nwl10q.htm
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the Quarterly Period Ended June 30, 2009
|
|
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 þ 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 þ 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 þ
|
|
|
As
of August 5, 2009, the number of shares of Registrant's common stock
outstanding was: Class A – 3,425,966 and Class
B - 200,000.
|
|
|
|
|
Page
|
|
|
|
3
|
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|
|
3
|
|
|
|
3
|
June
30, 2009 (Unaudited) and December 31, 2008
|
|
|
|
|
5
|
For
the Three Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
6
|
For
the Six Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
7
|
For
the Three Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
8
|
For
the Six Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
9
|
For
the Six Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
11
|
For
the Six Months Ended June 30, 2009 and 2008 (Unaudited)
|
|
|
|
|
13
|
|
|
|
46
|
Financial
Condition and Results of Operations
|
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
72
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
74
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
June
30,
|
|
December
31,
|
ASSETS
|
|
2009
|
|
2008
|
|
|
|
|
|
Investments:
|
|
|
|
|
Securities
held to maturity, at amortized cost
|
|
|
|
|
(fair
value: $4,015,880 and $3,727,353)
|
$
|
3,986,365
|
|
3,831,417
|
Securities
available for sale, at fair value
|
|
|
|
|
(cost:
$1,897,918 and $1,904,053)
|
|
1,855,738
|
|
1,745,266
|
Mortgage
loans, net of allowance for possible losses
|
|
|
|
|
($3,577
and $4,587)
|
|
93,016
|
|
90,733
|
Policy
loans
|
|
77,928
|
|
79,277
|
Derivatives,
index options
|
|
27,018
|
|
11,920
|
Other
long-term investments
|
|
29,651
|
|
14,168
|
|
|
|
|
|
Total
investments
|
|
6,069,716
|
|
5,772,781
|
|
|
|
|
|
Cash
and short-term investments
|
|
54,850
|
|
67,796
|
Deferred
policy acquisition costs
|
|
658,921
|
|
701,984
|
Deferred
sales inducements
|
|
121,202
|
|
120,955
|
Accrued
investment income
|
|
67,200
|
|
64,872
|
Federal
income tax receivable
|
|
-
|
|
1,820
|
Other
assets
|
|
64,862
|
|
56,272
|
|
|
|
|
|
|
$
|
7,036,751
|
|
6,786,480
|
See
accompanying notes to condensed consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
policy benefits:
|
|
|
|
|
|
|
Traditional
life and annuity contracts
|
|
$ |
136,470 |
|
|
|
137,530 |
|
Universal
life and annuity contracts
|
|
|
5,567,547 |
|
|
|
5,424,968 |
|
Other
policyholder liabilities
|
|
|
134,875 |
|
|
|
131,963 |
|
Federal
income tax liability:
|
|
|
|
|
|
|
|
|
Current
|
|
|
8,131 |
|
|
|
- |
|
Deferred
|
|
|
45,365 |
|
|
|
26,506 |
|
Other
liabilities
|
|
|
81,214 |
|
|
|
79,300 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,973,602 |
|
|
|
5,800,267 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 5 and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Class
A - $1 par value; 7,500,000 shares authorized; 3,425,966
|
|
|
|
|
|
|
|
|
and
3,425,454 issued and outstanding in 2009 and 2008
|
|
|
3,426 |
|
|
|
3,426 |
|
Class
B - $1 par value; 200,000 shares authorized, issued,
|
|
|
|
|
|
|
|
|
and
outstanding in 2009 and 2008
|
|
|
200 |
|
|
|
200 |
|
Additional
paid-in capital
|
|
|
36,680 |
|
|
|
36,680 |
|
Accumulated
other comprehensive loss
|
|
|
(22,799 |
) |
|
|
(65,358 |
) |
Retained
earnings
|
|
|
1,045,642 |
|
|
|
1,011,265 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
1,063,149 |
|
|
|
986,213 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,036,751 |
|
|
|
6,786,480 |
|
See
accompanying notes to condensed consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Three Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
4,389 |
|
|
|
4,624 |
|
Universal
life and annuity contract charges
|
|
|
38,862 |
|
|
|
33,593 |
|
Net
investment income
|
|
|
93,743 |
|
|
|
72,278 |
|
Other
revenues
|
|
|
3,507 |
|
|
|
3,153 |
|
Net
realized investment gains (losses):
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment (“OTTI”)
losses
|
|
|
(1,849 |
) |
|
|
(1,425 |
) |
Portion of OTTI losses recognized in other comprehensive
income
|
|
|
1,823 |
|
|
|
- |
|
Net OTTI losses recognized in earnings
|
|
|
(26 |
) |
|
|
(1,425 |
) |
Other
net investment gains
|
|
|
192 |
|
|
|
1,158 |
|
Total net realized investment gains (losses)
|
|
|
166 |
|
|
|
(267 |
) |
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
140,667 |
|
|
|
113,381 |
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
10,248 |
|
|
|
7,655 |
|
Amortization
of deferred policy acquisition costs and
|
|
|
|
|
|
|
|
|
deferred sales inducements
|
|
|
28,549 |
|
|
|
30,263 |
|
Universal
life and annuity contract interest
|
|
|
57,651 |
|
|
|
33,555 |
|
Other
operating expenses
|
|
|
16,631 |
|
|
|
14,627 |
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
113,079 |
|
|
|
86,100 |
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
27,588 |
|
|
|
27,281 |
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes:
|
|
|
|
|
|
|
|
|
Current
|
|
|
15,141 |
|
|
|
7,928 |
|
Deferred
|
|
|
(6,395 |
) |
|
|
1,211 |
|
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
|
8,746 |
|
|
|
9,139 |
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
18,842 |
|
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
5.34 |
|
|
|
5.15 |
|
Class
B
|
|
$ |
2.67 |
|
|
|
2.57 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
5.34 |
|
|
|
5.10 |
|
Class
B
|
|
$ |
2.67 |
|
|
|
2.57 |
|
See
accompanying notes to condensed consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Premiums
and other revenues:
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
8,520 |
|
|
|
8,518 |
|
Universal
life and annuity contract charges
|
|
|
77,433 |
|
|
|
65,811 |
|
Net
investment income
|
|
|
164,349 |
|
|
|
131,708 |
|
Other
revenues
|
|
|
7,101 |
|
|
|
6,292 |
|
Net
realized investment gains (losses):
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment (“OTTI”) losses
|
|
|
(7,130 |
) |
|
|
(1,450 |
) |
Portion of OTTI losses recognized in other comprehensive
income
|
|
|
1,823 |
|
|
|
- |
|
Net OTTI losses recognized in earnings
|
|
|
(5,307 |
) |
|
|
(1,450 |
) |
Other net investment gains
|
|
|
128 |
|
|
|
1,139 |
|
Total net realized investment losses
|
|
|
(5,179 |
) |
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
252,224 |
|
|
|
212,018 |
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
23,276 |
|
|
|
18,111 |
|
Amortization
of deferred policy acquisition costs and
|
|
|
|
|
|
|
|
|
deferred sales inducements
|
|
|
56,497 |
|
|
|
56,511 |
|
Universal
life and annuity contract interest
|
|
|
92,917 |
|
|
|
60,172 |
|
Other
operating expenses
|
|
|
29,344 |
|
|
|
28,057 |
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
202,034 |
|
|
|
162,851 |
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
50,190 |
|
|
|
49,167 |
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes:
|
|
|
|
|
|
|
|
|
Current
|
|
|
21,005 |
|
|
|
11,819 |
|
Deferred
|
|
|
(4,685 |
) |
|
|
4,760 |
|
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
|
16,320 |
|
|
|
16,579 |
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
33,870 |
|
|
|
32,588 |
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
9.61 |
|
|
|
9.25 |
|
Class
B
|
|
$ |
4.80 |
|
|
|
4.62 |
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
9.60 |
|
|
|
9.18 |
|
Class
B
|
|
$ |
4.80 |
|
|
|
4.62 |
|
See
accompanying notes to condensed consolidated financial statements.
|
|
|
|
For
the Three Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
18,842 |
|
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
31,868 |
|
|
|
(15,503 |
) |
Reclassification
adjustment for net amounts |
|
|
|
|
|
|
|
|
included
in net earnings |
|
|
171 |
|
|
|
(574 |
) |
Amortization
of net unrealized gains related to
|
|
|
|
|
|
|
|
|
transferred
securities
|
|
|
(12 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on securities |
|
|
32,027 |
|
|
|
(16,107 |
) |
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(93 |
) |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
Benefit
plans:
|
|
|
|
|
|
|
|
|
Amortization
of net prior service cost and net gain
|
|
|
411 |
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
32,345 |
|
|
|
(15,693 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
51,187 |
|
|
|
2,449 |
|
See
accompanying notes to condensed consolidated financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
33,870 |
|
|
|
32,588 |
|
|
|
|
|
|
|
|
|
|
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
|
|
|
39,513 |
|
|
|
(15,095 |
) |
Reclassification
adjustment for net amounts |
|
|
|
|
|
|
|
|
included
in net earnings |
|
|
2,872 |
|
|
|
(610 |
) |
Amortization
of net unrealized gains related to
|
|
|
|
|
|
|
|
|
transferred
securities
|
|
|
(44 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
Net unrelaized gains (losses) on securities |
|
|
42,341 |
|
|
|
(15,719 |
) |
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(98 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
Benefit
plans:
|
|
|
|
|
|
|
|
|
Amortization
of net prior service cost and net gain
|
|
|
823 |
|
|
|
684 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
43,066 |
|
|
|
(15,177 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
76,936 |
|
|
|
17,411 |
|
See
accompanying notes to condensed consolidated financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Common
stock:
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
3,626 |
|
|
|
3,622 |
|
Shares
exercised under stock option plan
|
|
|
- |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
3,626 |
|
|
|
3,626 |
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
36,680 |
|
|
|
36,236 |
|
Shares
exercised under the stock option plan
|
|
|
- |
|
|
|
444 |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
36,680 |
|
|
|
36,680 |
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on non-impaired securities:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(53,770 |
) |
|
|
1,184 |
|
Change
in unrealized gains (losses) during period
|
|
|
42,902 |
|
|
|
(15,719 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(10,868 |
) |
|
|
(14,535 |
) |
|
|
|
|
|
|
|
|
|
Unrealized
losses on impaired held to maturity securities:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
- |
|
|
|
- |
|
Cumulative
effect of change in accounting principle (See Note 3)
|
|
|
(507 |
) |
|
|
- |
|
Amortization
|
|
|
15 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(492 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on impaired available for sale securities:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
- |
|
|
|
- |
|
Other-than-temporary
impairments
|
|
|
(576 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(576 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
2,966 |
|
|
|
3,078 |
|
Change
in translation adjustments during period
|
|
|
(98 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
2,868 |
|
|
|
2,936 |
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
(14,554 |
) |
|
|
(11,327 |
) |
Amortization
of net prior service cost and net gain
|
|
|
823 |
|
|
|
684 |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(13,731 |
) |
|
|
(10,643 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss at end of period
|
|
|
(22,799 |
) |
|
|
(22,242 |
) |
Continued
on next page
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
1,011,265 |
|
|
|
978,892 |
|
Cumulative
effect of change in accounting principle,
|
|
|
|
|
|
|
|
|
net
of tax (See Note 3)
|
|
|
507 |
|
|
|
- |
|
Net
earnings
|
|
|
33,870 |
|
|
|
32,588 |
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
1,045,642 |
|
|
|
1,011,480 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$ |
1,063,149 |
|
|
|
1,029,544 |
|
See
accompanying notes to condensed consolidated financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
33,870 |
|
|
|
32,588 |
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
|
from
operating activities:
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract interest
|
|
|
105,066 |
|
|
|
69,219 |
|
Surrender
charges and other policy revenues
|
|
|
(30,471 |
) |
|
|
(19,667 |
) |
Realized
losses on investments
|
|
|
5,179 |
|
|
|
311 |
|
Accrual
and amortization of investment income
|
|
|
(2,833 |
) |
|
|
(2,487 |
) |
Depreciation
and amortization
|
|
|
1,344 |
|
|
|
495 |
|
(Increase)
decrease in value of derivatives
|
|
|
(18,344 |
) |
|
|
21,289 |
|
Increase
in deferred policy acquisition and
|
|
|
|
|
|
|
|
|
sales
inducement costs
|
|
|
(9,210 |
) |
|
|
(5,741 |
) |
(Increase)
decrease in accrued investment income
|
|
|
(2,328 |
) |
|
|
172 |
|
Increase
in other assets
|
|
|
(11,822 |
) |
|
|
(5,273 |
) |
Decrease
in liabilities for future policy benefits
|
|
|
(1,060 |
) |
|
|
(601 |
) |
Increase
in other policyholder liabilities
|
|
|
2,912 |
|
|
|
3,421 |
|
Increase
in Federal income tax liability
|
|
|
5,266 |
|
|
|
8,401 |
|
Increase
(decrease) in other liabilities
|
|
|
13,642 |
|
|
|
(4,115 |
) |
Other
|
|
|
1,250 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
92,461 |
|
|
|
98,371 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
- |
|
|
|
- |
|
Securities
available for sale
|
|
|
14,770 |
|
|
|
999 |
|
Other
investments
|
|
|
671 |
|
|
|
443 |
|
Proceeds
from maturities and redemptions of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
530,236 |
|
|
|
355,100 |
|
Securities
available for sale
|
|
|
64,563 |
|
|
|
140,458 |
|
Derivatives,
index options
|
|
|
24,405 |
|
|
|
22,143 |
|
Purchases
of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
(668,004 |
) |
|
|
(379,575 |
) |
Securities
available for sale
|
|
|
(101,172 |
) |
|
|
(167,134 |
) |
Other
investments
|
|
|
(37,603 |
) |
|
|
(26,292 |
) |
Principal
payments on mortgage loans
|
|
|
3,921 |
|
|
|
10,200 |
|
Cost
of mortgage loans acquired
|
|
|
(6,049 |
) |
|
|
(1,962 |
) |
Decrease
in policy loans
|
|
|
1,349 |
|
|
|
1,895 |
|
Other
|
|
|
- |
|
|
|
(3,899 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(172,913 |
) |
|
|
(47,624 |
) |
(Continued
on next page)
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
|
|
For
the Six Months Ended June 30, 2009 and 2008
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Deposits
to account balances for universal life
|
|
|
|
|
|
|
and
annuity contracts
|
|
$ |
363,145 |
|
|
|
238,296 |
|
Return
of account balances on universal life
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
(295,546 |
) |
|
|
(300,961 |
) |
Issuance
of common stock under stock option plan
|
|
|
- |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
67,599 |
|
|
|
(62,217 |
) |
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange
|
|
|
(93 |
) |
|
|
(351 |
) |
|
|
|
|
|
|
|
|
|
Net
decrease in cash and short-term investments
|
|
|
(12,946 |
) |
|
|
(11,821 |
) |
Cash
and short-term investments at beginning of period
|
|
|
67,796 |
|
|
|
45,206 |
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments at end of period
|
|
$ |
54,850 |
|
|
|
33,385 |
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
20 |
|
|
|
20 |
|
Income
taxes
|
|
|
10,748 |
|
|
|
8,178 |
|
|
|
|
|
|
|
|
|
|
Noncash
operating activities:
|
|
|
|
|
|
|
|
|
Net
change in deferral of sales inducements
|
|
|
10,124 |
|
|
|
9,047 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
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”) as of June 30, 2009, and the results of its operations and its cash
flows for the three and six months ended June 30, 2009 and 2008. The results of
operations for the six months ended June 30, 2009 and 2008 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, 2008
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, 2008, has been derived from
the audited consolidated financial statements as of that date. Certain amounts
in the prior year condensed consolidated financial statements have been
reclassified to conform to the current year presentation.
The
accompanying 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., 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, and (6) valuation allowances for mortgage loans and real
estate.
(2) NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair
Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles,
and requires additional disclosures about fair value measurements. The Company
adopted this guidance effective January 1, 2008 and the adoption did not have an
impact on the Company’s consolidated financial statements. See related
disclosures in Note 10 to Consolidated Financial Statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This Statement
permits entities to choose upon adoption or at specified election dates, to
measure at fair value many financial
instruments and certain other items at fair value. The Company adopted SFAS 159
effective January 1, 2008, with no impact to the Company’s consolidated
financial statements as no eligible financial assets or liabilities were elected
to be measured at fair value upon initial adoption. Management will continue to
evaluate eligible financial assets and liabilities on their election dates, and
will disclose any future elections in accordance with provisions outlined in the
Statement.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements. SFAS No. 160 establishes accounting
and reporting standards for entities that have equity investments that are not
attributable directly to the parent, called noncontrolling interests or minority
interests. Specifically, SFAS No. 160 states where and how to report
noncontrolling interests in the consolidated statements of financial position
and operations, how to account for changes in noncontrolling interests and
provides disclosure requirements. The provisions of SFAS No. 160 were effective
beginning January 1, 2009. The adoption of SFAS No. 160 did not have a material
impact on the Company’s consolidated financial condition and results of
operations.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS
No. 141(R) establishes how an entity accounts for the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests acquired, how to
account for goodwill acquired and determines what disclosures are required as
part of a business combination. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The adoption of this statement did not have any impact on the
Company’s consolidated financial condition and results of
operations.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No.
157. This FSP delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, to
fiscal years and interim periods beginning after November 15, 2008. The adoption
of FSP FAS 157-2 did not have a material impact on the Company’s consolidated
financial condition and results of operations.
On April
9, 2009 the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP provides additional
guidance for estimating fair value in accordance with SFAS No. 157, when the
volume and level of activity for the asset or liability have significantly
decreased. This FSP also includes guidance on identifying circumstances that
indicate a transaction is not orderly. This FSP emphasizes that even if there
has been a significant decrease in the volume and level of activity for the
asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction (that is, not a forced liquidation or distressed sale)
between market participants at the measurement date under current market
conditions. This FSP is effective for interim and annual reporting periods
ending after June 15, 2009. As discussed in Note 10, the adoption of FSP FAS
157-4 did not have a material impact on the Company’s consolidated financial
condition and results of operations.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133.
This statement requires enhanced disclosures regarding an entity’s
derivative and
hedging activity to enable investors to better understand the effects on an
entity’s financial position, financial performance, and cash flows. The Company
adopted SFAS No. 161 as of January 1, 2009. See Note 11 for disclosures
regarding derivative instruments and hedging activities.
In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives
and Certain Guarantees:
An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161. This FSP
amends SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, to require disclosures
by entities that assume credit risk through the sale of credit derivatives including credit
derivatives embedded in a hybrid instrument to enable users of financial
statements to assess the potential effect on its financial position, financial
performance, and cash flows from these credit derivatives. This FSP also amends
FASB Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to require additional disclosure about the
current status of the payment/performance
risk of a guarantee. The Company adopted FSP FAS 133-1 and FIN 45-4 effective
January 1, 2009. The adoption did not have a material effect on the Company’s
consolidated financial condition and results of operations.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. This FSP requires
that information about plan assets be disclosed, on an annual basis, based on
the fair value disclosure requirements
of SFAS No. 157. The Company would be required to separate plan assets into the
three fair value hierarchy levels and provide a rollforward of the changes in
fair value of plan assets classified as Level 3. The disclosures about plan
assets required by this FSP are effective for fiscal years ending after December
15, 2009, but will have no effect on the Company’s consolidated financial
condition and results of operations.
