10-Q 1 nwlgi2016q310q.htm NWLGI FORM 10-Q Document

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, 2016
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: 000-55522
 
 
NATIONAL WESTERN LIFE GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
 
 
DELAWARE
47-3339380
(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 3, 2016, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and  Class B - 200,000.




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TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
September 30, 2016 (Unaudited) and December 31, 2015
 
 
For the Three Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
For the Three Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
For the Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

 
(Unaudited)
 
 
ASSETS
September 30,
2016
 
December 31,
2015
 
 
 
 
Investments:
 
 
 
Securities held to maturity, at amortized cost (fair value: $7,542,335 and $7,335,436)
$
7,106,373

 
7,173,967

Securities available for sale, at fair value (cost: $2,934,609 and $2,847,414)
3,106,794

 
2,879,583

Mortgage loans, net of allowance for possible losses ($650 and $650)
146,913

 
108,311

Policy loans
59,218

 
61,957

Derivatives, index options
90,097

 
38,409

Other long-term investments
51,980

 
26,787

Short-term investments
14,972

 

 
 
 
 
Total investments
10,576,347

 
10,289,014

 
 
 
 
Cash and cash equivalents
177,288

 
106,007

Deferred policy acquisition costs
795,210

 
853,451

Deferred sales inducements
138,793

 
159,166

Accrued investment income
101,237

 
99,619

Federal income tax receivable

 
12,512

Other assets
91,729

 
92,807

 
 
 
 
Total assets
$
11,880,604

 
11,612,576


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

3


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
September 30,
2016
 
December 31,
2015
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,661,675

 
9,561,358

Traditional life reserves
136,423

 
138,000

Other policyholder liabilities
150,087

 
155,261

Deferred Federal income tax liability
84,717

 
49,333

Federal income tax payable
9,149

 

Other liabilities
103,235

 
96,638

 
 
 
 
Total liabilities
10,145,286

 
10,000,590

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $.01 par value; 7,500,000 shares authorized; 3,436,166 issued and outstanding in 2016 and 2015
34

 
34

Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2016 and 2015
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income
46,381

 
329

Retained earnings
1,647,185

 
1,569,905

 
 
 
 
Total stockholders’ equity
1,735,318

 
1,611,986

 
 
 
 
Total liabilities and stockholders' equity
$
11,880,604

 
11,612,576


Note:  The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited Consolidated Financial Statements as of that date.

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


4


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands, except per share amounts)
 
2016
 
2015
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
40,333

 
39,175

Traditional life premiums
4,631

 
4,840

Net investment income
126,981

 
56,209

Other revenues
4,476

 
5,067

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
27

 
284

Portion of OTTI (gains) losses recognized in other comprehensive income
(27
)
 
(284
)
Net OTTI losses recognized in earnings

 

Other net investment gains (losses)
5,426

 
813

Total net realized investment gains (losses)
5,426

 
813

 
 
 
 
Total revenues
181,847

 
106,104

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
17,430

 
14,181

Amortization of deferred policy acquisition costs
24,395

 
32,058

Universal life and annuity contract interest
67,776

 
16,259

Other operating expenses
23,595

 
18,482

 
 
 
 
Total benefits and expenses
133,196

 
80,980

 
 
 
 
Earnings before Federal income taxes
48,651

 
25,124

 
 
 
 
Federal income taxes
14,915

 
8,903

 
 
 
 
Net earnings
$
33,736

 
16,221

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
9.54

 
$
4.59

Class B
$
4.77

 
$
2.29

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
9.54

 
$
4.59

Class B
$
4.77

 
$
2.29


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


5


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands, except per share amounts)

 
2016
 
2015
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
123,791

 
114,833

Traditional life premiums
13,721

 
14,349

Net investment income
335,732

 
258,391

Other revenues
14,050

 
15,590

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
80

 
442

Portion of OTTI (gains) losses recognized in other comprehensive income
(80
)
 
