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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2020

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 000-55522

NATIONAL WESTERN LIFE GROUP, INC.
(Exact name of Registrant as specified in its charter)

Delaware  47-3339380
(State or Other Jurisdiction of Incorporation)  (IRS Employer Identification No.)
 
10801 N. Mopac Expy Bldg 3
Austin,Texas 
78759(512)836-1010
(Address of Principal Executive Offices) (Zip Code) (Telephone Number, including area code)

Securities registered pursuant to Section 12 (b) of the Act:
Title of each class to be so registered:Trading Symbol Name of each exchange on which
each class is to be registered:
Class A Common Stock, $0.01 par valueNWLI The NASDAQ Stock Market LLC

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 ☒   No ☐ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes ☒   No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definition of "accelerated filer." "large accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☒  Accelerated filer  ☐    Non-accelerated filer (Do not check if a smaller reporting company)  ☐  Smaller reporting company ☐  Emerging growth company ☐ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒
As of November 5, 2020, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,020 and  Class B - 200,000.

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TABLE OF CONTENTS
 Page
September 30, 2020 (Unaudited) and December 31, 2019
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
2
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 (Unaudited) 
ASSETSSeptember 30,
2020		December 31,
2019
Investments:  
Debt securities held to maturity, at amortized cost, net of allowance for credit losses ($5,086 and $0; fair value: $7,378,399 and $7,407,703)
$6,822,053 7,106,245 
Debt securities available for sale, at fair value (cost: $3,156,486 and $3,206,120)
3,410,656 3,356,945 
Mortgage loans, net of allowance for credit losses ($2,357 and $675)
302,715 272,422 
Policy loans75,714 80,008 
Derivatives, index options93,367 157,588 
Equity securities, at fair value (cost: $15,157 and $16,894)
18,610 23,594 
Other long-term investments78,579 62,090 
Total investments10,801,694 11,058,892 
Cash and cash equivalents507,025 253,525 
Deferred policy acquisition costs633,349 723,972 
Deferred sales inducements86,104 104,359 
Value of business acquired132,426 138,071 
Accrued investment income93,330 93,298 
Federal income tax receivable802 — 
Other assets166,256 181,330 
Total assets$12,420,986 12,553,447 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

 (Unaudited) 
LIABILITIES AND STOCKHOLDERS’ EQUITYSeptember 30,
2020		December 31,
2019
LIABILITIES:  
Future policy benefits:  
Universal life and annuity contracts (Note 1)$9,013,661 9,303,233 
Traditional life reserves848,515 838,738 
Other policyholder liabilities136,392 127,607 
Deferred Federal income tax liability (Note 1)53,055 36,767 
Federal income tax payable— 3,748 
Other liabilities154,133 126,924 
Total liabilities10,205,756 10,437,017 
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:  
Common stock:  
Class A - $0.01 par value; 7,500,000 shares authorized; 3,436,020 issued and outstanding in 2020 and 2019
34 34 
Class B - $0.01 par value; 200,000 shares authorized, issued, and outstanding in 2020 and 2019
2 2 
Additional paid-in capital41,716 41,716 
Accumulated other comprehensive income (loss)104,764 60,108 
Retained earnings (Note 1)2,068,714 2,014,570 
Total stockholders’ equity2,215,230 2,116,430 
Total liabilities and stockholders' equity$12,420,986 12,553,447 

Note:  The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited Consolidated Financial Statements as of that date.

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the Three Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands, except per share amounts)

 20202019
Premiums and other revenues:  
Universal life and annuity contract charges$40,303 37,840 
Traditional life premiums22,693 24,099 
Net investment income (loss)129,679 108,456 
Other revenues3,977 3,273 
Net realized investment gains (losses):  
Total other-than-temporary impairment (“OTTI”) gains (losses)1 (1,943)
Portion of OTTI (gains) losses recognized in other comprehensive income(1)(2)
Net OTTI losses recognized in earnings— (1,945)
Other net investment gains (losses)6,050 1,443 
Total net realized investment gains (losses)6,050 (502)
Total revenues202,702 173,166 
Benefits and expenses:  
Life and other policy benefits26,940 39,918 
Amortization of deferred policy acquisition costs and value of business acquired50,800 22,998 
Universal life and annuity contract interest85,879 59,445 
Other operating expenses25,754 25,813 
Total benefits and expenses189,373 148,174 
Earnings before Federal income taxes13,329 24,992 
Federal income taxes2,504 5,003 
Net earnings$10,825 19,989 
Basic earnings per share:  
Class A$3.06 $5.65 
Class B$1.53 $2.83 
Diluted earnings per share:  
Class A$3.06 $5.65 
Class B$1.53 $2.83 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands, except per share amounts)