In
January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20. The FSP amends EITF 99-20’s impairment
model to be more consistent with SFAS No. 115 Accounting for Certain Investments
in Debt and Equity Securities, removing its exclusive reliance on “market
participant” estimate of future cash flows used in
determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows management to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The FSP was effective for the
Company as of December 31, 2008. The adoption of this FSP did not have a
significant impact on the consolidated financial statements of the
Company.
On April
9, 2009 the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. This FSP amends
FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at interim
reporting periods. This FSP was effective for the Company as of June 30, 2009.
The adoption of this FSP did not have a significant impact on the consolidated
financial position or results of operations. See Note 10 for the additional
disclosures required by this FSP.
On April
9, 2009 the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance for debt securities to make the guidance more
operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement
guidance related to other-than-temporary impairments of equity securities. This
FSP was effective for the Company as of June 30, 2009. The impact of the
adoption of this FSP is discussed in Note 3, Stockholders Equity.
On May
28, 2009, the FASB issued SFAS No. 165, Subsequent Events. This
statement is intended to establish general standards of accounting for the
disclosure of events that occur after the balance sheet date, but before the
financial statements are issued or are available to be issued. This statement
was effective for the Company as of June 30, 2009. The adoption of this
statement did not have a significant impact on the consolidated financial
position or results of operations. See Note 12 for the additional disclosure
required by this FSP.
On June
12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets and SFAS No. 167 Amendments to FASB Interpretation
No. 46(R), which changes the way entities account for securitizations and
special purpose
entities. Both statements are effective as of the beginning of the Company’s
first annual reporting period beginning after November 15, 2009. The adoption of
these statements should not have a significant impact on the consolidated
financial position, results of operations and disclosures.
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
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 Company paid no cash dividends on common stock during the six
months ended June 30, 2009 and 2008.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Change
in Accounting Principles
With the
adoption of the new FSP FAS 115-2 and FAS 124-2, the Company reviewed all
previously-recorded other-than-temporary impairments of securities and estimated
the credit versus the non-credit component consistent with the methodology used
in the current period to analyze and bifurcate impairments into credit and
non-credit components. As a result, the Company determined that $0.8 million in
previously recorded other-than-temporary impairments had been due to non-credit
impairments.
For each
security, the Company developed its best estimate of the net present value of
the cash flows expected to be received. The credit component of the impairment
for these securities was determined to be the difference between the amortized
cost of the security and the projected net cash flows. The non-credit component
was determined to be the difference between projected net cash flows and fair
value. It also determined whether it had the intent to sell the security, or if
it was more likely than not that it will be required to sell the security, prior
to the recovery of the non-credit component.
With the
implementation of this FSP, the Company recorded a net of tax opening balance
adjustment that increased retained earnings in the amount of $0.5 million and
increased accumulated other comprehensive loss in the amount of $0.5 million.
See Note 9 for further discussion of the adoption of the new FSP.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for Basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,842 |
|
|
|
|
|
|
|
18,142 |
|
|
|
|
|
Dividends
– Class A shares
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Dividends
– Class B shares
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
income
|
|
$ |
18,842 |
|
|
|
|
|
|
|
18,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Allocation
of undistributed income
|
|
|
18,307 |
|
|
|
535 |
|
|
|
17,627 |
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,307 |
|
|
|
535 |
|
|
|
17,627 |
|
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,426 |
|
|
|
200 |
|
|
|
3,426 |
|
|
|
200 |
|
Effect
of dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
4 |
|
|
|
- |
|
|
|
27 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
for assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversions
|
|
|
3,430 |
|
|
|
200 |
|
|
|
3,453 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
5.34 |
|
|
|
2.67 |
|
|
|
5.15 |
|
|
|
2.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
5.34 |
|
|
|
2.67 |
|
|
|
5.10 |
|
|
|
2.57 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for Basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
33,870 |
|
|
|
|
|
|
|
32,588 |
|
|
|
|
|
Dividends
– Class A shares
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Dividends
– Class B shares
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
income
|
|
$ |
33,870 |
|
|
|
|
|
|
|
32,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Allocation
of undistributed income
|
|
|
32,909 |
|
|
|
961 |
|
|
|
31,664 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
32,909 |
|
|
|
961 |
|
|
|
31,664 |
|
|
|
924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,426 |
|
|
|
200 |
|
|
|
3,424 |
|
|
|
200 |
|
Effect
of dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
4 |
|
|
|
- |
|
|
|
26 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
for assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversions
|
|
|
3,430 |
|
|
|
200 |
|
|
|
3,450 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
9.61 |
|
|
|
4.80 |
|
|
|
9.25 |
|
|
|
4.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
9.60 |
|
|
|
4.80 |
|
|
|
9.18 |
|
|
|
4.62 |
|
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 comply 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 summarizes the components of net periodic benefit
cost.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- |
|
|
|
(180 |
) |
|
|
- |
|
|
|
- |
|
Interest
cost
|
|
|
262 |
|
|
|
246 |
|
|
|
524 |
|
|
|
518 |
|
Expected
return on plan assets
|
|
|
(223 |
) |
|
|
(295 |
) |
|
|
(445 |
) |
|
|
(570 |
) |
Amortization
of prior service cost
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
Amortization
of net loss
|
|
|
149 |
|
|
|
42 |
|
|
|
297 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
189 |
|
|
|
(186 |
) |
|
|
378 |
|
|
|
72 |
|
The
Company expects to contribute $1.8 million to the plan in 2009. As of
June 30, 2009, the Company has contributed $0.1 million to the
plan.
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 pension 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 plan, while
complying with the requirements of the Act.
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 plan as previously discussed, while
complying with the requirements of the Act.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following summarizes the components of net periodic benefit costs for these
non-qualified plans.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
37 |
|
|
|
100 |
|
|
|
74 |
|
|
|
293 |
|
Interest
cost
|
|
|
309 |
|
|
|
354 |
|
|
|
617 |
|
|
|
595 |
|
Amortization
of prior service cost
|
|
|
260 |
|
|
|
260 |
|
|
|
520 |
|
|
|
520 |
|
Amortization
of net loss
|
|
|
198 |
|
|
|
252 |
|
|
|
396 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
804 |
|
|
|
966 |
|
|
|
1,607 |
|
|
|
1,761 |
|
The
Company expects to contribute $2.0 million to these plans in 2009. As
of June 30, 2009, the Company has contributed $0.7 million to the
plans.
(B) Defined
Benefit Postretirement Plans
The
Company sponsors two healthcare plans to provide postretirement benefits to
certain fully-vested individuals. The following summarizes the
components of net periodic benefit costs.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
33 |
|
|
|
32 |
|
|
|
65 |
|
|
|
67 |
|
Amortization
of prior service cost
|
|
|
26 |
|
|
|
26 |
|
|
|
52 |
|
|
|
52 |
|
Amortization
of net loss (gain)
|
|
|
- |
|
|
|
(4 |
) |
|
|
- |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
59 |
|
|
|
54 |
|
|
|
117 |
|
|
|
122 |
|
As
previously disclosed in its financial statements for the year ended December 31,
2008, the Company expects to contribute minimal amounts to the plan in
2009.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(6) SEGMENT
AND OTHER OPERATING INFORMATION
Under
SFAS No. 131, Disclosures
About Segments of an Enterprise and Related 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 as of and for the periods ended June 30, 2009 and 2008 is provided
below.
Selected
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
61,850 |
|
|
|
209,021 |
|
|
|
509,252 |
|
|
|
- |
|
|
|
780,123 |
|
Total
segment assets
|
|
|
393,864 |
|
|
|
1,000,007 |
|
|
|
5,448,684 |
|
|
|
146,332 |
|
|
|
6,988,887 |
|
Future
policy benefits
|
|
|
319,259 |
|
|
|
608,331 |
|
|
|
4,776,427 |
|
|
|
- |
|
|
|
5,704,017 |
|
Other
policyholder liabilities
|
|
|
11,748 |
|
|
|
24,726 |
|
|
|
98,401 |
|
|
|
- |
|
|
|
134,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
9,418 |
|
|
|
26,585 |
|
|
|
7,248 |
|
|
|
- |
|
|
|
43,251 |
|
Net
investment income
|
|
|
4,962 |
|
|
|
9,822 |
|
|
|
75,096 |
|
|
|
3,863 |
|
|
|
93,743 |
|
Other
income
|
|
|
6 |
|
|
|
12 |
|
|
|
78 |
|
|
|
3,411 |
|
|
|
3,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
14,386 |
|
|
|
36,419 |
|
|
|
82,422 |
|
|
|
7,274 |
|
|
|
140,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
4,334 |
|
|
|
4,374 |
|
|
|
1,540 |
|
|
|
- |
|
|
|
10,248 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
1,979 |
|
|
|
11,600 |
|
|
|
14,970 |
|
|
|
- |
|
|
|
28,549 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
2,226 |
|
|
|
10,480 |
|
|
|
44,945 |
|
|
|
- |
|
|
|
57,651 |
|
Other
operating expenses
|
|
|
3,649 |
|
|
|
5,174 |
|
|
|
4,540 |
|
|
|
3,268 |
|
|
|
16,631 |
|
Federal
income taxes
|
|
|
686 |
|
|
|
1,553 |
|
|
|
5,164 |
|
|
|
1,285 |
|
|
|
8,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
12,874 |
|
|
|
33,181 |
|
|
|
71,159 |
|
|
|
4,553 |
|
|
|
121,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
1,512 |
|
|
|
3,238 |
|
|
|
11,263 |
|
|
|
2,721 |
|
|
|
18,734 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
18,957 |
|
|
|
52,834 |
|
|
|
14,162 |
|
|
|
- |
|
|
|
85,953 |
|
Net
investment income
|
|
|
10,060 |
|
|
|
13,880 |
|
|
|
135,117 |
|
|
|
5,292 |
|
|
|
164,349 |
|
Other
income
|
|
|
20 |
|
|
|
39 |
|
|
|
213 |
|
|
|
6,829 |
|
|
|
7,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
29,037 |
|
|
|
66,753 |
|
|
|
149,492 |
|
|
|
12,121 |
|
|
|
257,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
8,155 |
|
|
|
12,098 |
|
|
|
3,023 |
|
|
|
- |
|
|
|
23,276 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
4,334 |
|
|
|
24,762 |
|
|
|
27,401 |
|
|
|
- |
|
|
|
56,497 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
4,498 |
|
|
|
14,200 |
|
|
|
74,219 |
|
|
|
- |
|
|
|
92,917 |
|
Other
operating expenses
|
|
|
6,379 |
|
|
|
8,680 |
|
|
|
7,734 |
|
|
|
6,551 |
|
|
|
29,344 |
|
Federal
income taxes
|
|
|
1,859 |
|
|
|
2,299 |
|
|
|
12,152 |
|
|
|
1,823 |
|
|
|
18,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
25,225 |
|
|
|
62,039 |
|
|
|
124,529 |
|
|
|
8,374 |
|
|
|
220,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
3,812 |
|
|
|
4,714 |
|
|
|
24,963 |
|
|
|
3,747 |
|
|
|
37,236 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Selected
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
63,709 |
|
|
|
213,085 |
|
|
|
512,052 |
|
|
|
- |
|
|
|
788,846 |
|
Total
segment assets
|
|
|
401,193 |
|
|
|
823,498 |
|
|
|
5,428,195 |
|
|
|
131,362 |
|
|
|
6,784,248 |
|
Future
policy benefits
|
|
|
319,676 |
|
|
|
579,006 |
|
|
|
4,659,100 |
|
|
|
- |
|
|
|
5,557,782 |
|
Other
policyholder liabilities
|
|
|
10,838 |
|
|
|
12,261 |
|
|
|
100,722 |
|
|
|
- |
|
|
|
123,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
6,691 |
|
|
|
24,741 |
|
|
|
6,785 |
|
|
|
- |
|
|
|
38,217 |
|
Net
investment income
|
|
|
5,030 |
|
|
|
5,005 |
|
|
|
59,006 |
|
|
|
3,237 |
|
|
|
72,278 |
|
Other
income
|
|
|
4 |
|
|
|
13 |
|
|
|
85 |
|
|
|
3,051 |
|
|
|
3,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
11,725 |
|
|
|
29,759 |
|
|
|
65,876 |
|
|
|
6,288 |
|
|
|
113,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
2,814 |
|
|
|
4,286 |
|
|
|
555 |
|
|
|
- |
|
|
|
7,655 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
2,068 |
|
|
|
9,610 |
|
|
|
18,585 |
|
|
|
- |
|
|
|
30,263 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
2,288 |
|
|
|
4,586 |
|
|
|
26,681 |
|
|
|
- |
|
|
|
33,555 |
|
Other
operating expenses
|
|
|
3,049 |
|
|
|
4,254 |
|
|
|
4,489 |
|
|
|
2,835 |
|
|
|
14,627 |
|
Federal
income taxes
|
|
|
508 |
|
|
|
2,354 |
|
|
|
5,210 |
|
|
|
1,161 |
|
|
|
9,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
10,727 |
|
|
|
25,090 |
|
|
|
55,520 |
|
|
|
3,996 |
|
|
|
95,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
998 |
|
|
|
4,669 |
|
|
|
10,356 |
|
|
|
2,292 |
|
|
|
18,315 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
13,310 |
|
|
|
48,226 |
|
|
|
12,793 |
|
|
|
- |
|
|
|
74,329 |
|
Net
investment income
|
|
|
10,191 |
|
|
|
8,044 |
|
|
|
109,303 |
|
|
|
4,170 |
|
|
|
131,708 |
|
Other
income
|
|
|
10 |
|
|
|
25 |
|
|
|
123 |
|
|
|
6,134 |
|
|
|
6,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
23,511 |
|
|
|
56,295 |
|
|
|
122,219 |
|
|
|
10,304 |
|
|
|
212,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
7,019 |
|
|
|
9,599 |
|
|
|
1,493 |
|
|
|
- |
|
|
|
18,111 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
4,355 |
|
|
|
18,401 |
|
|
|
33,755 |
|
|
|
- |
|
|
|
56,511 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
4,643 |
|
|
|
7,280 |
|
|
|
48,249 |
|
|
|
- |
|
|
|
60,172 |
|
Other
operating expenses
|
|
|
6,023 |
|
|
|
8,126 |
|
|
|
8,295 |
|
|
|
5,613 |
|
|
|
28,057 |
|
Federal
income taxes
|
|
|
496 |
|
|
|
4,348 |
|
|
|
10,262 |
|
|
|
1,582 |
|
|
|
16,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
22,536 |
|
|
|
47,754 |
|
|
|
102,054 |
|
|
|
7,195 |
|
|
|
179,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
975 |
|
|
|
8,541 |
|
|
|
20,165 |
|
|
|
3,109 |
|
|
|
32,790 |
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Premiums and Other
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
43,251 |
|
|
|
38,217 |
|
|
|
85,953 |
|
|
|
74,329 |
|
Net
investment income
|
|
|
93,743 |
|
|
|
72,278 |
|
|
|
164,349 |
|
|
|
131,708 |
|
Other
income
|
|
|
3,507 |
|
|
|
3,153 |
|
|
|
7,101 |
|
|
|
6,292 |
|
Realized
gains (losses) on investments
|
|
|
166 |
|
|
|
(267 |
) |
|
|
(5,179 |
) |
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated premiums and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
revenue
|
|
$ |
140,667 |
|
|
|
113,381 |
|
|
|
252,224 |
|
|
|
212,018 |
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Federal Income
Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment Federal income taxes
|
|
$ |
8,688 |
|
|
|
9,233 |
|
|
|
18,133 |
|
|
|
16,688 |
|
Taxes
on realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
investments
|
|
|
58 |
|
|
|
(94 |
) |
|
|
(1,813 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
8,746 |
|
|
|
9,139 |
|
|
|
16,320 |
|
|
|
16,579 |
|
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Net
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment earnings
|
|
$ |
18,734 |
|
|
|
18,315 |
|
|
|
37,236 |
|
|
|
32,790 |
|
Realized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments,
net of taxes
|
|
|
108 |
|
|
|
(173 |
) |
|
|
(3,366 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net earnings
|
|
$ |
18,842 |
|
|
|
18,142 |
|
|
|
33,870 |
|
|
|
32,588 |
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
|
Total
segment assets
|
|
$ |
6,988,887 |
|
|
|
6,784,248 |
|
Other
unallocated assets
|
|
|
47,864 |
|
|
|
42,082 |
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$ |
7,036,751 |
|
|
|
6,826,330 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) SHARE-BASED
PAYMENTS
The
Company has a stock and incentive plan ("1995 Plan") which provides for the
grant of any or all of the following types of awards to eligible employees: (1)
stock options, including incentive stock options and nonqualified stock options;
(2) stock appreciation rights, in tandem with stock options or freestanding; (3)
restricted stock; and (4) performance awards. The Company has issued only
nonqualified stock options and stock appreciation rights. The 1995 Plan began on
April 21, 1995, and was amended on June 25, 2004 to extend the termination date
to April 20, 2010. The number of shares of Class A, $1.00 par value, common
stock which may be issued under the 1995 Plan, or as to which stock appreciation
rights or other awards may be granted, may not exceed 300,000. Effective June
20, 2008, the Company’s shareholders approved a 2008 Incentive Plan (“2008
Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized
an additional number of Class A, $1.00 par value, common stock shares eligible
for issue not to exceed 300,000. These shares may be authorized and unissued
shares.
All of
the employees of the Company and its subsidiaries are eligible to participate in
the two Plans. In addition, directors of the Company are eligible to receive the
same types of awards as employees except that they are not eligible to receive
incentive stock options. Company directors, including members of the
Compensation and Stock Option Committee, are eligible for nondiscretionary stock
options. The directors’ grants vest 20% annually following one full year of
service to the Company from the date of grant. The employees’ grants vest 20%
annually following three full years of service to the Company from the date of
grant. All grants issued expire after ten years. On February 19, 2009, the
Company awarded 29,393 stock appreciation rights to Company officers and 9,000
stock appreciation rights to Company directors at a market value price of
$114.64. On April 18, 2008, the Company awarded 28,268 stock options to Company
officers at a market value price of $255.13 and on June 20, 2008, the Company
awarded 9,000 stock options to Company directors at a market value price of
$208.05.
Effective
during March 2006, the Company adopted and implemented a limited stock buy-back
program which provides option holders the additional alternative of selling
shares acquired through the exercise of options directly back to the Company.
Option holders may elect to sell such acquired shares back to the Company at any
time within ninety (90) days after the exercise of options at the prevailing
market price as of the date of notice of election. The buy-back program did not
alter the terms and conditions of the Plan, however the program necessitated a
change in accounting from the equity classification to the liability
classification.
In August
2008, the Company implemented another limited stock buy-back program,
substantially similar to the 2006 program, for shares issued under the 2008
Plan.
The
Company uses the current fair value method to measure compensation cost. As of
June 30, 2009 and 2008, the liability balance was $2.6 million and $6.3 million,
respectively. A summary of shares available for grant and stock option activity
is detailed below.
|
|
|
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
|
|
|
Exercise
|
|
|
|
For
Grant
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
291,400 |
|
|
|
105,812 |
|
|
$ |
174.33 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
800 |
|
|
|
(800 |
) |
|
|
215.71 |
|
Expired
|
|
|
200 |
|
|
|
(200 |
) |
|
|
150.00 |
|
Stock
options granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2009
|
|
|
292,400 |
|
|
|
104,812 |
|
|
$ |
174.06 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Stock
Appreciation Rights Outstanding
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Awards
|
|
|
Price
|
|
|
|
|
|
|
|
|
Stock
Appreciation Rights:
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
2,750 |
|
|
$ |
245.70 |
|
SARs
granted February 19, 2009
|
|
|
38,393 |
|
|
|
114.64 |
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2009
|
|
|
41,143 |
|
|
$ |
123.40 |
|
The total
intrinsic value of options exercised was zero and $2.3 million for the six
months ended June 30, 2009 and 2008, respectively. The total share-based
liabilities paid were zero and $2.0 million for the six months ended June 30,
2009 and 2008, respectively. For the quarters ended June 30, 2009 and 2008, the
total cash received from the exercise of options under the Plan was zero and
$0.4 million, respectively. The total fair value of shares vested during the six
months ended June 30, 2009 and 2008 was $0.2 million and $2.0 million,
respectively.