(549
)
Net OTTI losses recognized in earnings

 
(107
)
Other net investment gains (losses)
10,589

 
6,156

Total net realized investment gains (losses)
10,589

 
6,049

 
 
 
 
Total revenues
497,883

 
409,212

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
48,571

 
49,567

Amortization of deferred policy acquisition costs
88,581

 
87,780

Universal life and annuity contract interest
179,592

 
114,729

Other operating expenses
66,306

 
57,794

 
 
 
 
Total benefits and expenses
383,050

 
309,870

 
 
 
 
Earnings before Federal income taxes
114,833

 
99,342

 
 
 
 
Federal income taxes
37,553

 
32,937

 
 
 
 
Net earnings
$
77,280

 
66,405

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
21.85

 
$
18.78

Class B
$
10.93

 
$
9.39

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
21.85

 
$
18.77

Class B
$
10.93

 
$
9.39

 
 
 
 

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



6


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Net earnings
$
33,736

 
16,221

 
 
 
 
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
2,824

 
(7,334
)
Net unrealized liquidity gains (losses)
9

 
95

Reclassification adjustment for net amounts included in net earnings
(1,398
)
 
(96
)
 
 
 
 
Net unrealized gains (losses) on securities
1,435

 
(7,335
)
 
 
 
 
Foreign currency translation adjustments
22

 
54

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(283
)
 
(303
)
 
 
 
 
Other comprehensive income (loss)
1,174

 
(7,584
)
 
 
 
 
Comprehensive income (loss)
$
34,910

 
8,637


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


7


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)

 
2016
 
2015
 
 
 
 
Net earnings
$
77,280

 
66,405

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
48,927

 
(19,164
)
Net unrealized liquidity gains (losses)
27

 
188

Reclassification adjustment for net amounts included in net earnings
(1,971
)
 
(2,116
)
 
 
 
 
Net unrealized gains (losses) on securities
46,983

 
(21,092
)
 
 
 
 
Foreign currency translation adjustments
(81
)
 
42

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(850
)
 
(910
)
 
 
 
 
Other comprehensive income (loss)
46,052

 
(21,960
)
 
 
 
 
Comprehensive income (loss)
$
123,332

 
44,445

 
 
 
 

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


8


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
36

 
3,636

Shares exercised under stock option plan

 

 
 
 
 
       Balance at end of period
36

 
3,636

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
41,716

 
38,116

Shares exercised under stock option plan

 

 
 
 
 
       Balance at end of period
41,716

 
38,116

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
12,347

 
54,229

Change in unrealized gains (losses) during period, net of tax
46,956

 
(21,280
)
 
 
 
 
   Balance at end of period
59,303

 
32,949

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(240
)
 
(1,262
)
Amortization
52

 
357

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

 

Additional credit loss on previously impaired securities

 

Change in shadow deferred policy acquisition costs
(25
)
 
(169
)
 
 
 
 
   Balance at end of period
(213
)
 
(1,074
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

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

 

Change in shadow deferred policy acquisition costs

 

Recoveries, net of tax

 

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

9


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
2,825

 
2,685

Change in translation adjustments during period
(81
)
 
42

 
 
 
 
  Balance at end of period
2,744

 
2,727

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(14,602
)
 
(13,865
)
Amortization of net prior service cost and net loss, net of tax
(850
)
 
(910
)
 
 
 
 
  Balance at end of period
(15,452
)
 
(14,775
)
 
 
 
 
Accumulated other comprehensive income at end of period
46,381

 
19,826

 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,569,905

 
1,472,782

   Net earnings
77,280

 
66,405

   Stockholder dividends

 

 
 
 
 
   Balance at end of period
1,647,185

 
1,539,187

 
 
 
 
Total stockholders' equity
$
1,735,318

 
$
1,600,765


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



10


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
77,280

 
66,405

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

 
 

Universal life and annuity contract interest
179,592

 
114,729

Surrender charges and other policy revenues
(34,955
)
 