 20202019
Premiums and other revenues:  
Universal life and annuity contract charges$112,478 112,703 
Traditional life premiums68,956 65,492 
Net investment income261,894 388,211 
Other revenues15,217 13,652 
Net realized investment gains (losses):  
Total other-than-temporary impairment (“OTTI”) gains (losses)5 (7,840)
Portion of OTTI (gains) losses recognized in other comprehensive income(5)(7)
Net OTTI losses recognized in earnings— (7,847)
Other net investment gains (losses)12,660 11,549 
Total net realized investment gains (losses)12,660 3,702 
Total revenues471,205 583,760 
Benefits and expenses:  
Life and other policy benefits94,005 101,764 
Amortization of deferred policy acquisition costs and value of business acquired111,937 86,573 
Universal life and annuity contract interest119,625 200,500 
Other operating expenses74,730 77,196 
Total benefits and expenses400,297 466,033 
Earnings before Federal income taxes70,908 117,727 
Federal income taxes13,732 23,844 
Net earnings$57,176 93,883 
Basic earnings per share:  
Class A$16.17 $26.55 
Class B$8.08 $13.28 
Diluted earnings per share:  
Class A$16.17 $26.55 
Class B$8.08 $13.28 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)

 20202019
Net earnings$10,825 19,989 
Other comprehensive income (loss), net of effects of deferred costs and taxes:  
Unrealized gains (losses) on securities:  
Net unrealized holding gains (losses) arising during period24,357 15,586 
Net unrealized liquidity gains (losses)1 1 
Reclassification adjustment for net amounts included in net earnings(702)1,380 
Net unrealized gains (losses) on securities23,656 16,967 
Foreign currency translation adjustments85 52 
Benefit plans:  
Amortization of net prior service cost and net gain (loss)(2,066)(504)
Other comprehensive income (loss)21,675 16,515 
Comprehensive income (loss)$32,500 36,504 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)

 20202019
Net earnings$57,176 93,883 
Other comprehensive income, net of effects of deferred costs and taxes:  
Unrealized gains (losses) on securities:  
Net unrealized holding gains (losses) arising during period53,569 93,730 
Net unrealized liquidity gains (losses)2 3 
Reclassification adjustment for net amounts included in net earnings(2,670)4,252 
Net unrealized gains (losses) on securities50,901 97,985 
Foreign currency translation adjustments(46)519 
Benefit plans:  
Amortization of net prior service cost and net gain (loss)(6,199)(1,512)
Other comprehensive income (loss)44,656 96,992 
Comprehensive income (loss)$101,832 190,875 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).






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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)

