 
Total benefits and expenses
228,890

 
291,924

 
 
 
 
Earnings before Federal income taxes
74,218

 
72,920

 
 
 
 
Federal income taxes
24,034

 
23,911

 
 
 
 
Net earnings
$
50,184

 
49,009

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
14.19

 
$
13.86

Class B
$
7.10

 
$
6.93

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
14.19

 
$
13.86

Class B
$
7.10

 
$
6.93

 
 
 
 

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 (LOSS)
For the Three Months Ended June 30, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Net earnings
$
28,858

 
29,183

 
 
 
 
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
(21,202
)
 
10,892

Net unrealized liquidity gains (losses)
32

 
28

Reclassification adjustment for net amounts included in net earnings
(1,855
)
 
(1,946
)
 
 
 
 
Net unrealized gains (losses) on securities
(23,025
)
 
8,974

 
 
 
 
Foreign currency translation adjustments
(53
)
 
(122
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(304
)
 
(175
)
 
 
 
 
Other comprehensive income (loss)
(23,382
)
 
8,677

 
 
 
 
Comprehensive income (loss)
$
5,476

 
37,860


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, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Net earnings
$
50,184

 
49,009

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
(11,830
)
 
21,894

Net unrealized liquidity gains (losses)
93

 
51

Reclassification adjustment for net amounts included in net earnings
(2,020
)
 
(2,371
)
 
 
 
 
Net unrealized gains (losses) on securities
(13,757
)
 
19,574

 
 
 
 
Foreign currency translation adjustments
(12
)
 
(633
)
 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(607
)
 
(351
)
 
 
 
 
Other comprehensive income (loss)
(14,376
)
 
18,590

 
 
 
 
Comprehensive income (loss)
$
35,808

 
67,599

 
 
 
 

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


8
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
3,636

 
3,635

Shares exercised under stock option plan
—

 
1

 
 
 
 
       Balance at end of period
3,636

 
3,636

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
38,116

 
37,767

Shares exercised under stock option plan
—

 
349

 
 
 
 
       Balance at end of period
38,116

 
38,116

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
54,229

 
46,693

Change in unrealized gains (losses) during period, net of tax
(13,850
)
 
19,523

 
 
 
 
   Balance at end of period
40,379

 
66,216

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(1,262
)
 
(1,287
)
Amortization
172

 
117

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

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(79
)
 
(67
)
 
 
 
 
   Balance at end of period
(1,169
)
 
(1,237
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

Balance at beginning of period
(1
)
 
(2
)
Other-than-temporary impairments, non-credit, net of tax
—

 
—

Change in shadow deferred policy acquisition costs
—

 
(1
)
Recoveries, net of tax
—

 
2

 
 
 
 
  Balance at end of period
(1
)
 
(1
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Six Months Ended June30, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,685

 
3,241

Change in translation adjustments during period
(12
)
 
(633
)
 
 
 
 
  Balance at end of period
2,673

 
2,608

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(13,865
)
 
(10,565
)
Amortization of net prior service cost and net loss, net of tax
(607
)
 
(351
)
 
 
 
 
  Balance at end of period
(14,472
)
 
(10,916
)
 
 
 
 
Accumulated other comprehensive income at end of period
27,410

 
56,670

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,472,782

 
1,368,466

   Net earnings
50,184

 
49,009

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,522,966

 
1,417,475

 
 
 
 
Total stockholders' equity
$
1,592,128

 
$
1,515,897


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, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
50,184

 
49,009

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

 
 

Universal life and annuity contract interest
98,470

 
165,365

Surrender charges and other policy revenues
(8,302
)
 
(9,104
)
Realized (gains) losses on investments
(5,236
)
 
(4,578
)
Accretion/amortization of discounts and premiums, investments
102

 
(465
)
Depreciation and amortization
1,671

 
1,741

(Increase) decrease in value of derivatives
17,069

 
(45,799
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
(2,190
)
 
(6,062
)
(Increase) decrease in accrued investment income
(3,311
)
 
(449
)
(Increase) decrease in other assets
(6,938
)
 
(1,635
)
Increase (decrease) in liabilities for future policy benefits
2,588

 
1,344

Increase (decrease) in other policyholder liabilities
4,558

 
7,127

Increase (decrease) in Federal income taxes liability
(10,882
)
 
(13,501
)
Increase (decrease) in deferred Federal income tax
15,735

 
12,517

Increase (decrease) in other liabilities
4,658

 
(2,806
)
Other, net
—

 
(1
)
 
 
 
 
Net cash provided by operating activities
158,176

 
152,703

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
—

Securities available for sale
13,131

 
5,334

Other investments
—

 
1,016

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
257,063

 
360,420

Securities available for sale
163,057

 
102,813

Derivatives, index options
64,619

 
105,268

Purchases of:
 

 
 

Securities held to maturity
(534,663
)
 
(477,353
)
Securities available for sale
(310,637
)
 
(195,023
)
Derivatives, index options
(40,977
)
 
(33,610
)
Other investments
(420
)
 