(13,302
)
Realized (gains) losses on investments
(10,589
)
 
(6,049
)
Accretion/amortization of discounts and premiums, investments
51

 
9

Depreciation and amortization
5,823

 
2,317

(Increase) decrease in value of derivatives
(8,307
)
 
69,884

(Increase) decrease in deferred policy acquisition and sales inducement costs
10,799

 
(632
)
(Increase) decrease in accrued investment income
(1,618
)
 
(4,592
)
(Increase) decrease in other assets
(3,683
)
 
(6,578
)
Increase (decrease) in liabilities for future policy benefits
3,408

 
6,887

Increase (decrease) in other policyholder liabilities
(5,175
)
 
7,382

Increase (decrease) in Federal income taxes liability
21,661

 
(22,703
)
Increase (decrease) in deferred Federal income tax
10,587

 
31,047

Increase (decrease) in other liabilities
1,352

 
2,452

 
 
 
 
Net cash provided by operating activities
246,226

 
247,256

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity

 

Securities available for sale
16,087

 
14,011

Other investments
3,947

 
2,182

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
304,190

 
343,494

Securities available for sale
134,208

 
219,676

Derivatives, index options
13,273

 
83,835

Purchases of:
 

 
 

Securities held to maturity
(231,804
)
 
(684,725
)
Securities available for sale
(229,932
)
 
(423,672
)
Derivatives, index options
(57,224
)
 
(66,395
)
Other investments
(27,525
)
 
(1,340
)
Net change in short-term investments
(14,972
)
 

 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

11


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2016 and 2015
(Unaudited)
(In thousands)
 
2016
 
2015
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
17,295

 
66,830

Cost of mortgage loans acquired
(55,796
)
 
(5,040
)
Decrease (increase) in policy loans
2,739

 
2,034

 
 
 
 
Net cash used in investing activities
(125,514
)
 
(449,110
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
626,083

 
679,128

Return of account balances on universal life and annuity contracts
(675,389
)
 
(668,037
)
 
 
 
 
Net cash provided by (used in) financing activities
(49,306
)
 
11,091

 
 
 
 
Effect of foreign exchange
(125
)
 
42

 
 
 
 
Net increase (decrease) in cash and cash equivalents
71,281

 
(190,721
)
Cash and cash equivalents at beginning of period
106,007

 
277,078

 
 
 
 
Cash and cash equivalents at end of period
$
177,288

 
$
86,357

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
33

 
30

Income taxes
$
5,032

 
24,127

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(7,146
)
 
(9,171
)

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



12


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

On October 1, 2015, National Western Life Insurance Company ("National Western", "NWLIC", or "company") completed its previously announced holding company reorganization. As a result of the reorganization, National Western became a wholly owned subsidiary of National Western Life Group, Inc. ("NWLGI"), a Delaware Corporation, and NWLGI replaced National Western as the publicly held company.

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 NWLGI and its subsidiaries (“Company”) as of September 30, 2016, and the results of its operations and its cash flows for the three and nine months ended September 30, 2016 and 2015. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2016 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, 2015 and are accessible free of charge through the Company's internet site at www.nwlgi.com or the Securities and Exchange Commission internet site at www.sec.gov. The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited consolidated financial statements as of that date.

Prior to the reorganization, the accompanying consolidated financial statements included the accounts of National Western and its wholly owned subsidiaries: The Westcap Corporation, Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., NWL Services, Inc., NWLSM, Inc., and NWL Financial, Inc. During the fourth quarter of 2015, subsequent to the reorganization, National Western transferred ownership of Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., and NWL Services, Inc. to NWLGI via a dividend transaction resulting in those entities becoming wholly owned subsidiaries of NWLGI.

The preparation of financial statements in accordance with 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, 2016 and 2015.