The
following table summarizes information about stock options and SARs outstanding
at June 30, 2009.
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Options
|
|
|
|
Outstanding
|
|
|
Contractual
Life
|
|
|
Exercisable
|
|
Exercise
prices:
|
|
|
|
|
|
|
|
|
|
$ 92.13
|
|
|
10,194 |
|
|
|
1.8
years |
|
|
|
10,194 |
|
95.00
|
|
|
6,000 |
|
|
2.0
years
|
|
|
|
6,000 |
|
150.00
|
|
|
51,850 |
|
|
4.8
years
|
|
|
|
32,650 |
|
255.13
|
|
|
27,768 |
|
|
8.8
years
|
|
|
|
- |
|
208.05
|
|
|
9,000 |
|
|
9.0
years
|
|
|
|
1,800 |
|
236.00
|
|
|
1,250 |
|
|
9.1
years
|
|
|
|
- |
|
251.49
|
|
|
1,000 |
|
|
9.2
years
|
|
|
|
- |
|
256.00
|
|
|
500 |
|
|
9.2
years
|
|
|
|
- |
|
114.64
|
|
|
38,393 |
|
|
9.6
years
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
145,955 |
|
|
|
|
|
|
|
50,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
$ |
462 |
|
|
|
|
|
|
$ |
381 |
|
The
aggregate intrinsic value in the table above is based on the closing stock price
of $116.75 per share on June 30, 2009.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
estimating the fair value of the options outstanding at June 30, 2009 and
December 31, 2008, the Company employed the Black-Scholes option pricing model
with assumptions as detailed below.
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Expected
term of options
|
|
1
to 9 years
|
|
|
2
to 10 years
|
|
Expected
volatility:
|
|
|
|
|
|
|
Range
|
|
27.61%
to 101.15
|
% |
|
24.70%
to 77.55
|
%
|
Weighted-average
|
|
|
49.08 |
% |
|
|
37.10 |
% |
Expected
dividend yield
|
|
|
0.31 |
% |
|
|
0.22 |
% |
Risk-free
rate:
|
|
|
|
|
|
|
|
|
Range
|
|
1.52%
to 3.74
|
% |
|
1.44%
% to 2.40
|
% |
Weighted-average
|
|
|
2.63 |
% |
|
|
1.94 |
% |
The
Company reviewed the contractual term relative to the options as well as
perceived future behavior patterns of exercise. Volatility is based on the
Company’s historical volatility over the expected term.
The
pre-tax compensation cost recognized in the financial statements related to the
Plan was $(1.2) million and $0.7 million for the six months ended June 30, 2009
and 2008, respectively. The related tax expense recognized was $(0.4) million
and $0.2 million for the six months ended June 30, 2009 and 2008,
respectively.
As of
June 30, 2009, the total compensation cost related to nonvested options not yet
recognized was $1.8 million. This amount is expected to be recognized over a
weighted-average period of 2.6 years. The Company recognizes compensation cost
over the graded vesting periods.
(8)
COMMITMENTS AND CONTINGENCIES
(A)
Legal Proceedings
The
Company is a defendant in two class action lawsuits. In one case, the Court has
certified a class consisting of certain California policyholders age 65 and
older alleging violations under California Business and Professions Code section
17200. The Court has additionally certified a subclass of 36 policyholders
alleging fraud against their agent, and vicariously, against the Company. A
second class action lawsuit in federal court in California is in discovery and
the Company is currently opposing a recently filed motion for class
certification. Management believes that the Company has good and meritorious
defenses and intends to continue to vigorously defend itself against these
claims.
The
Company is involved or may become involved in various other legal actions, in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
In
January 2009, the SEC published its newly adopted rule 151A, Indexed Annuities and Certain Other
Insurance Contracts.
This rule defines “indexed annuities to be securities and thus subject to
regulation by the SEC and under federal securities
laws”. Currently indexed annuities sold by life insurance companies are
regulated by the States as Insurance products and Section 3(a)(8) of the
Securities Act of 1933 provides an exemption for certain “annuity contracts,”
“optional annuity contracts,” and other insurance contracts. The new rule is not
effective until January 12, 2011. The Company and others have filed suit in the
U. S. Court of Appeals for the District of Columbia to overturn this rule. The
court heard oral arguments on May 8, 2009, and issued its opinion on July 21,
2009, stating that the matter was remanded to the SEC to address deficiencies in
its Sec 2(b) analysis. In the event rule 151A is not overturned, it could have a
material effect on the Company’s business, results of operations and financial
condition.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(9)
INVESTMENTS
(A)
Investment Gains and Losses
The table
below presents realized investment gains and losses, excluding impairment
losses, for the periods indicated.
|
|
Six
months ended June 30,
|
|
|
Three
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains on disposal
|
|
$ |
146 |
|
|
|
887 |
|
|
|
88 |
|
|
|
830 |
|
Realized
losses on disposal
|
|
|
(180 |
) |
|
|
- |
|
|
|
(30 |
) |
|
|
- |
|
Held
to maturity debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains on disposal
|
|
|
114 |
|
|
|
149 |
|
|
|
35 |
|
|
|
27 |
|
Realized
losses on disposal
|
|
|
(19 |
) |
|
|
- |
|
|
|
(14 |
) |
|
|
- |
|
Equity
securities realized gains
|
|
|
62 |
|
|
|
79 |
|
|
|
103 |
|
|
|
72 |
|
Real
estate writedown
|
|
|
(52 |
) |
|
|
- |
|
|
|
(52 |
) |
|
|
- |
|
Mortgage
loans writedowns
|
|
|
(12 |
) |
|
|
(4 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
Other
|
|
|
69 |
|
|
|
28 |
|
|
|
68 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
128 |
|
|
|
1,139 |
|
|
|
192 |
|
|
|
1,158 |
|
The table
below presents net impairment losses recognized in earnings for the periods
indicated.
|
|
Six
months ended June 30,
|
|
|
Three
months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment
losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
securities
|
|
$ |
(6,714 |
) |
|
|
- |
|
|
|
(1,839 |
) |
|
|
- |
|
Portion
of loss recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
comprehensive income
|
|
|
1,823 |
|
|
|
- |
|
|
|
1,823 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
impairment losses on debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
recognized in earnings
|
|
|
(4,891 |
) |
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
Equity
securities impairments
|
|
|
(416 |
) |
|
|
(1,450 |
) |
|
|
(10 |
) |
|
|
(1,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
(5,307 |
) |
|
|
(1,450 |
) |
|
|
(26 |
) |
|
|
(1,425 |
) |
In the
second quarter of 2009, the Company recognized $1,839,000 as an
other-than-temporary impairment on an available for sale mortgage-backed
security, of which $16,000 was recognized in earnings as a credit loss and
$1,823,000 was recognized in other comprehensive income as a non-credit loss.
The credit component of the impairment was determined to be the difference
between amortized cost and the present value of the cash flows expected to be
received, discounted at the original yield.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table
below presents a roll forward of credit losses on securities for which the
company also recorded non-credit other-than-temporary impairments.
|
|
Three
Months
|
|
|
|
Ended
|
|
|
|
June
30, 2009
|
|
|
|
(In
thousands)
|
|
Credit
losses on securities held at beginning of period in
|
|
|
|
other
comprehensive loss, as of April 1, 2009
|
|
$ |
28 |
|
Additions
for credit losses not previously recognized in
|
|
|
|
|
other-than-temporary
impairment
|
|
|
16 |
|
|
|
|
|
|
Credit
losses on securities held at the end of period in other
|
|
|
|
|
comprehensive
loss
|
|
$ |
44 |
|
(B)
Debt and Equity Securities
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at June 30, 2009.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
48,186 |
|
|
|
2,721 |
|
|
|
- |
|
|
|
50,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
1,920 |
|
|
|
430 |
|
|
|
- |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
67,104 |
|
|
|
703 |
|
|
|
801 |
|
|
|
67,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
9,959 |
|
|
|
548 |
|
|
|
- |
|
|
|
10,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
602,780 |
|
|
|
17,668 |
|
|
|
8,418 |
|
|
|
612,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,483,144 |
|
|
|
34,447 |
|
|
|
71,503 |
|
|
|
1,446,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,709,241 |
|
|
|
75,264 |
|
|
|
3,767 |
|
|
|
1,780,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
36,835 |
|
|
|
- |
|
|
|
14,596 |
|
|
|
22,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
27,196 |
|
|
|
179 |
|
|
|
3,360 |
|
|
|
24,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
3,986,365 |
|
|
|
131,960 |
|
|
|
102,445 |
|
|
|
4,015,880 |
|
A total
of $0.7 million of non-credit other-than-temporary impairment on held to
maturity manufactured housing securities is included in accumulated other
comprehensive income, net of tax, as of June 30, 2009.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
46,348 |
|
|
|
- |
|
|
|
4,775 |
|
|
|
41,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,388 |
|
|
|
810 |
|
|
|
- |
|
|
|
11,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
318,203 |
|
|
|
6,407 |
|
|
|
7,200 |
|
|
|
317,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,248,280 |
|
|
|
22,565 |
|
|
|
62,915 |
|
|
|
1,207,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
242,731 |
|
|
|
8,926 |
|
|
|
4,977 |
|
|
|
246,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
13,886 |
|
|
|
- |
|
|
|
6,896 |
|
|
|
6,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
11,277 |
|
|
|
86 |
|
|
|
980 |
|
|
|
10,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities – private
|
|
|
195 |
|
|
|
6,962 |
|
|
|
- |
|
|
|
7,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities – public
|
|
|
6,610 |
|
|
|
618 |
|
|
|
811 |
|
|
|
6,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,897,918 |
|
|
|
46,374 |
|
|
|
88,554 |
|
|
|
1,855,738 |
|
Included
in gross unrealized losses at June 30, 2009 is $1.8 million of non-credit
other-than-temporary impairment on a mortgage backed security. This
impairment is included in accumulated other comprehensive loss, net of tax and
deferred acquisition costs.
During
the quarter ended June 30, 2009, the Company made transfers totaling $30.7
million to the held to maturity category from securities available for sale.
Lower holdings of securities available for sale reduce the Company's exposure to
market price volatility while still providing securities for liquidity and
asset/liability management purposes. The transfers of securities were recorded
at fair value in accordance with GAAP, which requires that the $0.6 million
unrealized holding gain at the date of the transfer continue to be reported in a
separate component of stockholders' equity and be amortized over the remaining
life of the security as an adjustment of yield in a manner consistent with the
amortization of any premium or discount.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 2008.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
119,674 |
|
|
|
3,975 |
|
|
|
- |
|
|
|
123,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
1,923 |
|
|
|
592 |
|
|
|
- |
|
|
|
2,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
23,123 |
|
|
|
3 |
|
|
|
801 |
|
|
|
22,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
9,955 |
|
|
|
438 |
|
|
|
- |
|
|
|
10,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
527,277 |
|
|
|
5,073 |
|
|
|
31,530 |
|
|
|
500,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,334,157 |
|
|
|
13,580 |
|
|
|
118,204 |
|
|
|
1,229,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,747,104 |
|
|
|
44,213 |
|
|
|
8,210 |
|
|
|
1,783,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
37,808 |
|
|
|
37 |
|
|
|
9,533 |
|
|
|
28,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
30,396 |
|
|
|
93 |
|
|
|
3,790 |
|
|
|
26,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
3,831,417 |
|
|
|
68,004 |
|
|
|
172,068 |
|
|
|
3,727,353 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
77,160 |
|
|
|
332 |
|
|
|
13,653 |
|
|
|
63,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,418 |
|
|
|
907 |
|
|
|
- |
|
|
|
11,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
287,927 |
|
|
|
300 |
|
|
|
25,085 |
|
|
|
263,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,239,712 |
|
|
|
6,503 |
|
|
|
126,968 |
|
|
|
1,119,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
255,910 |
|
|
|
5,739 |
|
|
|
7,693 |
|
|
|
253,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
13,877 |
|
|
|
- |
|
|
|
4,726 |
|
|
|
9,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
11,942 |
|
|
|
- |
|
|
|
1,019 |
|
|
|
10,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities - private
|
|
|
195 |
|
|
|
6,995 |
|
|
|
- |
|
|
|
7,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities - public
|
|
|
6,912 |
|
|
|
486 |
|
|
|
905 |
|
|
|
6,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,904,053 |
|
|
|
21,262 |
|
|
|
180,049 |
|
|
|
1,745,266 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following tables show the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at June 30,
2009.
|
|
Held
to Maturity
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
28,608 |
|
|
|
484 |
|
|
|
9,318 |
|
|
|
317 |
|
|
|
37,926 |
|
|
|
801 |
|
subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
26,012 |
|
|
|
962 |
|
|
|
169,774 |
|
|
|
7,456 |
|
|
|
195,786 |
|
|
|
8,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
214,405 |
|
|
|
4,225 |
|
|
|
456,562 |
|
|
|
67,278 |
|
|
|
670,967 |
|
|
|
71,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
- |
|
|
|
- |
|
|
|
60,236 |
|
|
|
3,767 |
|
|
|
60,236 |
|
|
|
3,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
3,232 |
|
|
|
552 |
|
|
|
17,426 |
|
|
|
14,044 |
|
|
|
20,658 |
|
|
|
14,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
6,684 |
|
|
|
507 |
|
|
|
16,834 |
|
|
|
2,853 |
|
|
|
23,518 |
|
|
|
3,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
278,941 |
|
|
|
6,730 |
|
|
|
730,150 |
|
|
|
95,715 |
|
|
|
1,009,091 |
|
|
|
102,445 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Available
For Sale
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
2,481 |
|
|
|
224 |
|
|
|
39,093 |
|
|
|
4,551 |
|
|
|
41,574 |
|
|
|
4,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
- |
|
|
|
- |
|
|
|
142,976 |
|
|
|
7,200 |
|
|
|
142,976 |
|
|
|
7,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
153,377 |
|
|
|
10,949 |
|
|
|
567,443 |
|
|
|
51,966 |
|
|
|
720,820 |
|
|
|
62,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
- |
|
|
|
- |
|
|
|
47,418 |
|
|
|
4,977 |
|
|
|
47,418 |
|
|
|
4,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
- |
|
|
|
- |
|
|
|
6,990 |
|
|
|
6,896 |
|
|
|
6,990 |
|
|
|
6,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
800 |
|
|
|
87 |
|
|
|
8,537 |
|
|
|
893 |
|
|
|
9,337 |
|
|
|
980 |
|
|
|
|
156,658 |
|
|
|
11,260 |
|
|
|
812,457 |
|
|
|
76,483 |
|
|
|
969,115 |
|
|
|
87,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities – public
|
|
|
2,526 |
|
|
|
467 |
|
|
|
1,455 |
|
|
|
344 |
|
|
|
3,981 |
|
|
|
811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
159,184 |
|
|
|
11,727 |
|
|
|
813,912 |
|
|
|
76,827 |
|
|
|
973,096 |
|
|
|
88,554 |
|
Debt securities. The gross
unrealized losses for debt securities at June 30, 2009 are made up of 329
individual issues, or 40.8% of the total debt
securities held by the Company. The market value of these bonds as a percent of
amortized cost averages 91.2%. Of the 329 securities, 256, or approximately
77.8%, fall in the 12 months or greater aging category; of the 329 debt
securities, 306 were rated investment grade at June 30, 2009. Additional
information on debt securities by investment category is summarized
below:
State and political subdivisions.
The unrealized losses on these investments are the result of holdings in
54 securities. Of
these securities, all are rated A or above except two which are rated BBB+ and
BB. Based on these facts and the Company's intent not to sell, and belief that
it is not more likely than not to be required to sell, prior to a market price
recovery, no other-than-temporary loss was recognized as of June 30,
2009.
Public utilities. Of the 53
securities, all are rated BBB or above except one, which is priced at 79.9% of
par. At this time,
the Company does not consider any of these unrealized losses as
other-than-temporary.
Corporate bonds. Corporate
securities with unrealized losses are reviewed based on monitoring procedures
including; review
of the amount of the unrealized loss, the length of time that the issue has been
in an unrealized loss position, credit ratings, analyst reports, and recent
issuer financial information. A total of 181 securities had unrealized losses;
with 16 issues rated below investment grade. More extensive analysis was
performed on these 16 issues and based on the work performed, none of the
unrealized losses are considered other-than-temporarily impaired at June 30,
2009.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Mortgage-backed securities.
These securities are all rated AAA except one which is rated B. The Company
generally purchases these investments at a discount relative to
their face amount and it is expected that the securities will not be settled at
a price less than the stated par. Because the decline in market value is
attributable to the current illiquidity in the market and not credit quality,
and because the Company has the ability and intent to hold these securities
until a recovery of fair value, which may be maturity, and based on the lack of
adverse changes in expected cash flows, the Company does not consider these AAA
investments to have other-than-temporary impairments at June 30, 2009. The
Company recognized an other-than-temporary loss in the second quarter of 2009 on
the B rated security.
Home equity. Of the 15
securities, 9 are rated AAA, 2 are rated AA and 4 are rated below AA. The
Company performs a
quarterly cash flow analysis on asset-backed securities that are rated below AA.
Based on the lack of adverse changes in expected cash flows, the 4 issues rated
below AA are not considered other-than-temporarily impaired.
Manufactured housing. Of the
12 securities, 8 are rated AAA, 1 is rated AA and 3 are rated below AA. The
Company performs a
quarterly cash flow analysis on asset-backed securities that are rated below AA.
Based on the lack of adverse changes in expected cash flows, the 3 issues rated
below AA are not considered other-than-temporarily impaired.
Equity securities - public.
The gross unrealized losses for equity securities are made up of 58
individual issues. These holdings are reviewed
for impairment quarterly. During the six months ended June 30, 2009, the Company
recorded other-than-temporary impairments on 19 equity securities.
Management
believes the unrealized declines in fair values are temporary. Accordingly,
realized credit losses have not been recorded by the Company.