 20202019
Common stock:  
Balance at beginning of period$36 36 
Shares exercised under stock option plan— — 
Balance at end of period36 36 
Additional paid-in capital:  
Balance at beginning of period41,716 41,716 
Shares exercised under stock option plan— — 
Balance at end of period41,716 41,716 
Accumulated other comprehensive income (loss):  
Unrealized gains (losses) on non-impaired securities:  
Balance at beginning of period97,909 50,730 
Change in unrealized gains (losses) during period, net of tax23,655 16,966 
Balance at end of period121,564 67,696 
Unrealized losses on impaired held to maturity securities:  
Balance at beginning of period(3)(5)
Cumulative effect of change in accounting principle— — 
Amortization1 2 
Other-than-temporary impairments, non-credit, net of tax— — 
Additional credit loss on previously impaired securities— — 
Change in shadow deferred policy acquisition costs— (1)
Balance at end of period(2)(4)
Unrealized losses on impaired available for sale securities:  
Balance at beginning of period(2)(2)
Other-than-temporary impairments, non-credit, net of tax— — 
Change in shadow deferred policy acquisition costs— — 
Recoveries, net of tax— — 
Balance at end of period(2)(2)
Continued on Next Page
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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Three Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
20202019
Foreign currency translation adjustments:  
Balance at beginning of period4,970 5,044 
Change in translation adjustments during period85 52 
Balance at end of period5,055 5,096 
Benefit plan liability adjustment:  
Balance at beginning of period(19,785)(12,305)
Amortization of net prior service cost and net loss, net of tax(2,066)(504)
Balance at end of period(21,851)(12,809)
Accumulated other comprehensive income (loss) at end of period104,764 59,977 
Retained earnings:  
Balance at beginning of period2,057,889 1,969,934 
Cumulative effect of change in accounting principle, net of tax— — 
Net earnings10,825 19,989 
Balance at end of period 2,068,714 1,989,923 
Total stockholders' equity$2,215,230 2,091,652 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).





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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)

 20202019
Common stock:  
Balance at beginning of period$36 36 
Shares exercised under stock option plan— — 
Balance at end of period36 36 
Additional paid-in capital:  
Balance at beginning of period41,716 41,716 
Shares exercised under stock option plan— — 
Balance at end of period
41,716 41,716 
Accumulated other comprehensive income:  
Unrealized gains (losses) on non-impaired securities:  
Balance at beginning of period70,665 (30,286)
Change in unrealized gains (losses) during period, net of tax50,899 97,982 
Cumulative effect of change in accounting principle, net of tax — — 
Balance at end of period121,564 67,696 
Unrealized losses on impaired held to maturity securities:  
Balance at beginning of period(4)(7)
Amortization4 6 
Other-than-temporary impairments, non-credit, net of tax— — 
Additional credit loss on previously impaired securities— — 
Change in shadow deferred policy acquisition costs(2)(3)
Balance at end of period(2)(4)
Unrealized losses on impaired available for sale securities:  
Balance at beginning of period(2)(2)
Other-than-temporary impairments, non-credit, net of tax— — 
Change in shadow deferred policy acquisition costs— — 
Recoveries, net of tax— — 
Balance at end of period(2)(2)
Continued on Next Page
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
20202019
Foreign currency translation adjustments:  
Balance at beginning of period5,101 4,577 
Change in translation adjustments during period(46)519 
Balance at end of period5,055 5,096 
Benefit plan liability adjustment:  
Balance at beginning of period(15,652)(11,297)
Amortization of net prior service cost and net loss, net of tax(6,199)(1,512)
Balance at end of period(21,851)(12,809)
Accumulated other comprehensive income (loss) at end of period104,764 59,977 
Retained earnings:  
Balance at beginning of period2,014,570 1,896,040 
Cumulative effect of change in accounting principle, net of tax (Note 2)(3,032)— 
Net earnings57,176 93,883 
Balance at end of period (Note 1)2,068,714 1,989,923 
Total stockholders' equity$2,215,230 2,091,652 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).