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,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
2,151

 
147

 
3,033

 
3,362

Net OTTI losses recognized in earnings
 

 

 

 
(107
)
Earnings before Federal income taxes
 
2,151

 
147

 
3,033

 
3,255

Federal income taxes
 
753

 
51

 
1,062

 
1,139

 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,398

 
96

 
1,971

 
2,116



13


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

In June 2014, the Financial Accounting Standards Board ("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 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this standard during the three month period ended March 31, 2016. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
In January 2016, the FASB released accounting standards update 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. The provisions of this update become effective for interim and annual periods beginning after December 15, 2017. The Company does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

In June 2016, the FASB released accounting standards update 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.
 
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial statements.


(3)
 STOCKHOLDERS' EQUITY

NWLIC 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 2016 is $117.1 million. National Western did declare a cash dividend of $3.0 million payable to its sole shareholder, NWLGI, on August 19, 2016. The cash dividend was subsequently paid on October 3, 2016.

As discussed in Note 1, Consolidation and Basis of Presentation, on October 1, 2015, NWLIC completed its previously announced holding company reorganization and became a wholly owned subsidiary of NWLGI. While remaining under the same Colorado Division of Insurance restrictions pertaining to dividend amounts, dividends declared by NWLIC from that date forward are payable entirely to NWLGI as the sole owner of NWLIC.

The reorganization effective October 1, 2015 provided for the conversion of each share of Class A common stock, par value $1.00 per share, and each share of Class B common stock, par value $1.00 per share, of NWLIC 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, and Class B common stock, par value $0.01 per share, of NWLGI. Consequently, NWLGI replaced NWLIC as the publicly held company and is the successor issuer to NWLIC.



14


NATIONAL WESTERN LIFE GROUP, INC.
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. Net income for the periods shown is allocated between Class A shares and Class B shares based upon (1) the proportionate number of shares issued and outstanding as of the end of the period, and (2) the per share dividend rights of the two classes under the Company's Restated Certificate of Incorporation (the Class B dividend per share is equal to one-half the Class A dividend per share).
 
Three Months Ended September 30,
 
2016
 
2015
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
33,736

 
 
 
16,221

 
 
Dividends - Class A shares

 
 
 

 
 
Dividends - Class B shares

 
 
 

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
33,736

 
 
 
16,221

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$

 

 

 

Allocation of undistributed income
32,782

 
954

 
15,763

 
458

 
 
 
 
 
 
 
 
Net income
$
32,782

 
954

 
15,763

 
458

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options

 

 
1

 

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,436

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
9.54

 
4.77

 
4.59

 
2.29

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
9.54

 
4.77

 
4.59

 
2.29


Stock options that were outstanding during the three months ended September 30, 2016 and 2015, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive, were approximately 27,300 and 20,800, respectively.

15


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Nine Months Ended September 30,
 
2016
 
2015
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
77,280

 
 
 
66,405

 
 
Dividends - Class A shares

 
 
 

 
 
Dividends - Class B shares

 
 
 

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
77,280

 
 
 
66,405

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$

 

 

 

Allocation of undistributed income
75,095

 
2,185

 
64,527

 
1,878

 
 
 
 
 
 
 
 
Net income
$
75,095

 
2,185

 
64,527

 
1,878

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options

 

 
1

 

 
 
 
 
 
 
 
 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions
3,436

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
21.85

 
10.93

 
18.78

 
9.39

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
21.85

 
10.93

 
18.77

 
9.39


Stock options that were outstanding during the nine months ended September 30, 2016 and 2015, but were not included in the computation of diluted earnings per share because the effect was anti-dilutive were approximately 22,900 and 21,100, respectively.


16


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(5)
 PENSION AND OTHER POSTRETIREMENT PLANS

(A)
Defined Benefit Pension Plans

National Western 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, National Western'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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
26

 
51

 
79

 
153

Interest cost
250

 
246

 
750

 
738

Expected return on plan assets
(304
)
 
(330
)
 
(912
)
 
(991
)
Amortization of prior service cost

 
1

 

 
3

Amortization of net loss
193

 
196

 
579

 
588

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
165

 
164

 
496

 
491


The service costs shown in the above table represent plan expenses expected to be paid out of plan assets. Under the clarified rules of 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 2016 plan year is $0.2 million. There was no remaining contribution payable for the 2015 plan year as of September 30, 2016. As of September 30, 2016, the company had contributed a total of $0.1 million to the plan for the 2016 plan year.