The
following tables show the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at December 31,
2008.
|
|
Held
to Maturity
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
9,687 |
|
|
|
631 |
|
|
|
2,635 |
|
|
|
170 |
|
|
|
12,322 |
|
|
|
801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
312,575 |
|
|
|
21,485 |
|
|
|
84,474 |
|
|
|
10,045 |
|
|
|
397,049 |
|
|
|
31,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
518,841 |
|
|
|
52,581 |
|
|
|
278,975 |
|
|
|
65,623 |
|
|
|
797,816 |
|
|
|
118,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
4,624 |
|
|
|
299 |
|
|
|
54,582 |
|
|
|
7,911 |
|
|
|
59,206 |
|
|
|
8,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
5,901 |
|
|
|
559 |
|
|
|
19,657 |
|
|
|
8,974 |
|
|
|
25,558 |
|
|
|
9,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
17,507 |
|
|
|
1,404 |
|
|
|
7,024 |
|
|
|
2,386 |
|
|
|
24,531 |
|
|
|
3,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$ |
869,135 |
|
|
|
76,959 |
|
|
|
447,347 |
|
|
|
95,109 |
|
|
|
1,316,482 |
|
|
|
172,068 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Available
For Sale
|
|
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
45,848 |
|
|
|
8,675 |
|
|
|
13,486 |
|
|
|
4,978 |
|
|
|
59,334 |
|
|
|
13,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
148,901 |
|
|
|
9,286 |
|
|
|
105,498 |
|
|
|
15,799 |
|
|
|
254,399 |
|
|
|
25,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
|
560,028 |
|
|
|
56,214 |
|
|
|
367,933 |
|
|
|
70,754 |
|
|
|
927,961 |
|
|
|
126,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
- |
|
|
|
- |
|
|
|
48,540 |
|
|
|
7,693 |
|
|
|
48,540 |
|
|
|
7,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity
|
|
|
2,289 |
|
|
|
2,624 |
|
|
|
6,862 |
|
|
|
2,102 |
|
|
|
9,151 |
|
|
|
4,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
housing
|
|
|
9,456 |
|
|
|
988 |
|
|
|
1,467 |
|
|
|
31 |
|
|
|
10,923 |
|
|
|
1,019 |
|
|
|
|
766,522 |
|
|
|
77,787 |
|
|
|
543,786 |
|
|
|
101,357 |
|
|
|
1,310,308 |
|
|
|
179,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities – public
|
|
|
2,057 |
|
|
|
577 |
|
|
|
1,205 |
|
|
|
328 |
|
|
|
3,262 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$ |
768,579 |
|
|
|
78,364 |
|
|
|
544,991 |
|
|
|
101,685 |
|
|
|
1,313,570 |
|
|
|
180,049 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(10) FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and requires additional disclosures
about fair value measurements.
In
compliance with SFAS No. 157, the Company has categorized its financial
instruments, based on the priority of the inputs to the valuation technique,
into a three level hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure fair value fall within different levels of the hierarchy,
the category level is based on the lowest priority level input that is
significant to the fair value measurement of the instrument.
Financial
assets and liabilities recorded at fair value on the Condensed Consolidated
Balance Sheets are categorized as follows:
Level 1: Fair value is based
on unadjusted quoted prices in active markets that are accessible to the Company
for identical
assets or liabilities. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. These generally provide the most reliable
evidence and are used to measure fair value whenever available. The Company’s
Level 1 assets include equity securities that are traded in an active exchange
market. Valuations are obtained from readily available pricing sources for
market transactions involving identical assets.
Level 2: Fair value is based
upon significant inputs other than quoted prices in active markets included in
Level 1, which are
either directly or indirectly observable for substantially the full term of the
asset or liability through corroboration with observable market data as of the
reporting date. Level 2 inputs include quoted market prices in active markets
for similar assets and liabilities, quoted market prices in markets that are not
active for identical or similar assets or liabilities, model-derived valuations
whose inputs are observable or whose significant value drivers are observable
and other observable inputs. The Company’s Level 2 assets include fixed maturity
debt securities (corporate and private bonds, government or agency securities,
asset-backed and mortgage-backed securities), preferred stock, certain equity
securities, and over-the-counter derivative contracts. The Company’s Level 2
liabilities consist of certain product-related embedded derivatives. Valuations
are generally obtained from third party pricing services for identical or
comparable assets or determined through use of valuation methodologies using
observable market inputs.
Level 3: Fair value is based
on significant unobservable inputs which reflect the entity’s or third party
pricing service assumptions about the
assumptions market participants would use in pricing an asset or liability. The
Company’s Level 3 assets include certain equity securities and certain less
liquid or private fixed maturity debt securities where significant valuation
inputs cannot be corroborated with observable market data. The Company’s Level 3
liabilities consist of share-based compensation obligations. Valuations are
estimated based on non-binding broker prices or internally developed valuation
models or methodologies, discounted cash flow models and other similar
techniques.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth the Company’s assets and liabilities that are
measured at fair value on a recurring basis as of the date
indicated:
|
|
June
30, 2009
|
|
Description
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities, available for sale
|
|
$ |
1,842,164 |
|
|
|
- |
|
|
|
1,834,619 |
|
|
|
7,545 |
|
Equity
securities, available for sale
|
|
|
13,574 |
|
|
|
4,488 |
|
|
|
1,929 |
|
|
|
7,157 |
|
Derivatives
|
|
|
27,018 |
|
|
|
- |
|
|
|
27,018 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,882,756 |
|
|
|
4,488 |
|
|
|
1,863,566 |
|
|
|
14,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
account balances (a)
|
|
$ |
30,273 |
|
|
|
- |
|
|
|
30,273 |
|
|
|
- |
|
Other
liabilities (b)
|
|
|
2,557 |
|
|
|
- |
|
|
|
- |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$ |
32,830 |
|
|
|
- |
|
|
|
30,273 |
|
|
|
2,557 |
|
|
|
December
31, 2008
|
|
Description
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities, available for sale
|
|
$ |
1,731,583 |
|
|
|
- |
|
|
|
1,721,341 |
|
|
|
10,242 |
|
Equity
securities, available for sale
|
|
|
13,683 |
|
|
|
4,558 |
|
|
|
1,935 |
|
|
|
7,190 |
|
Derivatives
|
|
|
11,920 |
|
|
|
- |
|
|
|
11,920 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,757,186 |
|
|
|
4,558 |
|
|
|
1,735,196 |
|
|
|
17,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
account balances (a)
|
|
$ |
19,377 |
|
|
|
- |
|
|
|
19,377 |
|
|
|
- |
|
Other
liabilities (b)
|
|
|
3,787 |
|
|
|
- |
|
|
|
- |
|
|
|
3,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$ |
23,164 |
|
|
|
- |
|
|
|
19,377 |
|
|
|
3,787 |
|
(a) Represents the
fair value of certain product-related embedded derivatives that were recorded at
fair value.
(b) Represents the
liability for share-based compensation.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following tables provide additional information about fair value measurements
for which significant unobservable (Level 3) inputs were utilized to determine
fair value.
|
|
For
the Three Months Ended June, 2009
|
|
|
|
Debt
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Securities,
|
|
|
Securities,
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Available
|
|
|
Total
|
|
|
Other
|
|
|
|
For
Sale
|
|
|
For
Sale
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, April 1, 2009
|
|
$ |
6,976 |
|
|
|
7,157 |
|
|
|
14,133 |
|
|
|
1,573 |
|
Total
realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,033 |
|
Included
in other comprehensive income
|
|
|
1,104 |
|
|
|
- |
|
|
|
1,104 |
|
|
|
- |
|
Purchases,
sales, issuances and settlements, net
|
|
|
(535 |
) |
|
|
- |
|
|
|
(535 |
) |
|
|
(49 |
) |
Transfers
into (out of) Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, June 30, 2009
|
|
$ |
7,545 |
|
|
|
7,157 |
|
|
|
14,702 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of total gains (losses) for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income attributable to the change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
unrealized gains (losses) relating to assets still
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
as of June 30, 2009
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
983 |
|
|
|
For
the Three Months Ended June 30, 2008
|
|
|
|
Debt
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Securities,
|
|
|
Securities,
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Available
|
|
|
Total
|
|
|
Other
|
|
|
|
For
Sale
|
|
|
For
Sale
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, April 1, 2008
|
|
$ |
1,616 |
|
|
|
7,190 |
|
|
|
8,806 |
|
|
|
6,387 |
|
Total
realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
617 |
|
Included
in other comprehensive loss
|
|
|
(199 |
) |
|
|
- |
|
|
|
(199 |
) |
|
|
- |
|
Purchases,
sales, issuances and settlements, net
|
|
|
(522 |
) |
|
|
- |
|
|
|
(522 |
) |
|
|
(701 |
) |
Transfers
into (out of) Level 3
|
|
|
11,924 |
|
|
|
- |
|
|
|
11,924 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, June 30, 2008
|
|
$ |
12,819 |
|
|
|
7,190 |
|
|
|
20,009 |
|
|
|
6,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of total gains (losses) for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income attributable to the change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
unrealized gains (losses) relating to assets still
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
as of June 30, 2008
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
617 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
For
the Six Months Ended June 30, 2009
|
|
|
|
Debt
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Securities,
|
|
|
Securities,
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Available
|
|
|
Total
|
|
|
Other
|
|
|
|
For
Sale
|
|
|
For
Sale
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2009
|
|
$ |
10,242 |
|
|
|
7,190 |
|
|
|
17,432 |
|
|
|
3,787 |
|
Total
realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,241 |
) |
Included
in other comprehensive loss
|
|
|
(2,160 |
) |
|
|
(33 |
) |
|
|
(2,193 |
) |
|
|
- |
|
Purchases,
sales, issuances and settlements, net
|
|
|
(537 |
) |
|
|
- |
|
|
|
(537 |
) |
|
|
11 |
|
Transfers
into (out of) Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, June 30, 2009
|
|
$ |
7,545 |
|
|
|
7,157 |
|
|
|
14,702 |
|
|
|
2,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of total gains (losses) for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income attributable to the change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
unrealized gains (losses) relating to assets still
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
as of June 30, 2009
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,230 |
) |
|
|
For
the Six Months Ended June 30, 2008
|
|
|
|
Debt
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Securities,
|
|
|
Securities,
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
Available
|
|
|
Total
|
|
|
Other
|
|
|
|
For
Sale
|
|
|
For
Sale
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance, January 1, 2008
|
|
$ |
1,618 |
|
|
|
7,147 |
|
|
|
8,765 |
|
|
|
7,712 |
|
Total
realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in net income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
559 |
|
Included
in other comprehensive loss
|
|
|
(199 |
) |
|
|
43 |
|
|
|
(156 |
) |
|
|
- |
|
Purchases,
sales, issuances and settlements, net
|
|
|
(524 |
) |
|
|
- |
|
|
|
(524 |
) |
|
|
(1,968 |
) |
Transfers
into (out of) Level 3
|
|
|
11,924 |
|
|
|
- |
|
|
|
11,924 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance, June 30, 2008
|
|
$ |
12,819 |
|
|
|
7,190 |
|
|
|
20,009 |
|
|
|
6,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of total gains (losses) for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net income attributable to the change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
unrealized gains (losses) relating to assets still
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
held
as of June 30, 2008
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
559 |
|
Realized
gains (losses) on debt and equity securities are reported in the consolidated
statements of earnings as net investment gains (losses), unrealized gains
(losses) on available for sale debt and equity securities are reported as other
comprehensive income (loss) within stockholders’ equity.
The fair
value hierarchy classifications are reviewed each reporting period.
Reclassification of certain financial assets and liabilities may result from
changes in the observability of valuation attributes. Reclassifications are
reported as transfers into and out of Level 3 at the beginning fair value for
the reporting period in which the changes occur.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
carrying amounts and fair values of the Company’s financial instruments are as
follows.
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Values
|
|
|
Values
|
|
|
Values
|
|
|
Values
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in debt and equity
|
|
|
|
|
|
|
|
|
|
|
|
|
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
$ |
3,986,365 |
|
|
|
4,015,880 |
|
|
|
3,831,417 |
|
|
|
3,727,353 |
|
Securities
available for sale
|
|
|
1,855,738 |
|
|
|
1,855,738 |
|
|
|
1,745,266 |
|
|
|
1,745,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
54,850 |
|
|
|
54,850 |
|
|
|
67,796 |
|
|
|
67,796 |
|
Mortgage
loans
|
|
|
93,016 |
|
|
|
94,174 |
|
|
|
90,733 |
|
|
|
90,884 |
|
Policy
loans
|
|
|
77,928 |
|
|
|
77,928 |
|
|
|
79,277 |
|
|
|
79,277 |
|
Other
loans
|
|
|
7,959 |
|
|
|
9,584 |
|
|
|
1,541 |
|
|
|
1,572 |
|
Derivatives
|
|
|
27,018 |
|
|
|
27,018 |
|
|
|
11,920 |
|
|
|
11,920 |
|
Life
interest in Libbie Shearn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody
Trust
|
|
|
1,142 |
|
|
|
12,775 |
|
|
|
1,302 |
|
|
|
12,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
annuity contracts
|
|
$ |
4,418,468 |
|
|
|
4,073,973 |
|
|
|
4,324,702 |
|
|
|
3,997,005 |
|
Immediate
annuity and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supplemental
contracts
|
|
|
428,735 |
|
|
|
439,890 |
|
|
|
388,486 |
|
|
|
409,553 |
|
Investment securities. Fair
values for investments in debt and equity securities are based on quoted market
prices, where available. For
securities not actively traded, fair values are estimated using values obtained
from various independent pricing services. In the cases where prices are
unavailable from these sources, values are estimated by discounting expected
future cash flows using a current market rate applicable to the yield, credit
quality, and maturity of the investments.
Cash and short-term investments.
The carrying amounts reported in the balance sheet for these instruments
approximate their
fair values.
Mortgage and other loans. The
fair values of performing mortgage and other loans are estimated by
discounting scheduled cash flows
through the scheduled maturities of the loans, using interest rates currently
being offered for similar loans to borrowers with similar credit ratings. Fair
values for significant nonperforming loans are based on recent internal or
external appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
Policy Loans. The
carrying value of policy loans approximates fair values.
Derivatives. Fair
values for indexed options are based on counterparty market prices.
Life interest in Libbie Shearn Moody
Trust. The fair value of the life interest is estimated based on
assumptions as to future distributions
from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated
cash flows were discounted at a rate consistent with uncertainties relating to
the amount and timing of future cash distributions. However, the Company has
limited the fair value to the maximum amount to be received from insurance
proceeds in the event of Mr. Moody's death.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Annuity and supplemental
contracts. Fair values for the Company's insurance contracts other than
annuity contracts are not required to be disclosed. This includes the Company's
traditional and universal life products. Fair values for immediate annuities
without mortality features are based on the discounted future estimated cash
flows using current market interest rates for similar maturities. Fair values
for deferred annuities, including fixed-indexed annuities, are determined using
estimated projected future cash flows discounted at the rate that would be
required to transfer the liability in an orderly transaction. The fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance and annuity contracts.
Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(11) Derivative
Investments
Fixed-indexed
products provide traditional fixed annuities and universal life contracts with
the option to have credited interest rates linked in part to an underlying
equity index or a combination of equity indices. The equity return component of
such policy contracts is identified separately and accounted for in future
policy benefits as embedded derivatives on the consolidated balance sheet. The
remaining portions of these policy contracts are considered the host contracts
and are recorded separately as fixed annuity or universal life contracts. The
host contracts are accounted for under debt instrument type accounting in which
future policy benefits are recorded as discounted debt instruments that are
accreted, using the effective yield method, to their minimum account values at
their projected maturities or termination dates.
The
Company purchases over-the-counter index options, which are derivative financial
instruments, to hedge the equity return component of its fixed-indexed annuity
and life products. The index options act as hedges to match closely the returns
on the underlying index or indices. The amounts which may be credited to
policyholders are linked, in part, to the returns of the underlying index or
indices. As a result, changes to policyholders' liabilities are substantially
offset by changes in the value of the options. Cash is exchanged upon purchase
of the index options and no principal or interest payments are made by either
party during the option periods. Upon maturity or expiration of the options,
cash is paid to the Company based on the underlying index or indices performance
and terms of the contract.
The
Company does not elect hedge accounting relative to these derivative
instruments. The index options are reported at fair value in the accompanying
consolidated financial statements. The changes in the values of the index
options and the changes in the policyholder liabilities are both reflected in
the condensed consolidated statement of earnings. Any changes relative to the
embedded derivatives associated with policy contracts are reflected in contract
interest in the condensed consolidated statement of earnings. Any gains or
losses from the sale or expiration of the options, as well as period-to-period
changes in values, are reflected as net investment income in the condensed
consolidated statement of earnings.
Although
there is credit risk in the event of nonperformance by counterparties to the
index options, the Company does not expect any counterparties to fail to meet
their obligations, given their high credit ratings. In addition, credit support
agreements are in place with all counterparties for option holdings in excess of
specific limits, which may further reduce the Company's credit exposure. At June
30, 2009 and 2008, the fair values of index options owned by the Company totaled
$27.0 million and $6.9 million, respectively.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
tables below present the fair value of derivative instruments as of June 30,
2009 and December 31, 2008, respectively.
|
June
30, 2009
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
|
Sheet
|
|
Fair
|
|
Sheet
|
|
Fair
|
|
|
Location
|
|
Value
|
|
Location
|
|
Value
|
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
Derivatives
not designated as
|
|
|
|
|
|
|
|
|
hedging
instruments under
|
|
|
|
|
|
|
|
|
SFAS
No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
index options
|
Derivatives,
|
|
|
|
|
|
|
|
|
|
Index
Options
|
|
$ |
27,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
Life
|
|
|
|
|
|
|
|
|
|
|
and
Annuity
|
|
|
|
|
Fixed-indexed
products
|
|
|
|
|
|
Contracts
|
|
$ |
30,273 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
27,018 |
|
|
|
$ |
30,273 |
|
|
December
31, 2008
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
|
Sheet
|
|
Fair
|
|
Sheet
|
|
Fair
|
|
|
Location
|
|
Value
|
|
Location
|
|
Value
|
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
Derivatives
not designated as
|
|
|
|
|
|
|
|
|
hedging
instruments under
|
|
|
|
|
|
|
|
|
SFAS
No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
index options
|
Derivatives,
|
|
|
|
|
|
|
|
|
Index
Options
|
|
$ |
11,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
Life
|
|
|
|
|
|
|
|
|
|
|
and
Annuity
|
|
|
|
|
Fixed-indexed
products
|
|
|
|
|
|
Contracts
|
|
$ |
19,377 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$ |
11,920 |
|
|
|
$ |
19,377 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table
below presents the effect of derivative instruments in the condensed
consolidated statement of earnings for the six months ended June 30,
2009.
.
|
|
|
Amount
of Gain
|
|
|
|
|
or
(Loss)
|
|
|
|
|
Recognized
In
|
|
Derivatives
Not Designated as
|
Location
of Gain or (Loss) Recognized
|
|
Income
on
|
|
Hedging
Instruments Under SFAS No. 133
|
In
Income on Derivative
|
|
Derivative
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
Equity
index options
|
Net
investment income
|
|
$ |
(6,061 |
) |
|
|
|
|
|
|
Fixed-indexed
products
|
Universal
life and annuity contract interest
|
|
|
(14,246 |
) |
|
|
|
|
|
|
|
|
|
$ |
(20,307 |
) |
(12)
SUBSEQUENT EVENTS
The
Company allowed its $40 million bank line of credit with JP Morgan Chase Bank to
expire at the end of its three-year term effective July 31, 2009. A new $40
million line of credit with Moody National Bank is expected to be established
during August 2009. Robert L. Moody, the Company’s Chairman and Chief Executive
Officer, serves as Chairman of the Board and Chief Executive Officer of Moody
National Bank. The terms of the new line of credit are subject to the
appropriate approvals by the Company’s Board of Directors.
Subsequent
events have been evaluated through August 10, 2009, which is the date that the
financial statements have been issued.
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. Certain information contained herein or in other
written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries is or may be viewed as forward-looking.
Although the Company has taken appropriate care in developing any such
information, forward-looking information involves risks and uncertainties that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company’s SEC filings
such as exposure to market risks, anticipated cash flows or operating
performance, future capital needs, and statutory or regulatory related issues.