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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
 20202019
Cash flows from operating activities:  
Net earnings$57,176 93,883 
Adjustments to reconcile net earnings to net cash from operating activities:  
Universal life and annuity contract interest119,625 200,500 
Surrender charges and other policy revenues(21,219)(25,608)
Realized (gains) losses on investments(12,660)(3,702)
Accretion/amortization of discounts and premiums, investments1,580 1,798 
Depreciation and amortization8,892 8,501 
Increase (decrease) in estimated credit losses on investments2,930 — 
(Increase) decrease in value of equity securities3,107 (2,639)
(Increase) decrease in value of derivatives34,866 (63,127)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired75,604 53,837 
(Increase) decrease in accrued investment income(32)3,837 
(Increase) decrease in other assets8,746 1,831 
Increase (decrease) in liabilities for future policy benefits(5,288)6,960 
Increase (decrease) in other policyholder liabilities8,785 (19,847)
Increase (decrease) in Federal income tax liability(4,550)6,486 
Increase (decrease) in deferred Federal income tax5,224 (17,502)
Increase (decrease) in other liabilities(3,391)(1,045)
Net cash provided by operating activities279,395 244,163 
Cash flows from investing activities:  
Proceeds from sales of:  
Debt securities available for sale— 80,528 
Other investments5,786 29,960 
Proceeds from maturities, redemptions, and prepayments of:  
Debt securities held to maturity619,984 486,344 
Debt securities available for sale240,398 189,944 
  Other investments9,753 5,911 
Derivatives, index options84,778 28,457 
Purchases of:  
Debt securities held to maturity(318,138)(161,617)
Debt securities available for sale(181,162)(127,811)
Equity securities(1,019)(977)
Derivatives, index options(51,318)(57,443)
Other investments(23,268)(7,314)
Property, equipment, and other productive assets(7,223)(4,364)
Payment to acquire businesses, net of cash acquired— (189,121)
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Continued on Next Page

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
20202019
Principal payments on mortgage loans6,022 22,384 
Cost of mortgage loans acquired(41,530)(47,744)
Decrease (increase) in policy loans4,294 2,580 
Net cash provided by (used in) investing activities347,357 249,717 
Cash flows from financing activities:  
Deposits to account balances for universal life and annuity contracts348,583 292,551 
Return of account balances on universal life and annuity contracts(721,496)(747,260)
Borrowings under line of credit agreement— 75,000 
Principal payments on line of credit borrowings— (75,000)
Principal payments under finance lease obligation(280)(295)
Net cash provided by (used in) financing activities(373,193)(455,004)
Effect of foreign exchange(59)657 
Net increase (decrease) in cash, cash equivalents, and restricted cash253,500 39,533 
Cash, cash equivalents, and restricted cash at beginning of period253,525 131,976 
Cash, cash equivalents and restricted cash at end of period$507,025 171,509 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  
Cash paid (received) during the period for:  
Interest$56 252 
Income taxes$13,229 34,758 
Noncash operating activities:
Net deferral and amortization of sales inducements$(12,755)(13,501)
Noncash investing and financing activities:
Contingent consideration to acquire businesses$— 3,700 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).


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NATIONAL WESTERN LIFE GROUP, INC.
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 Group, Inc. ("NWLGI") and its wholly owned subsidiaries (“Company”) as of September 30, 2020, and the results of its operations and its cash flows for the three and nine months ended September 30, 2020 and September 30, 2019. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2020 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, 2019 which is accessible free of charge through the Company's internet site at www.nwlgi.com or the Securities and Exchange Commission internet site at www.sec.gov. The Condensed Consolidated Balance Sheet at December 31, 2019 has been derived from the audited consolidated financial statements as of that date.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NWLGI and its wholly owned subsidiaries: National Western Life Insurance Company ("NWLIC" or "National Western"), Regent Care San Marcos Holdings, LLC, NWL Services, Inc., and N.I.S. Financial Services, Inc. ("NIS"). National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., Braker P III, LLC, and Ozark National Life Insurance Company ("Ozark National"). The results of operations for Ozark National and NIS include their respective business activity subsequent to their acquisition effective January 31, 2019 and all references herein to results for the nine months ended September 30, 2019 for Ozark National and NIS refer to their eight month activity February 1, 2019 through September 30, 2019. All significant intercorporate transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying Condensed Consolidated Financial Statements include: (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs ("DPAC"), deferred sales inducements ("DSI") and the value of business acquired ("VOBA"), (4) valuation allowances for deferred tax assets, (5) goodwill, (6) allowances for credit losses and other-than-temporary impairment losses on debt securities, (7) commitments and contingencies, and (8) credit loss and valuation allowances for mortgage loans and real estate. During the first quarter of 2019, the Company incorporated accounting estimates for business combinations, value of business acquired, and fair value measurement as a result of its acquisition of Ozark National and NIS.