National Western 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 National Western 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 then 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 then Chairman and the then President of the company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, National Western established a second nonqualified defined benefit plan for the benefit of the then Chairman and the then 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


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table summarizes the components of net periodic benefit costs for the then Chairman in 2005 and the then President's nonqualified defined benefit plans.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Service cost
$
109

 
64

 
327

 
192

Interest cost
265

 
219

 
794

 
657

Amortization of prior service cost
15

 
14

 
45

 
44

Amortization of net loss
501

 
379

 
1,503

 
1,136

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
890

 
676

 
2,669

 
2,029


The company expects to contribute $2.0 million to these plans in 2016.  As of September 30, 2016, the company has contributed $1.3 million to the plans.

(B)
Defined Benefit Postretirement Healthcare Plans

National Western 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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Interest cost
$
30

 
33

 
90

 
98

Amortization of prior service cost
26

 
25

 
78

 
77

Amortization of net loss

 
15

 

 
45

 
 
 
 
 
 
 
 
Net periodic benefit cost
$
56

 
73

 
168

 
220


The company expects to contribute minimal amounts to the plan in 2016.



18


NATIONAL WESTERN LIFE GROUP, INC.
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 three and nine months ended September 30, 2016 and September 30, 2015 is provided below.

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
85,547

 
239,685

 
608,771

 

 
934,003

Total segment assets
961,205

 
1,248,425

 
9,232,802

 
293,963

 
11,736,395

Future policy benefits
809,493

 
923,235

 
8,065,370

 

 
9,798,098

Other policyholder liabilities
18,058

 
14,103

 
117,926

 

 
150,087

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 

September 30, 2016
 
 
 
 
 
 
 
 
 

Condensed Consolidated Statement of Earnings:
 
 
 
 
 
 
 
 
 

Premiums and contract revenues
$
8,507

 
31,066

 
5,391

 

 
44,964

Net investment income
12,294

 
12,763

 
97,384

 
4,540

 
126,981

Other revenues
7

 
10

 
139

 
4,320

 
4,476

 
 
 
 
 
 
 
 
 
 
Total revenues
20,808

 
43,839

 
102,914

 
8,860

 
176,421

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
5,338

 
5,038

 
7,054

 

 
17,430

Amortization of deferred policy acquisition costs
(4,331
)
 
7,296

 
21,430

 

 
24,395

Universal life and annuity contract interest
9,795

 
11,287

 
46,694

 

 
67,776

Other operating expenses
4,847

 
6,691

 
7,526

 
4,531

 
23,595

Federal income taxes (benefit)
1,667

 
3,591

 
6,549

 
1,209

 
13,016

 
 
 
 
 
 
 
 
 
 
Total expenses
17,316

 
33,903

 
89,253

 
5,740

 
146,212

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
3,492

 
9,936

 
13,661

 
3,120

 
30,209


19


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Earnings:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
24,814

 
95,291

 
17,407

 

 
137,512

Net investment income
28,011

 
30,203

 
261,579

 
15,939

 
335,732

Other revenues
37

 
50

 
145

 
13,818

 
14,050

 
 
 
 
 
 
 
 
 
 
Total revenues
52,862

 
125,544

 
279,131

 
29,757

 
487,294

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
13,629

 
14,789

 
20,153

 

 
48,571

Amortization of deferred acquisition costs
989

 
11,720

 
75,872

 

 
88,581

Universal life and annuity contract interest
20,855

 
19,643

 
139,094

 