However, National Western, as a matter of policy, does not make any specific
projections as to future earnings, nor does it endorse any projections regarding
future performance that may be made by others. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable events or developments. Also, the Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future developments, or
otherwise.
Management’s
discussion and analysis of financial condition and results of operations
(“MD&A”) of National Western Life Insurance Company for the three and six
months ended June 30, 2009 follows. This discussion should be read in
conjunction with the Company’s condensed consolidated financial statements and
related notes beginning on page 3 of this report.
Overview
The
Company provides life insurance products on a global basis for the savings and
protection needs of policyholders and annuity contracts for the asset
accumulation and retirement needs of contractholders both domestically and
internationally. The Company accepts funds from policyholders or contractholders
and establishes a liability representing future obligations to pay the policy or
contract-holders and their beneficiaries. To ensure the Company will be able to
pay these future commitments, the funds received as premium payments and
deposits are invested in high quality investments, primarily fixed income
securities.
Due to
the business of accepting funds to pay future obligations in later years, the
underlying economics and relevant factors affecting the life insurance industry
include the following:
Ÿ
|
level
of premium revenues collected
|
Ÿ
|
persistency
of policies and contracts
|
Ÿ
|
investment
credit quality
|
Ÿ
|
levels
of policy benefits and costs to acquire
business
|
Ÿ
|
effect
of interest rate changes on revenues and investments including asset and
liability matching
|
Ÿ
|
adequate
levels of capital and surplus
|
The
Company monitors these factors continually as key business indicators. The
discussion that follows in this Item includes these indicators and presents
information useful to an overall understanding of the Company’s business
performance in 2009, incorporating required disclosures in accordance with the
rules and regulations of the Securities and Exchange Commission.
Insurance
Operations - Domestic
The
Company is currently licensed to do business in all states except for New York.
Products marketed are annuities, universal life insurance, fixed-indexed
annuities and fixed-indexed universal life, and traditional life insurance,
which include both term and whole life products. The Company’s domestic sales
have historically been more heavily weighted toward annuity products, which
include single and flexible premium deferred annuities, single premium immediate
annuities, and fixed-indexed annuities. Most of these annuities can be sold as
tax qualified or nonqualified products. At June 30, 2009, the Company maintained
approximately 117,460 annuity policies in force.
National
Western markets and distributes its domestic products primarily through
independent national marketing organizations ("NMOs"). These NMOs assist the
Company in recruiting, contracting, and managing independent agents. The Company
currently has approximately 5,600 independent agents contracted. Roughly 27% of
these contracted agents have submitted policy applications to the Company in the
past twelve months.
Insurance
Operations - International
The
Company's international operations focus on foreign nationals in upper
socioeconomic classes. Insurance products are issued primarily to residents of
countries in Central and South America, the Caribbean, Eastern Europe, Asia and
the Pacific Rim. Issuing policies to residents of countries in these different
regions provides diversification that helps to minimize large fluctuations that
could arise due to various economic, political, and competitive pressures that
may occur from one country to another. Products issued to international
residents are almost entirely universal life and traditional life insurance
products. However, certain annuity and investment contracts are also available.
At June 30, 2009, the Company had approximately 72,650 international life
insurance policies in force representing approximately $15.7 billion in face
amount of coverage.
International
applications are submitted by independent contractor consultants and
broker-agents. The Company has approximately 4,700 independent international
consultants and brokers currently contracted, 42% of which have submitted policy
applications to the Company in the past twelve months.
There are
some inherent risks of accepting international applications which are not
present within the domestic market that are reduced substantially by the Company
in several ways. As previously described, the Company accepts applications from
foreign nationals in upper socioeconomic classes who have substantial financial
resources. This targeted customer base coupled with the Company's conservative
underwriting practices have historically resulted in claims experience, due to
natural causes, similar to that in the United States. The Company minimizes
exposure to foreign currency risks by requiring payment of premiums, claims and
other benefits almost entirely in United States dollars. The Company's over
forty years of experience with the international products and its longstanding
independent consultant and broker-agents relationships further serve to minimize
risks.
SALES
Life
Insurance
The
following table sets forth information regarding the Company's life insurance
sales activity as measured by annualized first year premiums. While the figures
shown below are in accordance with industry practice and represent the amount of
new business sold during the periods indicated, they are considered a non-GAAP
financial measure. The Company believes sales are a measure of distribution
productivity and are a leading indicator of future revenue trends. However,
revenues are driven by sales in prior periods as well as in the current period
and therefore, a reconciliation of sales to revenues is not meaningful or
determinable.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$ |
753 |
|
|
|
2,049 |
|
|
|
1,826 |
|
|
|
3,642 |
|
Traditional
life
|
|
|
944 |
|
|
|
1,379 |
|
|
|
2,292 |
|
|
|
2,733 |
|
Equity-indexed
life
|
|
|
4,536 |
|
|
|
5,689 |
|
|
|
8,802 |
|
|
|
11,433 |
|
|
|
|
6,233 |
|
|
|
9,117 |
|
|
|
12,920 |
|
|
|
17,808 |
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
|
911 |
|
|
|
2,033 |
|
|
|
1,143 |
|
|
|
2,932 |
|
Traditional
life
|
|
|
27 |
|
|
|
33 |
|
|
|
73 |
|
|
|
71 |
|
Equity-indexed
life
|
|
|
318 |
|
|
|
892 |
|
|
|
818 |
|
|
|
3,224 |
|
|
|
|
1,256 |
|
|
|
2,958 |
|
|
|
2,034 |
|
|
|
6,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
7,489 |
|
|
|
12,075 |
|
|
|
14,954 |
|
|
|
24,035 |
|
Life
insurance sales as measured by annualized first year premiums declined 38% in
the second quarter of 2009 as compared to the second quarter of 2008 and
declined by the same percentage for the first six months of 2009 compared to the
same period in 2008. Both of the Company's life insurance lines of business,
international and domestic, posted decreases over the comparable results in 2008
with international sales 32% and 27% lower for the three and six month periods
ended June 30, 2009, respectively, and domestic life sales down 58% and 67% for
the same three and six month periods.
Management
has placed considerable emphasis on building domestic life insurance sales over
the past several years as a strategic focus for future growth. This focus was
partially in response to comments from outside rating agencies who expressed a
preference for a greater proportion of overall Company earnings to derive from
the life insurance line of business. The Company’s domestic operations have
historically been more heavily skewed toward annuity sales than life insurance
sales. The Company spent the greater part of 2003 and 2004 revamping its
domestic life operations by changing the way it contracts distribution for life
business, eliminating products and distribution that had not contributed
significantly to earnings, and creating new and competitive products. A single
premium universal life ("SPUL") product was launched at the end of 2003
beginning a diversification of the Company's product portfolio away from smaller
dollar face amount policies. The Company released its first fixed equity-indexed
universal life ("EIUL") product for its domestic markets at the end of 2005 and
this product has subsequently accounted for 40% to 60% of domestic life
insurance sales.
The
Company developed hybrids of the initial EIUL and SPUL products, combining
features, and discontinued the marketing of smaller premium and volume life
insurance policies. As a result, the Company attracted new independent
distributors with access to customers purchasing larger face amounts of
insurance per policy. During the latter part of 2008, the Company’s internal
checking and monitoring procedures detected potential instances of rebating in
certain domestic geographic markets and instituted commission caps and other
preventive procedures to discourage this practice. Although not illegal in these
markets, the practice of rebating is particularly prone to large face amount
policies not renewing premium payments beyond the initial year of the policy.
The Company’s actions discouraged sales of larger face amounts resulting in
lower sales levels and amounts of insurance per policy as shown
below.
|
|
Average
New Policy Face Amount
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004
|
|
|
101,700 |
|
|
|
234,500 |
|
Year
ended December 31, 2005
|
|
|
137,900 |
|
|
|
245,900 |
|
Year
ended December 31, 2006
|
|
|
315,800 |
|
|
|
254,700 |
|
Year
ended December 31, 2007
|
|
|
416,800 |
|
|
|
251,000 |
|
Year
ended December 31, 2008
|
|
|
455,200 |
|
|
|
272,000 |
|
Six
months ended June 30, 2009
|
|
|
194,600 |
|
|
|
296,000 |
|
In
addition to the action taken above by the Company, the U.S. economic climate has
had a significant impact upon life insurance sales industry wide. The financial
burdens associated with the current climate evidenced by loss of employment,
higher debt levels, a reduction in wealth through home and financial holdings
declines in value, and a higher propensity to save versus spending have resulted
in dramatically reduced purchases of life insurance in the first half of
2009.
The
Company's international life business consists of applications submitted from
residents in various regions outside of the United States, the volume of which
typically varies based upon changes in the socioeconomic climates of these
regions. Historically, the Company has experienced a simultaneous combination of
rising and declining sales in various countries; however, the appeal of the
Company's dollar-denominated life insurance products overcomes many of the local
and national difficulties. In the “financial crisis” economic climate of the
past 12 to 18 months, individuals in countries outside of the United States have
become increasingly leery of the U.S. economy and the stability of financial
institutions and markets. These concerns have manifested in the past several
quarters via reduced international sales.
Applications
submitted from residents of Latin America and the Pacific Rim perennially have
comprised the majority of the Company's international life insurance sales. Over
the past few years, new sales efforts were directed toward the sale of a
traditional endowment form of life insurance product for residents of Eastern
European and the Commonwealth of Independent States (former Soviet Union). As
noted previously, the Company’s international sales by geographic market tend to
fluctuate with the socio and economic climates in these regions. The Company’s
mix of international sales by geographic region is as follows.
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Percentage
of International Sales:
|
|
|
|
|
|
|
Latin
America
|
|
|
69.2
|
% |
|
|
65.9
|
% |
Pacific
Rim
|
|
|
21.4 |
|
|
|
20.9 |
|
Eastern
Europe
|
|
|
9.4 |
|
|
|
13.2 |
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
100.0
|
% |
|
|
100.0
|
% |
Year-to-date,
the Company has recorded sales to residents outside of the United States in over
thirty different countries with Brazil (22%), Taiwan (18%), and Colombia (10%)
making up the largest markets.
The table
below sets forth information regarding the Company's life insurance in force for
each date presented.
|
|
Insurance
In Force as of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in thousands)
|
|
Universal
life:
|
|
|
|
|
|
|
Number
of policies
|
|
|
68,110 |
|
|
|
71,850 |
|
Face
amounts
|
|
$ |
7,677,170 |
|
|
|
7,977,850 |
|
|
|
|
|
|
|
|
|
|
Traditional
life:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
48,300 |
|
|
|
50,450 |
|
Face
amounts
|
|
$ |
2,222,790 |
|
|
|
1,931,080 |
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
life:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
27,880 |
|
|
|
27,230 |
|
Face
amounts
|
|
$ |
6,452,230 |
|
|
|
6,265,720 |
|
|
|
|
|
|
|
|
|
|
Rider
face amounts
|
|
$ |
2,112,870 |
|
|
|
2,142,040 |
|
|
|
|
|
|
|
|
|
|
Total
life insurance:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
144,290 |
|
|
|
149,530 |
|
Face
amounts
|
|
$ |
18,465,060 |
|
|
|
18,316,690 |
|
Annuities
The
following table sets forth information regarding the Company's annuity sales
activity as measured by single and annualized first year premiums. Similar to
life insurance sales, these figures are considered a non-GAAP financial measure
but are shown in accordance with industry practice and depict the Company's
sales productivity.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
$ |
116,474 |
|
|
|
83,979 |
|
|
|
223,339 |
|
|
|
156,987 |
|
Other
deferred annuities
|
|
|
60,980 |
|
|
|
18,734 |
|
|
|
105,073 |
|
|
|
44,556 |
|
Immediate
annuities
|
|
|
3,482 |
|
|
|
878 |
|
|
|
9,296 |
|
|
|
2,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
180,936 |
|
|
|
103,591 |
|
|
|
337,708 |
|
|
|
204,149 |
|
Annuity
sales for the second quarter of 2009 were 75% higher than the comparable period
in 2008 and increased 65% for the six months ended June 30, 2009 versus the same
period in 2008. Since 2003 when the Company achieved nearly $1.2 billion in
sales, annuity new business has trended lower due to a combination of declining
interest rates, investors returning to alternative investment vehicles, rating
agency concerns regarding the percentage of new business derived from the
annuity line of business, and the Company managing its targeted levels of risk
and statutory capital and surplus. In addition, during a large portion of the
past several years the interest rate yield curve has either been inverted
(shorter term rates higher than longer term rates) or relatively flat. In such
an interest rate environment, consumers tend toward short term investment
vehicles such as bank certificates of deposits rather than longer term choices
which include fixed rate annuities.
The
recessionary contraction and financial market crisis that began in the latter
half of 2007 has impacted many annuity carriers in the industry. Losses from
investment impairments as well as equity exposure through variable annuity
product offerings have crippled the capital position of numerous insurers and
limited their ability to write new business. The Company’s substantial capital
position achieved through ongoing operating profitability and limited investment
loss exposure has positioned it to write additional levels of annuity new
business. The sales increase in the first six months of 2009 over the first six
months of 2008 is indicative of the Company’s enhanced competitive position in
the marketplace. In addition, during the second quarter of 2009 the Company
received a rating increase from A.M. Best to “A” (Excellent) further advancing
the attractiveness of the Company’s product offerings. Management has performed
analyses of the capital strain associated with incrementally higher levels of
annuity new business and determined that the Company’s capital position is more
than sufficient to handle increased sales activity.
The
Company's mix of annuity sales tends to shift with interest rate levels and the
relative performance of the equity market. Over the past several years, sales of
fixed-indexed products have consistently accounted for more than one-half of all
annuity sales and were 66% of annuity activity during the first six months of
2009. For all fixed-indexed products, the Company purchases over the counter
options to hedge the equity return feature. The options are purchased relative
to the issuance of the annuity contracts in such a manner to minimize timing
risk. Generally, the index return during the indexing period (if the underlying
index increases) becomes a component in a formula (set forth in the annuity),
the result of which is credited as interest to contract holders electing the
index formula crediting method at the beginning of the indexing period. The
formula result can never be less than zero with these products. The Company does
not deliberately mismatch or under hedge for the equity feature of the products.
Fixed-indexed products also provide the contractholder the alternative to elect
a fixed interest rate crediting option. With the performance of the equity
markets over the past eighteen months, an increasing percentage of fixed-indexed
contractholders have elected this crediting option.
The level
of annuity sales volume the past several years has required a greater level of
asset/liability analysis. The Company monitors its asset/liability matching
within the self-constraints of desired capital levels and risk tolerance.
Despite the amounts of new business, the Company's capital level remains
substantially above industry averages and regulator targets.
The
following table sets forth information regarding annuities in force for each
date presented.
|
|
Annuities
In Force as of June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
|
|
|
|
|
Number
of policies
|
|
|
34,220 |
|
|
|
32,630 |
|
GAAP
annuity reserves
|
|
$ |
2,118,960 |
|
|
|
1,978,350 |
|
|
|
|
|
|
|
|
|
|
Other
deferred annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
67,930 |
|
|
|
71,870 |
|
GAAP
annuity reserves
|
|
$ |
2,299,510 |
|
|
|
2,401,570 |
|
|
|
|
|
|
|
|
|
|
Immediate
annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
15,310 |
|
|
|
13,860 |
|
GAAP
annuity reserves
|
|
$ |
353,370 |
|
|
|
276,360 |
|
|
|
|
|
|
|
|
|
|
Total
annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
117,460 |
|
|
|
118,360 |
|
GAAP
annuity reserves
|
|
$ |
4,771,840 |
|
|
|
4,656,280 |
|
Critical
Accounting Policies
Accounting
policies discussed below are those considered critical to an understanding of
the Company’s financial statements.
Impairment of Investment Securities.
The Company’s accounting policy requires that a decline in the value of a
security below its
amortized cost basis be evaluated to determine if the decline is
other-than-temporary. The primary factors considered in evaluating whether a
decline in value for fixed income and equity securities is other-than-temporary
include: (a) the length of time and the extent to which the fair value has been
less than cost, (b) the reasons for the decline in value (credit event, interest
rate related, credit spread widening), (c) the overall financial condition as
well as the near-term prospects of the issuer, (d) whether the debtor is current
on contractually obligated principal and interest payments, and (e) whether the
Company has the intent to sell, or if it is more likely than not that it will be
required to sell, the investment prior to a market price recovery. In addition,
certain securitized financial assets with contractual cash flows are evaluated
periodically by the Company to update the estimated cash flows over the life of
the security. If the Company determines that the fair value of the securitized
financial asset is less than its carrying amount and there has been a decrease
in the present value of the estimated cash flows since the previous purchase or
prior impairment, then an other-than-temporary impairment charge is recognized.
The Company would recognize impairment of securities due to non credit related
events in earnings only if it had the intent to sell or believes that is more
likely than not that it will be required to sell the securities prior to market
price recovery or maturity. When a security is deemed to be impaired, the
portion of the impairment that is deemed to be credit is charged to the income
statement and the cost basis of the investment is reduced. The portion of the
impairment that is deemed to be non-credit is charged to other comprehensive
income (loss). Once an impairment charge has been recorded, the fair value of
the impaired investment becomes its new cost basis and the Company continues to
review the other-than-temporarily impaired security for appropriate valuation on
an ongoing basis. However, the new cost basis of an impaired security is not
adjusted for subsequent increases in estimated fair value.
Deferred Acquisition Costs (“DAC”).
The Company is required to defer certain policy acquisition costs and
amortize them over
future periods. These costs include commissions and certain other expenses that
vary with and are primarily associated with acquiring new business. The deferred
costs are recorded as an asset commonly referred to as deferred policy
acquisition costs. The DAC asset balance is subsequently charged to income over
the lives of the underlying contracts in relation to the anticipated emergence
of revenue or profits. Actual revenue or profits can vary from Company estimates
resulting in increases or decreases in the rate of amortization. The Company
does regular evaluations to determine if actual experience or other evidence
suggests that earlier estimates should be revised. Assumptions considered
significant include surrender and lapse rates, mortality, expense levels,
investment performance, and estimated interest spread. Should actual experience
dictate that the Company change assumptions regarding the emergence of future
revenues or profits (commonly referred to as “unlocking”), the Company would
record a charge or credit to bring its DAC balance to the level it would have
been if using the new assumptions from the inception date of each
policy.
DAC is
also subject to periodic recoverability and loss recognition testing. These
tests ensure that the present value of future contract-related cash flows will
support the capitalized DAC balance to be amortized in the future. The present
value of these cash flows, less the benefit reserve, is compared with the
unamortized DAC balance and if the DAC balance is greater, the deficiency is
charged to expense as a component of amortization and the asset balance is
reduced to the recoverable amount.
Deferred Sales Inducements.
Costs related to sales inducements offered on sales to new customers,
principally on investment type
contracts and primarily in the form of additional credits to the customer’s
account value or enhancements to interest credited for a specified period, which
are beyond amounts currently being credited to existing contracts, are deferred
and recorded as other assets. All other sales inducements are expensed as
incurred and included in interest credited to contract holders’ funds. Deferred
sales inducements are amortized to income using the same methodology and
assumptions as DAC, and are included in interest credited to contract holders’
funds. Deferred sales inducements are periodically reviewed for
recoverability.
Future Policy Benefits.