Revision of Prior Period Consolidated Financial Statements

During the first quarter of 2020, management identified an understatement of an excess benefit reserve on a specific block of policies that dated back to the first quarter of 2004 with the adoption of the Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). Management concluded that this error was not material to previously issued consolidated financial statements and would be corrected through a revision to the comparative consolidated balance sheet presented for the year ended December 31, 2019. The impact of this revision as of December 31, 2019 was an increase to the future policy benefits liability of $15.0 million, a decrease to deferred federal income tax liability of $3.2 million, and a decrease to retained earnings of $11.8 million.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and nine months ended September 30, 2020 and September 30, 2019.

Affected Line Item in the
Statements of Earnings		Amount Reclassified From Accumulated Other Comprehensive Income
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Other net investment gains (losses)$889 198 3,380 2,465 
Net OTTI losses recognized in earnings— (1,945)— (7,847)
Earnings before Federal income taxes889 (1,747)3,380 (5,382)
Federal income taxes187 (367)710 (1,130)
Net earnings$702 (1,380)2,670 (4,252)


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

Recent accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-12 Financial Services-Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts. This update is aimed at improving the Codification as it relates to long-duration contracts which will improve the timeliness of recognizing changes in the liability for future policy benefits, simplify accounting for certain market-based options, simplify the amortization of deferred acquisition costs, and improve the effectiveness of required disclosures. Amendments include the following:

A. Require insurance entity to (1) review and update assumptions used to measure cash flows at least annually (with changes recognized in net income) and (2) update discount rate assumption at each reporting date (with changes recognized in other comprehensive income).

B. Require insurance entity to measure all market risk benefits associated with deposit (i.e. account balance) contracts at fair value, with change in fair value attributable to change in instrument-specific credit risk recognized in other comprehensive income.

C. Simplify amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins and require those balances be amortized on constant level basis over expected term of related contract. Deferred acquisition costs are required to be written off for unexpected contract terminations but are not subject to impairment test.

D. Require insurance entity to add disclosures of disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. Insurance entity must also disclose information about significant inputs, judgments, assumptions, and methods used in measurement, including changes in those inputs, judgments, and assumptions, and the effect of those changes on measurement.

These updates are required to be applied retrospectively to the earliest period presented in the financial statements for fiscal periods beginning after December 15, 2022, with early adoption permitted. The Company has performed a preliminary gap analysis and created a roadmap for implementation of this standard by the effective date and is evaluating the impact of the new guidance on its Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12 Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which simplifies various aspects of the income tax accounting guidance and will be applied using different approaches depending on the specific amendment. The amendments will be effective for fiscal periods beginning after December 15, 2020. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the Consolidated Financial Statements and related disclosures upon adoption.

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

In June 2016, the FASB released ASU 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model (“CECL”). The objective of the CECL model is for the reporting entity to recognize its estimate of current expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this Update add clarification and correction to ASU 2016-13 around accrued interest, transfers between classifications or categories for loans and debt securities, consideration of recoveries in estimating allowances, reinsurance recoveries, consideration of prepayments and estimated costs to sell when foreclosure is probable. In November, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments in this Update add clarification and correction to ASU 2016-13 around expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance for these pronouncements was effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained earnings. Effective January 1, 2020, the Company adopted the expected loss recognition model related to mortgage loans, debt securities held to maturity and reinsurance recoverable. The change in accounting, net of tax, of $3.0 million was recorded as a charge to retained earnings in the first quarter of 2020 reflecting initial allowance for estimated credit losses balances of $1.2 million on mortgage loans and $3.3 million on debt securities held to maturity. The estimated credit losses for the reinsurance recoverable were immaterial to the financial statements, but are monitored on a quarterly basis for any changes. Refer to Note (9) Investments for more information. Certain disclosures required by ASU 2016-13 are not included in the Consolidated Financial Statements as the impact of this standard was not material.

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.


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

Robert L. Moody, Sr., through the Robert L. Moody Revocable Trust, controls 99.0% of the total outstanding shares of the Company's Class B common stock as of September 30, 2020. Holders of the Company's Class A common stock elect one-third of the Board of Directors of the Company, and holders of the Class B common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock are to be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. In the event of liquidation of the Company, the Class A stockholders will receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B stock based upon the number of shares held.