(296
)
Net change in short-term investments
—

 
—

 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

11
Table of Contents

NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
For the Six Months Ended June 30, 2015 and 2014
(Unaudited)
(In thousands)
 
2015
 
2014
 
 
 
 
Principal payments on mortgage loans
18,962

 
10,240

Cost of mortgage loans acquired
(1,632
)
 
(29,611
)
Decrease (increase) in policy loans
1,712

 
981

Other, net
—

 
2

 
 
 
 
Net cash used in investing activities
(369,785
)
 
(149,819
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
452,124

 
460,611

Return of account balances on universal life and annuity contracts
(445,871
)
 
(450,565
)
Issuance of common stock under stock option plan
—

 
350

 
 
 
 
Net cash provided by (used in) financing activities
6,253

 
10,396

 
 
 
 
Effect of foreign exchange
(12
)
 
(633
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(205,368
)
 
12,647

Cash and cash equivalents at beginning of period
277,078

 
120,859

 
 
 
 
Cash and cash equivalents at end of period
$
71,710

 
$
133,506

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid during the period for:
 

 
 

Interest
$
20

 
20

Income taxes
$
22,647

 
24,416

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(6,895
)
 
(4,851
)

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, 2015, and the results of its operations and its cash flows for the for the three and six months ended June 30, 2015 and 2014. The results of operations for the six months ended June 30, 2015 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, 2014 and are 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, 2014 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, 2015 and 2014.

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,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
2,961

 
2,993

 
3,215

 
3,682

Net OTTI losses recognized in earnings
 
(107
)
 
—

 
(107
)
 
(35
)
Earnings before Federal income taxes
 
2,854

 
2,993

 
3,108

 
3,647

Federal income taxes
 
999

 
1,047

 
1,088

 
1,276

 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,855

 
1,946

 
2,020

 
2,371




13
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

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 Public Accountants ("AICPA"), and the SEC are not believed by management to, have a material impact on the Company’s present or future 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 surplus of the Company.  The maximum dividend payment which may be made without prior approval in 2015 is $118.2 million. The Company did not declare or pay cash dividends on its common stocks during the six months ended June 30, 2015 and 2014.

On April 6, 2015, the Company, National Western Life Group, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Newco”), and NWLIC MergerCo, Inc., a Colorado corporation and wholly-owned subsidiary of Newco (“MergerCo”), entered into an Agreement and Plan of Merger (the “Reorganization Agreement”), that provides for the merger (the “Merger”) of the Company with MergerCo, with the Company surviving the Merger as a wholly-owned subsidiary of Newco. The Merger provides for the conversion of each share of Class A common stock, par value $1.00 per share, of the Company and each share of Class B common stock, par value $1.00 per share, of the Company issued and outstanding immediately prior to the effective time of the Merger, into one duly issued, fully paid and non-assessable share of Class A common stock, par value $0.01 per share, of Newco ("Newco Class A Stock") or Class B common stock, par value $0.01 per share, of Newco, respectively (collectively with the other transactions contemplated by the Reorganization Agreement, the “Reorganization”). In addition, each outstanding option to acquire, or SARs relating to, shares of the Company's Class A Stock would automatically convert into an option to acquire, or SARs relating to, on the same terms and conditions, an identical number of shares of Newco Class A Stock.

Upon completion of the Reorganization, Newco, a Delaware corporation, would, in effect, replace the Company, a Colorado corporation, as the publicly held corporation traded on the NASDAQ Global Select Market under the symbol “NWLI”, and the holders of the Company's Class A Stock and Class B Stock would hold the same number of shares and same ownership percentage
of Newco after the Reorganization as they held of the Company immediately prior to the Reorganization. The directors of Newco immediately following the Reorganization would be the same individuals who were directors of the Company immediately prior to the Reorganization.

The Reorganization Agreement is subject to specified conditions, including approval by the Company's shareholders, which was granted at the Annual Meeting of Shareholders (the "Annual Meeting") on Friday, June 19, 2015. It is currently expected that the Reorganization will be completed in the latter part of 2015 once the other conditions set forth in the Reorganization Agreement are satisfied.


14
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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,
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
28,858

 
 
 
29,183

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
28,858

 
 
 
29,183

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
28,042

 
816

 
28,358

 
825

 
 
 
 
 
 
 
 
Net income
$
28,042

 
816

 
28,358

 
825

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
1

 
—

 
2

 
—

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

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
8.16

 
4.08

 
8.26

 
4.13

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
8.16

 
4.08

 
8.25

 
4.13


Stock options that were outstanding during the three months ended June 30, 2015 and 2014, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive, were approximately 20,800 and 22,300, respectively.