Because of the long-term nature of insurance contracts, the Company is
liable for policy benefit payments many years
into the future. The liability for future policy benefits represents estimates
of the present value of the Company’s expected benefit payments, net of the
related present value of future net premium collections. For traditional life
insurance contracts, this is determined by standard actuarial procedures, using
assumptions as to mortality (life expectancy), morbidity (health expectancy),
persistency, and interest rates, which are based on the Company’s experience
with similar products. The assumptions used are those considered to be
appropriate at the time the policies are issued. An additional provision is made
on most products to allow for possible adverse deviation from the assumptions
assumed. For universal life and annuity products, the Company’s liability is the
amount of the contract’s account balance. Account balances are also subject to
minimum liability calculations as a result of minimum guaranteed interest rates
in the policies. While management and Company actuaries have used their best
judgment in determining the assumptions and in calculating the liability for
future policy benefits, there is no assurance that the estimate of the
liabilities reflected in the financial statements represents the Company’s
ultimate obligation. In addition, significantly different assumptions could
result in materially different reported amounts.
Revenue Recognition. Premium
income for the Company’s traditional life insurance contracts is generally
recognized as the
premium becomes due from policyholders. For annuity and universal life
contracts, the amounts collected from policyholders are considered deposits and
are not included in revenue. For these contracts, fee income consists of policy
charges for policy administration, cost of insurance charges and surrender
charges assessed against policyholders’ account balances which are recognized in
the period the services are provided.
Investment
activities of the Company are integral to its insurance operations. Since life
insurance benefits may not be paid until many years into the future, the
accumulation of cash flows from premium receipts are invested with income
reported as revenue when earned. Anticipated yields on investments are reflected
in premium rates, contract liabilities, and other product contract features.
These anticipated yields are implied in the interest required on the Company’s
net insurance liabilities (future policy benefits less deferred acquisition
costs) and contractual interest obligations in its insurance and annuity
products. The Company benefits to the extent actual net investment income
exceeds the required interest on net insurance liabilities and manages the rates
it credits on its products to maintain the targeted excess or “spread” of
investment earnings over interest credited. The Company will continue to be
required to provide for future contractual obligations in the event of a decline
in investment yield. For more information concerning revenue recognition,
investment accounting, and interest sensitivity, please refer to Note 1, Summary
of Significant Accounting Policies and Note 9, Investments, in the Notes to
Consolidated Financial Statements in the Company’s Annual Report on Form
10-K.
Pension Plans and Other
Postretirement Benefits. The Company sponsors a qualified defined benefit
pension plan, covering substantially
all employees, which was frozen effective December 31, 2007, and three
nonqualified defined benefit plans covering certain senior officers. In
addition, the Company has postretirement health care benefits for certain senior
officers. The freeze of the qualified benefit pension plan 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. In accordance with prescribed accounting standards,
the Company annually reviews plan assumptions.
The
Company annually reviews its pension benefit plans assumptions which include the
discount rate, the expected long-term rate of return on plan assets, and the
compensation increase rate. The assumed discount rate is set based on the rates
of return on high quality long-term fixed income investments currently available
and expected to be available during the period to maturity of the pension
benefits. The assumed long-term rate of return on plan assets is generally set
at the rate expected to be earned based on the long-term investment policy of
the plans, the various classes of the invested funds, based on the input of the
plan’s investment advisors and consulting actuary, and the plan’s historic rate
of return. The compensation rate increase assumption is generally set at a rate
consistent with current and expected long-term compensation and salary policy,
including inflation. These assumptions involve uncertainties and judgment, and
therefore actual performance may not be reflective of the
assumptions.
Other
postretirement benefit assumptions include future events affecting retirement
age, mortality, dependency status, per capita claims costs by age, health care
trend rates, and discount rates. Per capita claims cost by age is the current
cost of providing postretirement health care benefits for one year at each age
from the youngest age to the oldest age at which plan participants are expected
to receive benefits under the plan. Health care trend rates involve assumptions
about the annual rate(s) of change in the cost of health care benefits currently
provided by the plan, due to factors other than changes in the composition of
the plan population by age and dependency status. These rates implicitly
consider estimates of health care inflation, changes in utilization,
technological advances and changes in health status of the
participants.
Share-Based Payments.
Liability awards under a share-based payment arrangement have been
measured based on the award's fair value at
the reporting date. The Black-Scholes valuation method has been used to estimate
the fair value of the options. This fair value calculation of the options
include assumptions relative to the following:
Ÿ
|
expected
term based on contractual term and perceived future behavior relative to
exercise
|
Ÿ
|
risk-free
interest rates
|
These
assumptions are continually reviewed by the Company and adjustments may be made
based upon current facts and circumstances.
Other
significant accounting policies, although not involving the same level of
measurement uncertainties as those discussed above, but nonetheless important to
an understanding of the financial statements, are described in Note 1, Summary
of Significant Accounting Policies in Notes to Consolidated Financial Statements
included in the Company’s Annual Report on Form 10-K.
Impact
of Recent Business Environment
The
financial markets began experiencing stress during the second half of 2007 which
significantly increased during 2008 and on into 2009. The volatility and
disruption in the financial markets has caused the availability and cost of
credit to be materially affected. Combined with volatile oil prices, depressed
home prices, increasing foreclosures, fluctuating equity market values,
declining business and consumer confidence, and higher unemployment, these
factors precipitated a severe recession that continued through the first half of
2009. The combination of economic conditions began to negatively impact our
sales in 2008, particularly in the international markets, and continued to
adversely impact the demand for our life products during the first half of 2009.
As such going forward, we also may experience a higher incidence of claims,
lapses or surrenders of policies.
The fixed
income markets, our primary investment source, are experiencing a high level of
volatility. Although market liquidity conditions have recently shown signs of
improvement in some sectors, credit downgrade events have continued and there is
an increased probability of default for many fixed income instruments. These
volatile market conditions have also increased the difficulty of valuing certain
securities as trading is less frequent and/or market data is less observable.
Certain securities that were in active markets with significant observable data
became illiquid due to the current financial environment resulting in valuations
that require greater estimation and judgment as well as valuation methods which
are more complex. Such valuations may not ultimately be realizable in a market
transaction and may change very rapidly as market conditions change and
valuation assumptions need to be modified.
Credit
spreads (difference between bond yields and risk-free interest rates) on fixed
maturity securities remain high given the market conditions. While the increase
in credit spreads generated higher yields making our products more attractive to
consumers, the higher rate levels caused a reduction in the carrying value of
our marked-to-market investments in 2008 negatively impacting our financial
condition and reported book value per share. There are early signs that the
economy and the financial markets are starting to stabilize. During the six
months ended June 30, 2009, the fair value of our mark to market securities
showed an increase from their year-end values.
Our
operating strategy is to maintain capital levels substantially above regulatory
and rating agency requirements. While not significant, our statutory capital
levels were impacted during the first half of the year as a result of rating
declines on some of our holdings.
RESULTS
OF OPERATIONS
The
Company's consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles ("GAAP"). In addition, the Company
regularly evaluates operating performance using non-GAAP financial measures
which exclude or segregate derivatives and realized investment gains and losses
from operating revenues and earnings. Similar measures are commonly used in the
insurance industry in order to assess profitability and results from ongoing
operations. The Company believes that the presentation of these non-GAAP
financial measures enhances the understanding of the Company's results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company's business. The Company excludes
or segregates derivatives and realized investment gains and losses because such
items are often the result of events which may or may not be at the Company's
discretion and the fluctuating effects of these items could distort trends in
the underlying profitability of the Company's business. Therefore, in the
following sections discussing consolidated operations and segment operations,
appropriate reconciliations have been included to report information management
considers useful in enhancing an understanding of the Company's operations to
reportable GAAP balances reflected in the consolidated financial
statements.
Consolidated
Operations
Revenues. The
following details Company revenues.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
4,389 |
|
|
|
4,624 |
|
|
|
8,520 |
|
|
|
8,518 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
revenues
|
|
|
38,862 |
|
|
|
33,593 |
|
|
|
77,433 |
|
|
|
65,811 |
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
86,834 |
|
|
|
86,034 |
|
|
|
170,410 |
|
|
|
170,021 |
|
Other
income
|
|
|
3,507 |
|
|
|
3,153 |
|
|
|
7,101 |
|
|
|
6,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
133,592 |
|
|
|
127,404 |
|
|
|
263,464 |
|
|
|
250,642 |
|
Derivative
income (loss)
|
|
|
6,909 |
|
|
|
(13,756 |
) |
|
|
(6,061 |
) |
|
|
(38,313 |
) |
Realized
gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
investments
|
|
|
166 |
|
|
|
(267 |
) |
|
|
(5,179 |
) |
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
140,667 |
|
|
|
113,381 |
|
|
|
252,224 |
|
|
|
212,018 |
|
Traditional life and annuity
premiums - Traditional life and annuity premiums decreased 5.1% and
remained flat for the three and six
months ended June 30, 2009, respectively, compared to the same periods in 2008.
Traditional life insurance premiums for products such as whole life and term
life are recognized as revenues over the premium-paying period. These are
products that supplement the Company’s main core offering of universal life
products particularly universal life products.
Universal life and annuity
contract revenues - Revenues for universal life and annuity contract
revenues increased 15.7% and 17.7% for
the three and six months ended June 30, 2009 compared to the same periods in
2008, and consist of policy charges for the cost of insurance, administration
charges, and surrender charges assessed against policyholder account balances.
Revenues in the form of cost of insurance charges were flat versus the prior
year at $20.8 million and $42.1 million for the three and six months ended June
30, 2009 compared to $20.4 million and $40.4 million for the three and six
months ended June 30, 2008. Surrender charges assessed against policyholder
account balances upon withdrawal increased to $13.5 million and $27.1 million
for the three and six months ended June 30, 2009 versus $9.5 million and $18.6
million for the three and six months ended June 30, 2008, indicative of a higher
incidence of policy withdrawals and terminations.
Net investment income
- A detail of net investment income is provided below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
81,912 |
|
|
|
80,636 |
|
|
|
162,652 |
|
|
|
160,050 |
|
Mortgage
loans
|
|
|
1,980 |
|
|
|
1,941 |
|
|
|
3,839 |
|
|
|
3,900 |
|
Policy
loans
|
|
|
1,443 |
|
|
|
1,534 |
|
|
|
2,919 |
|
|
|
3,054 |
|
Short-term
investments
|
|
|
22 |
|
|
|
225 |
|
|
|
90 |
|
|
|
668 |
|
Other
invested assets
|
|
|
2,448 |
|
|
|
2,349 |
|
|
|
2,862 |
|
|
|
3,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
87,805 |
|
|
|
86,685 |
|
|
|
172,362 |
|
|
|
171,329 |
|
Investment
expenses
|
|
|
971 |
|
|
|
651 |
|
|
|
1,952 |
|
|
|
1,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
86,834 |
|
|
|
86,034 |
|
|
|
170,410 |
|
|
|
170,021 |
|
Derivative
gain (loss)
|
|
|
6,909 |
|
|
|
(13,756 |
) |
|
|
(6,061 |
) |
|
|
(38,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
93,743 |
|
|
|
72,278 |
|
|
|
164,349 |
|
|
|
131,708 |
|
Income
from other invested assets for the six months ended June 30, 2008 includes a
settlement payment of $0.9 million from a previously impaired and sold security.
Derivative income and losses are recorded as a component of investment income
but may fluctuate substantially from period to period based on the performance
of the underlying indices. See the discussion that follows this section relating
to index options and derivatives.
To ensure
the Company will be able to pay future commitments to policyholders and provide
a financial return, the funds received as premium payments and deposits are
invested in high quality investments, primarily fixed maturity debt securities.
The income from these investments is closely monitored by the Company due to its
significant impact on the business. For the six months ended June 30, 2009, the
Company’s insurance operations purchased $366.2 million of debt securities with
a weighted average yield to maturity of 6.4% and average Standard and Poor’s
credit rating of “A”.
Net
investment income performance is summarized as follows:
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Excluding
derivatives:
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
170,410 |
|
|
|
170,021 |
|
Average
invested assets, at amortized cost
|
|
$ |
5,919,547 |
|
|
|
5,822,201 |
|
Annual
yield on average invested assets
|
|
|
5.76 |
% |
|
|
5.84 |
% |
|
|
|
|
|
|
|
|
|
Including
derivatives:
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
164,349 |
|
|
|
131,708 |
|
Average
invested assets, at amortized cost
|
|
$ |
5,938,561 |
|
|
|
5,876,907 |
|
Annual
yield on average invested assets
|
|
|
5.53 |
% |
|
|
4.48 |
% |
As the
Company’s invested assets are substantially held in debt securities, the yield
on average invested assets tends to move in conjunction with the yield on the
debt securities portfolio. Although long-term interest rate levels were lower in
the first six months of 2009 compared to the first six months of 2008, the
relative increase in corporate spreads over treasury rates substantially offset
the lower interest rate level such that long-term investment yields remained
largely the same. Net investment income performance is analyzed excluding the
derivative income which is a common practice in the insurance industry in order
to assess underlying profitability and results from ongoing
operations.
Other income - Other
income primarily pertains to the Company's operations involving a nursing home
in Reno, Nevada. Revenues
associated with this operation were $3.4 million and $3.0 million for the
quarter ended June 30, 2009 and 2008, respectively, and $6.8 million and $6.1
million for the six months ended June 30, 2009 and 2008,
respectively.
Derivative income (loss)
- Index options are derivative financial instruments used to partially
hedge the equity return component of
the Company's fixed-indexed products. Index options are intended to act as
economic hedges to match closely the returns on the products’ underlying
reference indices. With an increase or decline in this index, the index option
values likewise increase or decline. Any increases or decreases in income from
these options are substantially offset by corresponding increases or decreases
in amounts credited to fixed-indexed annuity and life policyholders. As such,
income or loss from the sale or expiration of the options, as well as
period-to-period changes in fair values, are reflected as a component of net
investment income.
Derivative
components included in net investment income and the corresponding contract
interest amounts are detailed below for each date presented.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$ |
19,709 |
|
|
|
(809 |
) |
|
|
18,344 |
|
|
|
(21,289 |
) |
Realized
loss
|
|
|
(12,800 |
) |
|
|
(12,947 |
) |
|
|
(24,405 |
) |
|
|
(17,024 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net investment income
|
|
$ |
6,909 |
|
|
|
(13,756 |
) |
|
|
(6,061 |
) |
|
|
(38,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
57,652 |
|
|
|
33,555 |
|
|
|
92,917 |
|
|
|
60,172 |
|
Benefits and
Expenses. The following details benefits and
expenses.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$ |
10,248 |
|
|
|
7,655 |
|
|
|
23,276 |
|
|
|
18,111 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
28,549 |
|
|
|
30,263 |
|
|
|
56,497 |
|
|
|
56,511 |
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
57,651 |
|
|
|
33,555 |
|
|
|
92,917 |
|
|
|
60,172 |
|
Other
operating expenses
|
|
|
16,631 |
|
|
|
14,627 |
|
|
|
29,344 |
|
|
|
28,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
113,079 |
|
|
|
86,100 |
|
|
|
202,034 |
|
|
|
162,851 |
|
Life and other policy
benefits - Death claims increased from $6.2 million and $14.2 million
during the three and six months ended June 30, 2008 to $7.7 million and $17.6
million for the same periods in 2009. During the quarter ended March 31, 2009,
the Company reviewed and updated its Incurred But Not Reported (“IBNR”) claims
reserving assumptions. The updated estimates resulted in a one-time reduction in
the IBNR claim reserve that is included in the six months ended June 30, 2009
amounts. While death claim amounts are subject to variation from period to
period, the Company's mortality experience generally has been consistent with
its product pricing assumptions.
Amortization of deferred
acquisition costs - Life insurance companies are required to defer
certain expenses associated with acquiring new business. The majority of these
acquisition expenses consist of commissions paid to agents, underwriting costs,
and certain marketing expenses and sales inducements. The Company defers sales
inducements in the form of first year interest bonuses on annuity and universal
life products that are directly related to the production of new business. These
charges are deferred and amortized using the same methodology and assumptions
used to amortize other capitalized acquisition costs and the amortization is
included in contract interest. Recognition of these deferred policy acquisition
costs in the financial statements occurs over future periods in relation to the
emergence of profits priced into the products sold. This emergence of profits is
based upon assumptions regarding premium payment patterns, mortality,
persistency, investment performance, and expense patterns. Companies are
required to review these assumptions periodically to ascertain whether actual
experience has deviated significantly from that assumed. If it is determined
that a significant deviation has occurred, the emergence of profits pattern is
to be "unlocked" and reset based upon the actual experience. While the Company
is required to evaluate its emergence of profits continually, management
believes that the current amortization patterns of deferred policy acquisition
costs are reflective of actual experience.
Amortization
of deferred policy acquisition costs decreased $1.7 million and remained flat
for the three and six months ended June 30, 2009, respectively, compared to the
same periods in 2008. The changes in amortization reflects the current activity
related to partial surrender rates, surrender rates, mortality rates, portfolio
yield rates and crediting rates on deferred annuities and universal life
products.
Universal life and annuity
contract interest - The Company closely monitors its credited interest
rates on interest sensitive policies, taking into consideration such factors as
profitability goals, policyholder benefits, product marketability, and economic
market conditions. As long term interest rates change, the Company's credited
interest rates are often adjusted accordingly, taking into consideration the
factors as described above. The difference between yields earned over policy
credited rates is often referred to as the "interest spread".
The
Company's approximated average credited rates are as follows:
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Excluding
derivative products)
|
|
|
(Including
derivative products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
2.21 |
% |
|
|
2.87 |
% |
|
|
3.14 |
% |
|
|
2.06 |
% |
Interest
sensitive life
|
|
|
1.63 |
% |
|
|
3.64 |
% |
|
|
4.75 |
% |
|
|
3.15 |
% |
Contract
interest also includes the performance of the equity-indexed component of the
Company's derivative products which resulted in a gain of $6.9 million and a
loss of $6.1 million in the three and six months ended June 30, 2009 and losses
of $13.8 million and $38.3 million in the three and six months ended June 30,
2008. As previously noted, the market performance of these equity-index features
is largely included in contract interest expense while also impacting the
Company's investment income given the hedge nature of the options purchased for
these products.
Other operating expenses
- Other operating expenses consist of general administrative expenses,
licenses and fees, commissions not
subject to deferral, nursing home expenses and share based compensation costs.
Nursing home operation expenses included in other operating expenses were $3.3
million and $6.6 million for the three and six months ended June 30, 2009 and
$2.8 million and $5.6 million for the three and six months ended June 30, 2008.
Share based compensation costs for the Company's stock option plan related to
outstanding vested and unvested options for the three and six months ended June
30, 2009 totaled $(1.2) million and $0.6 million compared to $0.8 million and
$0.6 million for the corresponding periods in 2008.
Federal Income Taxes. Federal
income taxes on earnings from continuing operations reflect effective tax rates
of 32.5% and 33.7%
for the six months ended June 30, 2009 and 2008, respectively. The effective tax
rate is lower than the Federal rate of 35% primarily due to tax-exempt
investment income related to municipal securities and dividends-received
deductions on income from stocks.
Segment
Operations
Summary
of Segment Earnings
A summary
of segment earnings for the three months and six months ended June 30, 2009 and
2008 is provided below. The segment earnings exclude realized gains and losses
on investments, net of taxes.