National Western is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on the lesser of statutory earnings from operations, excluding capital gains, or 10% of statutory surplus of National Western as of the previous year-end. Under these guidelines the maximum dividend payment which may be made without prior approval in 2020 is $152.8 million. As the sole owner of NWLIC, all dividends declared by National Western are payable entirely to NWLGI and are eliminated in consolidation.

Ozark National is similarly restricted under the state insurance laws of Missouri as to dividend amounts which may be paid to stockholders without prior approval to the greater of 10.0% of the statutory surplus of the company from the preceding year-end or the company's net gain from operations, excluding capital gains, from the prior calendar year. Based upon this restriction, the maximum dividend payment which may be made in 2020 without prior approval is $17.2 million.

As part of the Stock Purchase Agreement dated October 3, 2018, by and between NWLIC and Ozark National's previous owner, the Missouri Department of Commerce and Insurance granted approval for an extraordinary dividend of $102.7 million to be paid to the prior owner concurrent with the closing of the transaction effective January 31, 2019. All dividends declared by Ozark National thereafter are payable entirely to NWLIC as the sole owner and are eliminated in consolidation.
National Western did not declare or pay cash dividends to NWLGI in the nine months ended September 30, 2020. In the first quarter of 2019, National Western declared and paid a $32.0 million dividend to NWLGI, the proceeds of which were used as part of the cash purchase of NIS. In the third quarter of 2019, National Western declared a $4.0 million dividend to NWLGI which was subsequently paid on October 17, 2019.

NWLGI did not declare or pay cash dividends on its common shares during the nine months ended September 30, 2020 and 2019.


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

Basic earnings per share of common stock are computed by dividing net earnings available to each class of common stockholders on an as if distributed basis by the weighted-average number of common shares outstanding for the period. Diluted earnings per share, by definition, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, that then shared in the distributed earnings of each class of common stock. U.S. GAAP requires a two-class presentation for the Company's two classes of common stock. The Company currently has no share-based compensation awards outstanding that could be redeemed for shares of common stock.

Net earnings for the periods shown below is allocated between Class A shares and Class B shares based upon (1) the proportionate number of shares issued and outstanding as of the end of the period, and (2) the per share dividend rights of the two classes under the Company's Restated Certificate of Incorporation (the Class B dividend per share is equal to one-half the Class A dividend per share).

 Three Months Ended September 30,
 20202019
 Class AClass BClass AClass B
 (In thousands except per share amounts)
Numerator for Basic and Diluted Earnings Per Share:    
Net earnings$10,825  19,989  
Dividends - Class A shares—  —  
Dividends - Class B shares—  —  
Undistributed earnings$10,825  19,989  
Allocation of net earnings:    
Dividends$— — — — 
Allocation of undistributed earnings10,519 306 19,424 565 
Net earnings$10,519 306 19,424 565 
Denominator:    
Basic earnings per share - weighted-average shares3,436 200 3,436 200 
Effect of dilutive stock options— — — — 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions3,436 200 3,436 200 
Basic earnings per share$3.06 1.53 5.65 2.83 
Diluted earnings per share$3.06 1.53 5.65 2.83 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Nine Months Ended September 30,
 20202019
 Class AClass BClass AClass B
(In thousands except per share amounts)
Numerator for Basic and Diluted Earnings Per Share:    
Net earnings$57,176  93,883  
Dividends - Class A shares—  —  
Dividends - Class B shares—  —  
Undistributed earnings$57,176  93,883  
Allocation of net earnings:    
Dividends$— — — — 
Allocation of undistributed earnings55,560 1,616 91,228 2,655 
Net earnings$55,560 1,616 91,228 2,655 
Denominator:    
Basic earnings per share - weighted-average shares3,436 200 3,436 200 
Effect of dilutive stock options— — — — 
Diluted earnings per share - adjusted weighted-average shares for assumed conversions3,436 200 3,436 200 
Basic Earnings Per Share$16.17 8.08 26.55 13.28 
Diluted Earnings Per Share$16.17 8.08 26.55 13.28 


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) PENSION AND OTHER POSTRETIREMENT PLANS

(A)Defined Benefit Pension Plans

National Western sponsors a qualified defined benefit pension plan covering employees enrolled prior to 2008. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, National Western's Board of Directors approved an amendment to freeze the pension plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. As participants are no longer earning a credit for service, future qualified defined benefit plan expense is projected to be minimal. Fair values of plan assets and liabilities are measured as of the prior December 31 for each year. The following table summarizes the components of net periodic benefit cost.