 
179,592

Other operating expenses
11,745

 
17,867

 
23,044

 
13,650

 
66,306

Federal income taxes (benefit)
1,833

 
19,977

 
6,808

 
5,229

 
33,847

 
 
 
 
 
 
 
 
 
 
Total expenses
49,051

 
83,996

 
264,971

 
18,879

 
416,897

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
3,811

 
41,548

 
14,160

 
10,878

 
70,397

 
 
 
 
 
 
 
 
 
 

20


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Selected Segment Information:
 
 
 
 
 
 
 
 
 
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
73,746

 
252,632

 
665,738

 

 
992,116

Total segment assets
831,407

 
1,260,628

 
8,999,978

 
262,310

 
11,354,323

Future policy benefits
720,998

 
944,618

 
7,976,312

 

 
9,641,928

Other policyholder liabilities
11,437

 
17,835

 
117,331

 

 
146,603

 
 
 
 
 
 
 
 
 
 
Three Months Ended
 

 
 

 
 

 
 

 
 

September 30, 2015
 

 
 

 
 

 
 

 
 

Condensed Consolidated Statement of Earnings:
 

 
 

 
 

 
 

 
 

Premiums and contract revenues
$
8,259

 
29,773

 
5,983

 

 
44,015

Net investment income
2,095

 
448

 
49,518

 
4,148

 
56,209

Other revenues
3

 
5

 
12

 
5,047

 
5,067

 
 
 
 
 
 
 
 
 
 
Total revenues
10,357

 
30,226

 
55,513

 
9,195

 
105,291

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,545

 
5,002

 
5,634

 

 
14,181

Amortization of deferred acquisition costs
1,594

 
6,834

 
23,630

 

 
32,058

Universal life and annuity contract interest
14

 
(854
)
 
17,099

 

 
16,259

Other operating expenses
2,397

 
3,929

 
7,254

 
4,902

 
18,482

Federal income taxes (benefit)
911

 
5,363

 
825

 
1,520

 
8,619

 
 
 
 
 
 
 
 
 
 
Total expenses
8,461

 
20,274

 
54,442

 
6,422

 
89,599

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,896

 
9,952

 
1,071

 
2,773

 
15,692



21


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended
 
 
 
 
 
 
 
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Earnings:
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
22,683

 
89,470

 
17,029

 

 
129,182

Net investment income
17,265

 
17,847

 
208,263

 
15,016

 
258,391

Other revenues
23

 
66

 
31

 
15,470

 
15,590

 
 
 
 
 
 
 
 
 
 
Total revenues
39,971

 
107,383

 
225,323

 
30,486

 
403,163

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
12,540

 
16,794

 
20,233

 

 
49,567

Amortization of deferred acquisition costs
6,473

 
11,347

 
69,960

 

 
87,780

Universal life and annuity contract interest
10,413

 
13,203

 
91,113

 

 
114,729

Other operating expenses
9,554

 
15,063

 
18,866

 
14,311

 
57,794

Federal income taxes (benefit)
327

 
16,840

 
8,309

 
5,344

 
30,820

 
 
 
 
 
 
 
 
 
 
Total expenses
39,307

 
73,247

 
208,481

 
19,655

 
340,690

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
664

 
34,136

 
16,842

 
10,831

 
62,473

 
 
 
 
 
 
 
 
 
 


22


NATIONAL WESTERN LIFE GROUP, INC.
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,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Premiums and Other Revenues:
 
 
 
 
 
 
 
Premiums and contract revenues
$
44,964

 
44,015

 
137,512

 
129,182

Net investment income
126,981

 
56,209

 
335,732

 
258,391

Other revenues
4,476

 
5,067

 
14,050

 
15,590

Realized gains (losses) on investments
5,426

 
813

 
10,589

 
6,049

 
 
 
 
 
 
 
 
Total condensed consolidated premiums and other revenues
$
181,847

 
106,104

 
497,883

 
409,212


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
 
 
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
 
 
Total segment Federal income taxes
$
13,016