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
$ |
1,512 |
|
|
|
3,238 |
|
|
|
11,263 |
|
|
|
2,721 |
|
|
|
18,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
$ |
998 |
|
|
|
4,669 |
|
|
|
10,356 |
|
|
|
2,292 |
|
|
|
18,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
$ |
3,812 |
|
|
|
4,714 |
|
|
|
24,963 |
|
|
|
3,747 |
|
|
|
37,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
$ |
975 |
|
|
|
8,541 |
|
|
|
20,165 |
|
|
|
3,109 |
|
|
|
32,790 |
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic life
insurance segment is detailed below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
9,418 |
|
|
|
6,691 |
|
|
|
18,957 |
|
|
|
13,310 |
|
Net
investment income
|
|
|
4,962 |
|
|
|
5,030 |
|
|
|
10,060 |
|
|
|
10,191 |
|
Other
income
|
|
|
6 |
|
|
|
4 |
|
|
|
20 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
14,386 |
|
|
|
11,725 |
|
|
|
29,037 |
|
|
|
23,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
4,334 |
|
|
|
2,814 |
|
|
|
8,155 |
|
|
|
7,019 |
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
1,979 |
|
|
|
2,068 |
|
|
|
4,334 |
|
|
|
4,355 |
|
Universal
life insurance contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
2,226 |
|
|
|
2,288 |
|
|
|
4,498 |
|
|
|
4,643 |
|
Other
operating expenses
|
|
|
3,649 |
|
|
|
3,049 |
|
|
|
6,379 |
|
|
|
6,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
12,188 |
|
|
|
10,219 |
|
|
|
23,366 |
|
|
|
22,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
2,198 |
|
|
|
1,506 |
|
|
|
5,671 |
|
|
|
1,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
686 |
|
|
|
508 |
|
|
|
1,859 |
|
|
|
496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
1,512 |
|
|
|
998 |
|
|
|
3,812 |
|
|
|
975 |
|
Revenues
from domestic life insurance operations include life insurance premiums on
traditional type products and revenues from universal life insurance. Revenues
from traditional products are the premiums collected, while revenues from
universal life insurance consist of policy charges for the cost of insurance,
policy administration fees, and surrender charges assessed during the period. A
comparative detail of premiums and contract revenues is provided
below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
8,671 |
|
|
|
6,333 |
|
|
|
17,366 |
|
|
|
12,378 |
|
Traditional
life insurance premiums
|
|
|
1,783 |
|
|
|
1,309 |
|
|
|
3,955 |
|
|
|
2,931 |
|
Reinsurance
premiums
|
|
|
(1,036 |
) |
|
|
(951 |
) |
|
|
(2,364 |
) |
|
|
(1,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
9,418 |
|
|
|
6,691 |
|
|
|
18,957 |
|
|
|
13,310 |
|
The
Company's U.S. operations have made efforts over the past several years to
attract new independent agents and to promote life products to improve domestic
sales.
Premiums
collected on universal life products are not reflected as revenues in the
Company's statements of earnings in accordance with GAAP. Actual
universal life premiums collected are detailed below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
5,213 |
|
|
|
3,147 |
|
|
|
7,395 |
|
|
|
7,477 |
|
Renewal
premiums
|
|
|
5,809 |
|
|
|
4,851 |
|
|
|
11,377 |
|
|
|
9,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
11,022 |
|
|
|
7,998 |
|
|
|
18,772 |
|
|
|
17,056 |
|
The
increased revenues and a slightly more favorable mortality experience in the
first six months of 2009 compared to 2008 resulted in the increased earnings for
the three and six months ended June 30, 2009 versus the comparable periods in
2008.
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
26,585 |
|
|
|
24,741 |
|
|
|
52,834 |
|
|
|
48,226 |
|
Net
investment income
|
|
|
9,822 |
|
|
|
5,005 |
|
|
|
13,880 |
|
|
|
8,044 |
|
Other
income
|
|
|
12 |
|
|
|
13 |
|
|
|
39 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
36,419 |
|
|
|
29,759 |
|
|
|
66,753 |
|
|
|
56,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
4,374 |
|
|
|
4,286 |
|
|
|
12,098 |
|
|
|
9,599 |
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
11,600 |
|
|
|
9,610 |
|
|
|
24,762 |
|
|
|
18,401 |
|
Universal
life insurance contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
10,480 |
|
|
|
4,586 |
|
|
|
14,200 |
|
|
|
7,280 |
|
Other
operating expenses
|
|
|
5,174 |
|
|
|
4,254 |
|
|
|
8,680 |
|
|
|
8,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
31,628 |
|
|
|
22,736 |
|
|
|
59,740 |
|
|
|
43,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
4,791 |
|
|
|
7,023 |
|
|
|
7,013 |
|
|
|
12,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
1,553 |
|
|
|
2,354 |
|
|
|
2,299 |
|
|
|
4,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
3,238 |
|
|
|
4,669 |
|
|
|
4,714 |
|
|
|
8,541 |
|
International
applications are submitted by independent contractor consultants and
broker-agents. The Company has approximately 4,700 independent international
consultants and brokers currently contracted.
As with
domestic operations, revenues from the international life insurance segment
include both premiums on traditional type products and revenues from universal
life insurance. A comparative detail of premiums and contract revenues is
provided below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
26,659 |
|
|
|
23,913 |
|
|
|
54,384 |
|
|
|
47,865 |
|
Traditional
life insurance premiums
|
|
|
3,206 |
|
|
|
4,013 |
|
|
|
5,935 |
|
|
|
7,054 |
|
Reinsurance
premiums
|
|
|
(3,280 |
) |
|
|
(3,185 |
) |
|
|
(7,485 |
) |
|
|
(6,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
26,585 |
|
|
|
24,741 |
|
|
|
52,834 |
|
|
|
48,226 |
|
Premiums
collected on universal life products are not reflected as revenues in the
Company's statements of earnings in accordance with GAAP. Actual
universal life premiums collected are detailed below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
7,251 |
|
|
|
10,565 |
|
|
|
14,852 |
|
|
|
19,951 |
|
Renewal
premiums
|
|
|
24,325 |
|
|
|
24,426 |
|
|
|
46,671 |
|
|
|
46,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
31,576 |
|
|
|
34,991 |
|
|
|
61,523 |
|
|
|
66,933 |
|
For 2009,
the Company reported decreased premiums for fixed-indexed universal life
products of approximately $30.0 million versus $38.2 million for the first six
months of 2009 and 2008, respectively. Contract revenues have increased as the
amount of international life insurance in force has grown from $15.4 billion at
June 30, 2008, to $15.7 billion at June 30, 2009.
As
previously noted, net investment income and contract interest include
period-to-period changes in fair values pertaining to options purchased that are
tied to the performance of the products underlying reference indices. The
largest selling product in the international life insurance segment for the past
five years has been an equity-indexed universal life policy with the equity
component linked to the underlying indices. With the growth in this block of
business, the period-to-period changes in fair values of the underlying options
have had an increasingly greater impact on net investment and contract interest.
A detail of net investment income for international life insurance operations is
provided below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
8,206 |
|
|
|
7,503 |
|
|
|
15,402 |
|
|
|
14,570 |
|
Derivative
income (loss)
|
|
|
1,616 |
|
|
|
(2,498 |
) |
|
|
(1,522 |
) |
|
|
(6,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
9,822 |
|
|
|
5,005 |
|
|
|
13,880 |
|
|
|
8,044 |
|
Amortization
of deferred policy acquisition costs increased approximately 35% comparing the
first six months of 2009 to the same period in 2008, and increased 21% in the
second quarter of 2009 versus the second quarter of 2008 reflecting higher lapse
activity due to current economic conditions.
Annuity
Operations
The
Company's annuity operations are almost exclusively in the United States.
Although some of the Company's annuity products and investment contracts are
available to international residents, current sales are small relative to total
annuity sales. A comparative analysis of results of operations for the Company's
annuity segment is detailed below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
7,248 |
|
|
|
6,785 |
|
|
|
14,162 |
|
|
|
12,793 |
|
Net
investment income
|
|
|
75,096 |
|
|
|
59,006 |
|
|
|
135,117 |
|
|
|
109,303 |
|
Other
income
|
|
|
78 |
|
|
|
85 |
|
|
|
213 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
82,422 |
|
|
|
65,876 |
|
|
|
149,492 |
|
|
|
122,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other benefits
|
|
|
1,540 |
|
|
|
555 |
|
|
|
3,023 |
|
|
|
1,493 |
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
14,970 |
|
|
|
18,585 |
|
|
|
27,401 |
|
|
|
33,755 |
|
Annuity
contract interest
|
|
|
44,945 |
|
|
|
26,681 |
|
|
|
74,219 |
|
|
|
48,249 |
|
Other
operating expenses
|
|
|
4,540 |
|
|
|
4,489 |
|
|
|
7,734 |
|
|
|
8,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
65,995 |
|
|
|
50,310 |
|
|
|
112,377 |
|
|
|
91,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
16,427 |
|
|
|
15,566 |
|
|
|
37,115 |
|
|
|
30,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Federal income taxes
|
|
|
5,164 |
|
|
|
5,210 |
|
|
|
12,152 |
|
|
|
10,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
11,263 |
|
|
|
10,356 |
|
|
|
24,963 |
|
|
|
20,165 |
|
Revenues
from annuity operations primarily include surrender charges and recognition of
deferred revenues relating to immediate or payout annuities. A comparative
detail of the components of premiums and annuity contract revenues is provided
below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surrender
charges
|
|
$ |
5,771 |
|
|
|
5,630 |
|
|
|
11,124 |
|
|
|
10,425 |
|
Payout
annuity and other revenues
|
|
|
1,472 |
|
|
|
1,150 |
|
|
|
3,029 |
|
|
|
2,357 |
|
Traditional
annuity premiums
|
|
|
5 |
|
|
|
5 |
|
|
|
9 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
7,248 |
|
|
|
6,785 |
|
|
|
14,162 |
|
|
|
12,793 |
|
The
Company's earnings are dependent upon annuity contracts persisting or remaining
in force. While premium and contract revenues increased with an increase in
surrender charges, the Company's investment earnings benefit as more policies
remain in force.
Deposits
collected on annuity contracts are not reflected as revenues in the Company's
statements of earnings in accordance with GAAP. Actual annuity deposits
collected for the three and six months ended June 30, 2009 and 2008 are detailed
below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
$ |
114,260 |
|
|
|
76,282 |
|
|
|
218,026 |
|
|
|
145,306 |
|
Other
deferred annuities
|
|
|
63,285 |
|
|
|
29,276 |
|
|
|
110,834 |
|
|
|
59,004 |
|
Immediate
annuities
|
|
|
3,526 |
|
|
|
856 |
|
|
|
8,764 |
|
|
|
2,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
181,071 |
|
|
|
106,414 |
|
|
|
337,624 |
|
|
|
206,815 |
|
Fixed-indexed
product sales typically follow the stock market in that sales increase when
confidence is high in the stock market and decline if the stock market is
showing poor performance. However, in the current environment the Company’s
experience has shown a lower proportion of fixed-indexed annuity sales relative
to other deferred annuity products which have a fixed interest rate of interest
credited to the policy.
Other
deferred annuity product sales have generally been trending lower over the past
few years due to low interest rates and investor preferences. As a selling
inducement, many of the deferred products, as well as the fixed-indexed annuity
products, include a first year interest bonus in addition to a base interest
rate. These bonus rates are deferred in conjunction with other capitalized
policy acquisition costs. The amount deferred and amortized over future periods
amounted to approximately $8.4 million and $16.9 million for the three and six
months ended June 30, 2009, and $5.7 million and $10.2 million in the comparable
periods of 2008.
A detail
of net investment income for annuity operations is provided below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
69,853 |
|
|
|
70,263 |
|
|
|
139,248 |
|
|
|
141,089 |
|
Derivative
income (loss)
|
|
|
5,243 |
|
|
|
(11,257 |
) |
|
|
(4,131 |
) |
|
|
(31,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
75,096 |
|
|
|
59,006 |
|
|
|
135,117 |
|
|
|
109,303 |
|
As noted
previously, derivative income and loss fluctuate from period to period based on
the performance of the products’ underlying indices.
Annuity
contract interest includes the equity component return associated with the
Company's fixed-indexed annuities. The detail of fixed-indexed
annuity contract interest compared to contract interest for all other annuities
is as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
$ |
33,806 |
|
|
|
(1,486 |
) |
|
|
57,876 |
|
|
|
3,431 |
|
All
other annuities
|
|
|
16,408 |
|
|
|
29,442 |
|
|
|
26,600 |
|
|
|
47,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
contract interest
|
|
|
50,214 |
|
|
|
27,956 |
|
|
|
84,476 |
|
|
|
51,223 |
|
Bonus
interest deferred and capitalized
|
|
|
(8,460 |
) |
|
|
(5,672 |
) |
|
|
(16,939 |
) |
|
|
(10,156 |
) |
Bonus
interest amortization
|
|
|
3,278 |
|
|
|
4,397 |
|
|
|
6,769 |
|
|
|
7,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
45,032 |
|
|
|
26,681 |
|
|
|
74,306 |
|
|
|
48,249 |
|
Contract
interest includes the portion of its return on fixed interest products
associated with the performance of the underlying indices.
Amortization
of deferred policy acquisition costs decreased approximately 19% comparing the
first three and six months of 2009 to the same periods in 2008. During the first
three months of 2008 the Company experienced an increased conversion activity of
deferred annuities into payout annuities. This resulted in a higher amortization
for the six months ended June 30, 2008. Current amounts should be more
reflective of ongoing activity.
Other
Operations
National
Western's primary business encompasses its domestic and international life
insurance operations and its annuity operations. However, as previously noted,
National Western also has small real estate, nursing home, and other investment
operations through its wholly-owned subsidiaries. Nursing home operations
generated $0.3 million and $0.5 million of operating earnings in the first six
months of 2009 and 2008, respectively.
INVESTMENTS
General
The
Company's investment philosophy emphasizes the careful handling of policyowners'
and stockholders' funds to achieve security of principal, to obtain the maximum
possible yield while maintaining security of principal, and to maintain
liquidity in a measure consistent with current and long-term requirements of the
Company.
The
Company's overall conservative investment philosophy is reflected in the
allocation of its investments, which is detailed below as of June 30, 2009 and
December 31, 2008. The Company emphasizes investment grade debt
securities, with smaller holdings in mortgage loans and policy
loans.
|
|
Composition
of Investments
|
|
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
5,828,529 |
|
|
|
96.1 |
|
|
$ |
5,563,000 |
|
|
|
96.3 |
|
Mortgage
loans
|
|
|
93,016 |
|
|
|
1.5 |
|
|
|
90,733 |
|
|
|
1.6 |
|
Policy
loans
|
|
|
77,928 |
|
|
|
1.3 |
|
|
|
79,277 |
|
|
|
1.4 |
|
Derivatives
|
|
|
27,018 |
|
|
|
0.4 |
|
|
|
11,920 |
|
|
|
0.2 |
|
Equity
securities
|
|
|
13,574 |
|
|
|
0.2 |
|
|
|
13,683 |
|
|
|
0.2 |
|
Real
estate
|
|
|
20,282 |
|
|
|
0.3 |
|
|
|
10,828 |
|
|
|
0.2 |
|
Other
|
|
|
9,369 |
|
|
|
0.2 |
|
|
|
3,340 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
6,069,716 |
|
|
|
100.0 |
|
|
$ |
5,772,781 |
|
|
|
100.0 |
|
Debt
and Equity Securities
The
Company maintains a diversified portfolio which consists primarily of corporate,
mortgage-backed, and public utilities fixed income securities. Investments in
mortgage-backed securities include primarily U.S. government agency pass-through
securities and collateralized mortgage obligations ("CMOs"). As of June 30, 2009
and December 31, 2008, the Company's debt securities portfolio consisted of the
following:
|
|
Composition
of Debt Securities
|
|
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$ |
2,691,074 |
|
|
|
46.1 |
|
|
$ |
2,453,404 |
|
|
|
44.0 |
|
Mortgage-backed
securities
|
|
|
1,955,921 |
|
|
|
33.6 |
|
|
|
2,001,060 |
|
|
|
36.0 |
|
Public
utilities
|
|
|
920,190 |
|
|
|
15.8 |
|
|
|
790,419 |
|
|
|
14.2 |
|
U.S.
agencies
|
|
|
48,186 |
|
|
|
0.8 |
|
|
|
119,674 |
|
|
|
2.2 |
|
U.S.
Treasury
|
|
|
1,920 |
|
|
|
- |
|
|
|
1,923 |
|
|
|
- |
|
Home
equity
|
|
|
43,825 |
|
|
|
0.8 |
|
|
|
46,959 |
|
|
|
0.9 |
|
Manufactured
housing
|
|
|
37,579 |
|
|
|
0.6 |
|
|
|
41,319 |
|
|
|
0.7 |
|
States
& political subdivisions
|
|
|
108,677 |
|
|
|
1.9 |
|
|
|
86,962 |
|
|
|
1.6 |
|
Foreign
governments
|
|
|
21,157 |
|
|
|
0.4 |
|
|
|
21,280 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,828,529 |
|
|
|
100.0 |
|
|
$ |
5,563,000 |
|
|
|
100.0 |
|
Because
the Company's holdings of mortgage-backed securities are subject to prepayment
and extension risk, the Company has substantially reduced these risks by
investing primarily in collateralized mortgage obligations, which have more
predictable cash flow patterns than pass-through securities. These securities,
known as planned amortization class I ("PAC I") and sequential tranches, are
designed to amortize in a more predictable manner than other CMO classes or
pass-throughs. The Company does not purchase tranches, such as PAC II and
support tranches, that subject the portfolio to greater than average prepayment
risk. Using this strategy, the Company can more effectively manage and reduce
prepayment and extension risks, thereby helping to maintain the appropriate
matching of the Company's assets and liabilities.
Due to
negative news relative to the mortgage industry, and in particular subprime
mortgages, the Company has included detailed information below related to this
exposure in the debt securities portfolio. The Company holds approximately $81.4
million in asset-backed securities at June 30, 2009. This portfolio includes
$37.6 million of manufactured housing bonds and $43.8 million of home equity
loans (also referred to as subprime securities). The Company does not have any
holdings in collaterized bond obligations (CBOs), collateralized debt
obligations (CDOs), or collateralized loan obligations (CLOs). Principal risks
in holding asset-backed securities are structural, credit, and capital market
risks. Structural risks include the securities’ priority in the issuer’s capital
structure, the adequacy of and ability to realize proceeds from collateral and
the potential for prepayments. Credit risks include corporate credit risks or
consumer credit risks for financing such as subprime mortgages. Capital market
risks include the general level of interest rates and the liquidity for these
securities in the marketplace.
The
mortgage-backed portfolio includes one Alt-A security with a carrying value of
$3.6 million. The Alt-A sector is a sub-sector of the jumbo prime MBS sector.
The average FICO for an Alt-A borrower is approximately 715 compared to a score
of 730 for a jumbo prime borrower. The Company’s exposure to the Alt-A and
subprime sectors is limited to investments in the senior tranches of structured
securities collateralized by Alt-A or subprime residential mortgage loans. The
asset-backed portfolio includes thirteen subprime securities, totaling $43.8
million. The subprime sector is generally categorized under the asset-backed
sector. This sector lends to borrowers who do not qualify for prime interest
rates due to poor or insufficient credit history. Subprime borrowers generally
have FICO scores of 660 or below. The slowing housing market, rising interest
rates, and relaxed underwriting standards for loans originated after 2005
resulted in higher delinquency rates and losses in 2007. These events caused
illiquidity in the market and volatility in the market prices of subprime
securities. All of the loans classified as Alt-A or subprime in the Company’s
portfolio as of June 30, 2009 were underwritten prior to 2005 as noted in the
table below.