Three Months EndedNine Months Ended
 September 30,September 30,
 2020201920202019
 (In thousands)
Service cost$27 24 81 72 
Interest cost168 210 505 630 
Expected return on plan assets(315)(271)(946)(815)
Amortization of prior service cost— — — — 
Amortization of net loss145 165 435 495 
Net periodic benefit cost$25 128 75 382 

The service cost shown above for each period represents plan expenses expected to be paid out of plan assets. Under the clarified rules of the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The Company's minimum required contribution for the 2020 plan year is $0.0 million. There were no planned contributions remaining for the 2019 plan year as of September 30, 2020. As of September 30, 2020, the Company has made $0.2 million in contributions to the plan for the 2020 plan year.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
National Western also sponsors three non-qualified defined benefit pension plans. The first plan covers certain senior officers and provides benefits based on the participants' years of service and compensation. The primary pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Group, Inc. ("American National"), a related party. American National has guaranteed the payment of pension obligations under the plan. However, the Company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with National Western beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the then Chairman of the Company. As previously mentioned, these additional obligations are a liability to the Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the then Chairman and the then President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, National Western established a second non-qualified defined benefit plan for the benefit of the then 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, National Western established a third non-qualified defined benefit plan for the benefit of the then 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.

The following table summarizes the components of net periodic benefit costs for the non-qualified defined benefit plans.

 Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
 (In thousands)
Service cost$302 126 907 377 
Interest cost337 256 1,012 768 
Amortization of prior service cost14 14 44 44 
Amortization of net loss1,446 348 4,336 1,044 
Net periodic benefit cost$2,099 744 6,299 2,233 

As the plans are not funded, there is no expected return on plan assets shown in the net periodic benefit cost table above. The Company expects to contribute $2.0 million to these plans in 2020. As of September 30, 2020, the Company has contributed $1.6 million to the plans.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).

Ozark National and NIS have no defined benefit plans.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(B)Postretirement Employment Plans Other Than Pension

National Western sponsors two healthcare plans that were amended in 2004 to provide postretirement benefits to certain fully-vested individuals. The plans are unfunded. The following table summarizes the components of net periodic benefit costs.

 Three Months EndedNine Months Ended
September 30,September 30,
 2020201920202019
 (In thousands)
Interest cost$41 49 124 148 
Amortization of prior service cost— 13 — 39 
Amortization of net loss40 61 119 183 
Net periodic benefit cost$81 123 243 370 

As the plans are not funded, there is no expected return on plan assets shown in the net periodic benefit cost table above. The Company expects to contribute minimal amounts to the plans in 2020. Ozark National and NIS do not offer postemployment benefits.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(6)SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, annuities, and acquired businesses. These segments are organized based on product types, geographic marketing areas, and business groupings. Ozark National and NIS have been combined into the segment "Acquired Businesses" given its inter-related marketing and sales approach which consists of a coordinated sale of a non-participating whole life insurance product (Ozark National) and a mutual fund investment product (NIS). A fifth category "All Others" primarily includes investments and earnings of non-operating subsidiaries as well as other remaining investments and assets not otherwise supporting specific segment operations.

A summary of segment information as of September 30, 2020 and December 31, 2019 for the Condensed Consolidated Balance Sheet items and for the three and nine months ended September 30, 2020 and September 30, 2019 for the Condensed Consolidated Statements of Earnings (Loss) is provided below.