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

 
Six Months Ended June 30,
 
2015
 
2014
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
50,184

 
 
 
49,009

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
50,184

 
 
 
49,009

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
48,765

 
1,419

 
47,623

 
1,386

 
 
 
 
 
 
 
 
Net income
$
48,765

 
1,419

 
47,623

 
1,386

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,435

 
200

Effect of dilutive stock options
1

 
—

 
2

 
—

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

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
14.19

 
7.10

 
13.86

 
6.93

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
14.19

 
7.10

 
13.86

 
6.93


Stock options that were outstanding during the six months ended June 30, 2015 and 2014, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 21,300 and 22,300, 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 employees enrolled prior to 2008. 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. 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,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
51

 
42

 
102

 
84

Interest cost
246

 
239

 
492

 
479

Expected return on plan assets
(330
)
 
(319
)
 
(660
)
 
(639
)
Amortization of prior service cost
1

 
1

 
2

 
2

Amortization of net loss
196

 
106

 
392

 
211

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
164

 
69

 
328

 
137


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 2015 plan year is $0.0 million. The Company had no remaining contribution payable for the 2014 plan year as of June 30, 2015. As of June 30, 2015, the Company had contributed a total of $0.0 million to the plan for the 2015 and 2014 plan years.

The Company also sponsors a nonqualified 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 nonqualified defined benefit plan for the benefit of the Chairman and the President 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 nonqualified defined benefit plan, while complying with the requirements of the Act.


17
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NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table summarizes the components of net periodic benefit costs for the Chairman and President's nonqualified defined benefit plans.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
64

 
74

 
128

 
147

Interest cost
219

 
251

 
438

 
502

Amortization of prior service cost
15

 
14

 
30

 
29

Amortization of net loss
379

 
324

 
757

 
647

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
677

 
663

 
1,353

 
1,325


The Company expects to contribute $2.0 million to these plans in 2015.  As of June 30, 2015, 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,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
33

 
27

 
65

 
55

Amortization of prior service cost
26

 
26

 
52

 
52

Amortization of net loss
15

 
(1
)
 
30

 
(2
)
 
 
 
 
 
 
 
 
Net periodic benefit cost
$
74

 
52

 
147

 
105


The Company expects to contribute minimal amounts to the plan in 2015.



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, 2015 and June 30, 2014 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
70,561

 
254,785

 
657,108

 
—

 
982,454

Total segment assets
811,768

 
1,247,941

 
9,000,323

 
264,269

 
11,324,301

Future policy benefits
702,621

 
954,684

 
7,964,226

 
—

 
9,621,531

Other policyholder liabilities
11,846

 
16,398

 
115,537

 
—

 
143,781

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

June 30, 2015
 
 
 
 
 
 
 
 
 

Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
7,937

 
29,364

 
6,206

 
—

 
43,507

Net investment income
8,005

 
8,785

 
79,509

 
5,960

 
102,259

Other revenues
4

 
(25
)
 
4

 
5,211

 
5,194

 
 
 
 
 
 
 
 
 
 
Total revenues
15,946

 
38,124

 
85,719

 
11,171

 
150,960

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,882

 
5,587

 
6,651

 
—

 
16,120

Amortization of deferred acquisition costs
1,698

 
5,163

 
21,209

 
—

 
28,070

Universal life and annuity contract interest
5,460

 
6,927

 
37,044

 
—

 
49,431

Other operating expenses
3,442

 
5,212

 
5,434

 
4,714

 
18,802

Federal income taxes (benefit)
467

 
4,932

 
4,961

 
2,086

 
12,446

 
 
 
 
 
 
 
 
 
 
Total expenses
14,949

 
27,821

 
75,299

 
6,800

 
124,869

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
997

 
10,303

 
10,420

 
4,371

 
26,091


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

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Income Statements:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
14,424

 
59,697

 
11,046

 
—

 
85,167

Net investment income
15,170

 
17,399

 
158,745

 
10,868

 
202,182

Other revenues
20

 
61

 
19

 
10,423

 
10,523

 
 
 
 
 
 
 
 
 
 
Total revenues
29,614

 
77,157

 
169,810

 
21,291

 
297,872

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
8,995

 
11,792

 
14,599

 
—

 
35,386

Amortization of deferred acquisition costs
4,879

 
4,513

 
46,330

 
—

 
55,722

Universal life and annuity contract interest
10,399

 
14,057

 
74,014

 
—

 
98,470

Other operating expenses
7,157

 
11,134

 
11,612

 
9,409

 
39,312

Federal income taxes (benefit)
(584
)
 
11,477

 
7,484

 
3,824

 
22,201

 
 
 
 
 
 
 
 
 
 
Total expenses
30,846

 
52,973

 
154,039

 
13,233

 
251,091

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(1,232
)
 
24,184

 
15,771

 
8,058

 
46,781

 
 
 
 
 
 
 
 
 
 

20
Table of Contents

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

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 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



21
Table of Contents

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



22
Table of Contents

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

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
43,507

 
43,386

 
85,167

 
85,662

Net investment income
102,259

 
155,179

 
202,182

 
263,630

Other revenues
5,194

 
5,211

 
10,523

 
10,974

Realized gains (losses) on investments
4,258

 
3,065

 
5,236

 
4,578

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
155,218

 
206,841

 
303,108

 
364,844


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
12,446

 
12,602

 
22,201

 
<