Investment
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
Origination
Year
|
|
Carrying
Value
|
|
|
Market
Value
|
|
|
Carrying
Value
|
|
|
Market
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
|
|
$ |
11,534 |
|
|
|
9,829 |
|
|
|
12,125 |
|
|
|
11,157 |
|
2002
|
|
|
1,110 |
|
|
|
575 |
|
|
|
1,123 |
|
|
|
556 |
|
2003
|
|
|
6,533 |
|
|
|
3,343 |
|
|
|
6,894 |
|
|
|
3,779 |
|
2004
|
|
|
24,648 |
|
|
|
15,483 |
|
|
|
26,817 |
|
|
|
21,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
subprime
|
|
$ |
43,825 |
|
|
|
29,230 |
|
|
|
46,959 |
|
|
|
37,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt
A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$ |
3,586 |
|
|
|
3,586 |
|
|
|
3,821 |
|
|
|
3,821 |
|
As of
June 30, 2009, nine of the subprime securities were rated AAA, two were rated
AA, one rated A and one rated BBB.
In
addition to diversification, an important aspect of the Company's investment
approach is managing the credit quality of its investments in debt securities.
Thorough credit analysis is performed on potential corporate investments
including examination of a company's credit and industry outlook, financial
ratios and trends, and event risks. This emphasis is reflected in the high
average credit rating of the Company's portfolio with 98.0% held in investment
grade securities. In the table below, investments in debt securities are
classified according to credit ratings by Standard and Poor's ("S&P®"), or
other nationally recognized statistical rating organizations if securities were
not rated by S&P®.
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
and U.S. government
|
|
$ |
2,122,581 |
|
|
|
36.4 |
|
|
$ |
2,306,694 |
|
|
|
41.5 |
|
AA
|
|
|
275,180 |
|
|
|
4.7 |
|
|
|
205,729 |
|
|
|
3.7 |
|
A
|
|
|
1,501,730 |
|
|
|
25.8 |
|
|
|
1,431,703 |
|
|
|
25.7 |
|
BBB
|
|
|
1,811,130 |
|
|
|
31.1 |
|
|
|
1,546,720 |
|
|
|
27.8 |
|
BB
and other below investment grade
|
|
|
117,908 |
|
|
|
2.0 |
|
|
|
72,154 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,828,529 |
|
|
|
100.0 |
|
|
$ |
5,563,000 |
|
|
|
100.0 |
|
The
Company does not purchase below investment grade
securities. Investments held in debt securities below investment
grade are the result of subsequent downgrades of the
securities. These holdings are summarized below.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
%
of
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Invested
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Assets
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
$ |
134,685 |
|
|
|
117,908 |
|
|
|
107,747 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
$ |
84,229 |
|
|
|
72,154 |
|
|
|
67,375 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
105,067 |
|
|
|
100,221 |
|
|
|
97,618 |
|
|
|
1.7 |
% |
As of
June 30, 2009, the Company's percentage of below investment grade securities
compared to total invested assets totaled 1.9%. The increase from December 31,
2008 is primarily due to securities being downgraded during the first six months
of 2009. The Company's holdings of below investment grade securities as a
percentage of total invested assets is relatively small compared to industry
averages.
Holdings
in below investment grade securities by category as of June 30, 2009 are
summarized below, including June 30, 2009 and December 31, 2008 fair values for
comparison. The Company is continually monitoring developments in these
industries that may affect security valuation issues. Holdings in below
investment grade securities by category are summarized below.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
22,445 |
|
|
|
16,626 |
|
|
|
16,626 |
|
|
|
15,033 |
|
Utilities/Energy
|
|
|
2,098 |
|
|
|
2,043 |
|
|
|
2,043 |
|
|
|
1,839 |
|
Telecommunication
|
|
|
6,321 |
|
|
|
6,250 |
|
|
|
6,250 |
|
|
|
3,807 |
|
Manufactured
housing
|
|
|
10,783 |
|
|
|
10,870 |
|
|
|
8,673 |
|
|
|
7,436 |
|
Mortgage-backed
|
|
|
4,920 |
|
|
|
3,097 |
|
|
|
3,098 |
|
|
|
3,661 |
|
Transportation
|
|
|
1,635 |
|
|
|
1,477 |
|
|
|
1,478 |
|
|
|
1,144 |
|
Manufacturing
|
|
|
32,066 |
|
|
|
29,091 |
|
|
|
27,881 |
|
|
|
23,222 |
|
Banking/Finance
|
|
|
28,928 |
|
|
|
26,591 |
|
|
|
20,479 |
|
|
|
17,094 |
|
Medical
|
|
|
13,000 |
|
|
|
12,604 |
|
|
|
11,960 |
|
|
|
11,050 |
|
Other
|
|
|
12,489 |
|
|
|
9,259 |
|
|
|
9,259 |
|
|
|
8,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
134,685 |
|
|
|
117,908 |
|
|
|
107,747 |
|
|
|
92,975 |
|
The
Company closely monitors its other below investment grade holdings by reviewing
investment performance indicators including information such as issuer operating
performance, debt ratings, analyst reports and other economic factors that may
affect these specific investments. While additional losses are not currently
anticipated based on the existing status and condition of these securities,
continued credit deterioration of some securities is possible, which may result
in further writedowns.
The
Company is required to classify its investments in debt and equity securities
into one of three categories: (a) trading securities, (b) securities available
for sale, or (c) securities held to maturity. The Company purchases securities
with the intent to hold to maturity and accordingly does not maintain a
portfolio of trading securities. Of the remaining two categories, available for
sale and held to maturity, the Company makes a determination on categorization
based on various factors including the type and quality of the particular
security and how it will be incorporated into the Company's overall
asset/liability management strategy. As shown in the table below, at June 30,
2009, approximately 31.6% of the Company's total debt and equity securities,
based on fair values, were classified as securities available for sale. These
holdings provide flexibility to the Company to react to market opportunities and
conditions and to practice active management within the portfolio to provide
adequate liquidity to meet policyholder obligations and other cash
needs.
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
(Losses)
|
|
|
|
(In
thousands)
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
4,015,880 |
|
|
|
3,986,365 |
|
|
|
29,515 |
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,842,164 |
|
|
|
1,891,113 |
|
|
|
(48,949 |
) |
Equity
securities
|
|
|
13,574 |
|
|
|
6,805 |
|
|
|
6,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,871,618 |
|
|
|
5,884,283 |
|
|
|
(12,665 |
) |
During
the six months ending June 30, 2009 the Company recorded other-than-temporary
impairment writedowns on debt securities totaling $4.9 million and equity
securities totaling $0.4 million. See Note 9 in the accompanying condensed
consolidated financial statements.
As of
April 1, 2009, the Company adopted the new FSP FAS 115-2 and FAS 124 -2. See
Note 3 in the accompanying condensed consolidated financial statement. For the
three months ended June 30, 2009, the Company recognized $1.8 million of
other-than-temporary impairments; $26,000 was deemed credit related and
recognized as realized investment losses in earnings, $1.8 million was deemed
non-credit related impairments and recognized in other comprehensive
income.
Market
Risk
Market
risk is the risk of change in market values of financial instruments due to
changes in interest rates, currency exchange rates, commodity prices, or equity
prices. The most significant market risk exposure for National Western is
interest rate risk. The fair values of fixed income debt securities correlate to
external market interest rate conditions. Because interest rates are fixed on
almost all of the Company's debt securities, market values typically increase
when market interest rates decline, and decrease when market interest rates
rise. However, market values may fluctuate for other reasons, such as changing
economic conditions or increasing event-risk concerns.
The
correlation between fair values and interest rates for debt securities is
reflected in the tables below.
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities - fair value
|
|
$ |
5,858,044 |
|
|
|
5,610,330 |
|
|
|
5,458,936 |
|
Debt
securities - amortized cost
|
|
$ |
5,877,478 |
|
|
|
5,813,308 |
|
|
|
5,728,363 |
|
Fair
value as a percentage of amortized cost
|
|
|
99.67
|
% |
|
|
96.51
|
% |
|
|
95.30
|
% |
Unrealized
loss balance
|
|
$ |
(19,434 |
) |
|
|
(202,978 |
) |
|
|
(269,427 |
) |
Ten-year
U.S. Treasury bond - increase (decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
in
yield for the quarter
|
|
|
0.87
|
% |
|
|
0.45
|
% |
|
|
(1.81 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses) Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
YTD
|
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
Change
in
|
|
|
Change
in
|
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
Balance
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities held to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
$ |
29,515 |
|
|
|
(60,318 |
) |
|
|
(104,064 |
) |
|
|
89,833 |
|
|
|
133,579 |
|
Debt
securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
|
|
(48,949 |
) |
|
|
(142,660 |
) |
|
|
(165,363 |
) |
|
|
93,711 |
|
|
|
116,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
(19,434 |
) |
|
|
(202,978 |
) |
|
|
(269,427 |
) |
|
|
183,544 |
|
|
|
249,993 |
|
Changes
in interest rates typically have a sizable effect on the fair values of the
Company's debt securities. Although the market interest rates of the ten-year
U.S. Treasury bond increased approximately 87 basis points during the second
quarter, the Company experienced an unrealized gain of $183.5 million on a
portfolio of approximately $5.9 billion as the spread between corporate bonds
and treasuries narrowed during the quarter. Since the majority of the Company's
debt securities are classified as held to maturity, which are recorded at
amortized cost, changes in fair values have relatively small effects on the
Company's consolidated balance sheet.
The
Company manages interest rate risk through on-going cash flow testing required
for insurance regulatory purposes. Business models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Sensitivity analysis allows the Company to measure the potential gain
or loss in fair value of its interest-sensitive instruments and to protect its
economic value and achieve a predictable spread between what is earned on
invested assets and what is paid on liabilities. The Company seeks to minimize
the impact of interest risk through surrender charges that are imposed to
discourage policy surrenders. Interest rate changes can be anticipated in the
business models and the corresponding risk addressed by management actions
affecting asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest rate changes
will likely be different from actual changes experienced, and the differences
could be significant.
The
Company performed detailed sensitivity analysis as of December 31, 2008, for its
interest rate-sensitive assets and liabilities. The changes in market values of
the Company's debt securities in the second quarter of 2009 were reasonable
given the expected range of results of this analysis.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
requirements are met primarily by funds provided from operations. Premium
deposits and revenues, investment income, and investment maturities are the
primary sources of funds while investment purchases, policy benefits, and
operating expenses are the primary uses of funds. The Company historically has
not been put in the position of liquidating invested assets to provide cash
flow. However, investments consist primarily of marketable debt securities that
could be readily converted to cash for liquidity needs. The Company is currently
moving $40 million on its bank line of credit to a new provider. While the
current facility expired July 31, 2009, the new line of credit terms have been
negotiated and are expected to be in place by the end of August 2009. There
are expected to be no material changes in the term of the bank credit
facility.
A primary
liquidity concern for life insurers is the risk of an extraordinary level of
early policyholder withdrawals. The Company includes provisions within its
annuity and universal life insurance policies, such as surrender charges, that
help limit and discourage early withdrawals.
The
actual amounts paid by product line in connection with surrenders and
withdrawals for the periods ended June 30 are noted in the table
below.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Life
|
|
$ |
1,175 |
|
|
|
1,060 |
|
|
|
2,454 |
|
|
|
2,132 |
|
Universal
Life
|
|
|
14,556 |
|
|
|
9,220 |
|
|
|
30,421 |
|
|
|
18,670 |
|
Annuities
|
|
|
97,992 |
|
|
|
104,062 |
|
|
|
195,145 |
|
|
|
203,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
113,723 |
|
|
|
114,342 |
|
|
|
228,020 |
|
|
|
224,711 |
|
The above
contractual withdrawals, as well as the level of surrenders experienced, were
generally consistent with the Company's assumptions in asset/liability
management, and the associated cash outflows did not have an adverse impact on
overall liquidity. Individual life insurance policies are less susceptible to
withdrawal than annuity reserves and deposit liabilities because policyholders
may incur surrender charges and undergo a new underwriting process in order to
obtain a new insurance policy. Cash flow projections and tests under various
market interest rate scenarios are also performed to assist in evaluating
liquidity needs and adequacy. The Company currently expects available liquidity
sources and future cash flows to be more than adequate to meet the demand for
funds.
In the
past, cash flows from the Company's insurance operations have been sufficient to
meet current needs. Cash flows from operating activities were $92.5 million and
$98.4 million for the six months ended June 30, 2009 and 2008, respectively. The
Company also has significant cash flows from both scheduled and unscheduled
investment security maturities, redemptions, and prepayments. These cash flows
totaled $634.6 million and $519.1 million for the six months ended June 30, 2009
and 2008, respectively. These cash flow items could change if interest rates
rise. Net cash flows from the Company's universal life and investment annuity
deposit product operations totaled $67.6 million and $(62.7) million during the
six months ended June 30, 2009 and 2008, respectively.
Capital
Resources
The
Company relies on stockholders' equity for its capital resources as there is no
long-term debt outstanding and the Company does not anticipate the need for any
long-term debt in the near future. As of June 30, 2009, the Company had
commitments of approximately $1.8 million which were approved by the Company's
Board of Directors for the construction of a nursing home facility in Central
Texas. The construction of the new facility began in 2007 and is expected to be
completed in the third quarter of 2009.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
It is not
Company practice to enter into off-balance sheet arrangements nor is it Company
policy to issue guarantees to third parties, other than in the normal course of
issuing insurance contracts. Commitments related to insurance products sold are
reflected as liabilities for future policy benefits. Insurance contracts
guarantee certain performances by the Company.
Insurance
reserves are the means by which life insurance companies determine the
liabilities that must be established to assure that future policy benefits are
provided for and can be paid. These reserves are required by law and based upon
standard actuarial methodologies to ensure fulfillment of commitments guaranteed
to policyholders and their beneficiaries, even though the obligations may not be
due for many years. Refer to Note (1) in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 for a discussion of reserving methods.
The table
below summarizes future estimated cash payments under existing contractual
obligations as of June 30, 2009.
|
|
Payment
Due by Period
|
|
|
|
|
|
|
Less
Than
|
|
|
|
1-3
|
|
|
|
|
|
|
More
Than
|
|
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
|
$ |
212 |
|
|
|
196 |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
Loan
commitments
|
|
|
1,650 |
|
|
|
1,650 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Construction
commitments
|
|
|
1,784 |
|
|
|
1,784 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Life
claims payable (2)
|
|
|
51,081 |
|
|
|
51,081 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
long-term reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
reflected on the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance
sheet under GAAP (3)
|
|
|
7,922,428 |
|
|
|
809,556 |
|
|
|
1,470,586 |
|
|
|
1,796,133 |
|
|
|
3,846,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,977,155 |
|
|
|
864,267 |
|
|
|
1,470,602 |
|
|
|
1,796,133 |
|
|
|
3,846,153 |
|
(1) Refer
to Note 9 in the Notes to Consolidated Financial Statements relating to leases
in the Company’s Annual Report on Form 10-K.
(2) Life
claims payable includes benefit and claim liabilities for which the Company
believes the amount and timing of the payment is essentially fixed and
determinable. Such amounts generally relate to incurred and reported
death and critical illness claims including an estimate of claims incurred but
not reported.
(3) Other
long-term liabilities include estimated life and annuity obligations related to
death claims, policy surrenders, policy withdrawals, maturities and annuity
payments based on mortality, lapse, annuitization, and withdrawal assumptions
consistent with the Company’s historical experience. These estimated life and
annuity obligations are undiscounted projected cash outflows that assume
interest crediting and market growth consistent with assumptions used in
amortizing deferred acquisition costs. They do not include any offsets for
future premiums or deposits. Other long-term liabilities also include
determinable payout patterns related to immediate annuities. In contrast to this
table, the majority of the Company’s liabilities for future obligations recorded
on the consolidated balance sheet do not incorporate future credited interest
and market growth. Therefore, the estimated life and annuity obligations
presented in this table significantly exceed the life and annuity liabilities
recorded in the reserves for future life and annuity obligations. Due to the
significance of the assumptions used, the actual cash outflows will differ both
in amount and timing, possibly materially, from these estimates.
CHANGES
IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES
Changes
in Accounting Principles
Refer to
Notes 2, 3, and 9 of the Notes to Condensed Consolidated Financial
Statements.
REGULATORY
AND OTHER ISSUES
Statutory
Accounting Practices
Regulations
that affect the Company and the insurance industry are often the result of
efforts by the National Association of Insurance Commissioners ("NAIC"). The
NAIC routinely publishes new regulations as model acts or laws which states
subsequently adopt as part of their insurance regulations. Currently, the
Company is not aware of any NAIC regulatory matter material to its operations or
reporting of financial results.
Risk-Based
Capital Requirements
The NAIC
established risk-based capital ("RBC") requirements to help state regulators
monitor the financial strength and stability of life insurers by identifying
those companies that may be inadequately capitalized. Under the NAIC's
requirements, each insurer must maintain its total capital above a calculated
threshold or take corrective measures to achieve the threshold. The threshold of
adequate capital is based on a formula that takes into account the amount of
risk each company faces on its products and investments. The RBC formula takes
into consideration four major areas of risk which are: (i) asset risk which
primarily focuses on the quality of investments; (ii) insurance risk which
encompasses mortality and morbidity risk; (iii) interest rate risk which
involves asset/liability matching issues; and (iv) other business risks.
Statutory laws prohibit public dissemination of certain RBC information.
However, the Company's current statutory capital and surplus is significantly in
excess of the threshold RBC requirements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
This
information is included in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in the Investments in Debt and
Equity Securities section.
ITEM
4. CONTROLS AND PROCEDURES
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based on such evaluation, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of such period, the Company's disclosure controls and procedures are
effective in recording, processing, summarizing, and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act.
There
have been no changes in the Company's internal controls over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended June 30, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Refer to
Note 8(A) "Legal Proceedings" of the accompanying financial statements included
in this Form 10-Q.
ITEM
1A. RISK FACTORS
There
have been no changes relative to the risk factors disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June
19, 2009, the stockholders voted upon the following matters at the annual
stockholders meeting:
(a) The
election of Class A directors to the Company's Board of Directors to serve
one-year terms. The results of the voting were as
follows:
|
|
For
|
|
Against
|
|
|
|
|
|
Robert
L. Moody
|
|
2,843,906
|
|
394,460
|
Stephen
E. Glasgow
|
|
3,082,958
|
|
155,408
|
E.J.
Pederson
|
|
3,083,744
|
|
154,622
|
|
|
|
|
|
(b) The
election of Class B directors to the Company's Board of Directors to serve
one-year terms. The results of the voting were as
follows:
|
|
For
|
|
Against
|
|
|
|
|
|
E.
Douglas McLeod
|
|
200,000
|
|
-
|
Charles
D. Milos
|
|
200,000
|
|
-
|
Frances
A. Moody-Dahlberg
|
|
200,000
|
|
-
|
Ross
R. Moody
|
|
200,000
|
|
-
|
Russell
S. Moody
|
|
200,000
|
|
-
|
Louis
E. Pauls, Jr.
|
|
200,000
|
|
-
|
(a)
Exhibits
Exhibit
31(a)
|
-
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
31(b)
|
-
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
32(a)
|
-
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
August 10, 2009
|
|
|
/S/
Ross R. Moody
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
President,
Chief Operating Officer,
|
|
|
|
|
|
and
Director
|
|
|
|
|
|
(Authorized
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
August 10, 2009
|
|
|
/S/
Brian M. Pribyl
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
Senior
Vice President,
|
|
|
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Date:
August 10, 2009
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/S/
Michael G. Kean
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Michael
G. Kean
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Vice
President,
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Controller
and Assistant Treasurer
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(Principal
Accounting Officer)
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