Condensed Consolidated Balance Sheet Items:
September 30, 2020
 Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Deferred policy acquisition costs, sales inducements, and value of business acquired$127,124 183,318 402,072 139,365 — 851,879 
Total segment assets1,467,577 1,049,371 7,797,137 1,030,162 367,605 11,711,852 
Future policy benefits1,275,476 798,665 7,068,118 719,917 — 9,862,176 
Other policyholder liabilities17,190 12,214 91,818 15,170 — 136,392 

December 31, 2019
 Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Deferred policy acquisition costs, sales inducements, and value of business acquired$127,557 209,858 486,553 142,434 — 966,402 
Total segment assets1,399,818 1,153,105 8,198,730 978,243 362,900 12,092,796 
Future policy benefits (1)1,198,103 870,461 7,366,894 706,513 — 10,141,971 
Other policyholder liabilities18,016 14,903 80,002 14,686 — 127,607 

(1) Revised to correct for an adjustment related to an understatement of reserve liabilities of $15.0 million. Refer to Note 1.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidated Statements of Earnings (Loss):

Three Months Ended September 30, 2020
 Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Premiums and contract revenues$17,734 21,551 4,187 19,524 — 62,996 
Net investment income (loss)21,201 10,354 87,889 6,434 3,801 129,679 
Other revenues10 6 84 2,628 1,249 3,977 
Total revenues38,945 31,911 92,160 28,586 5,050 196,652 
Life and other policy benefits3,785 2,278 3,383 17,494 — 26,940 
Amortization of deferred policy acquisition costs and value of business acquired10,540 6,496 31,794 1,970 — 50,800 
Universal life and annuity contract interest20,352 (14,023)79,550 — — 85,879 
Other operating expenses5,185 5,434 9,205 4,498 1,432 25,754 
Federal income taxes (benefit)(161)5,169 (5,294)963 556 1,233 
Total expenses39,701 5,354 118,638 24,925 1,988 190,606 
Segment earnings (loss)$(756)26,557 (26,478)3,661 3,062 6,046 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 2020
Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Premiums and contract revenues$40,971 67,479 13,536 59,448 — 181,434 
Net investment income23,293 12,507 196,187 19,284 10,623 261,894 
Other revenues40 54 80 7,369 7,674 15,217 
Total revenues64,304 80,040 209,803 86,101 18,297 458,545 
Life and other policy benefits13,831 9,293 20,452 50,429 — 94,005 
Amortization of deferred policy acquisition costs and value of business acquired16,322 19,392 70,159 6,064 — 111,937 
Universal life and annuity contract interest17,831 (15,368)117,162 — — 119,625 
Other operating expenses15,123 13,047 28,787 13,361 4,412 74,730 
Federal income taxes (benefit)199 8,907 (4,440)4,103 2,304 11,073 
Total expenses63,306 35,271 232,120 73,957 6,716 411,370 
Segment earnings (loss)$998 44,769 (22,317)12,144 11,581 47,175 

Three Months Ended September 30, 2019
 Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Premiums and contract revenues$11,387 25,065 5,336 20,151 — 61,939 
Net investment income12,885 6,872 78,000 6,300 4,399 108,456 
Other revenues49 25 8 2,318 873 3,273 
Total revenues24,321 31,962 83,344 28,769 5,272 173,668 
Life and other policy benefits6,099 5,074 12,550 16,195 — 39,918 
Amortization of deferred acquisition costs and value of business acquired2,181 (3,047)21,688 2,176 — 22,998 
Universal life and annuity contract interest11,267 14,637 33,541 — — 59,445 
Other operating expenses5,297 5,493 8,596 4,772 1,655 25,813 
Federal income taxes (benefit)(107)1,970 1,388 1,133 725 5,109 
Total expenses24,737 24,127 77,763 24,276 2,380 153,283 
Segment earnings (loss)$(416)7,835 5,581 4,493 2,892 20,385 
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 2019
Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Premiums and contract revenues$32,897 74,905 16,061 54,332 — 178,195 
Net investment income51,379 30,165 270,727 16,283 19,657 388,211 
Other revenues113 79 80 6,049 7,331 13,652 
Total revenues84,389 105,149 286,868 76,664 26,988 580,058 
Life and other policy benefits13,850 10,195 33,856 43,863 — 101,764 
Amortization of deferred acquisition costs and value of business acquired8,898 11,195 60,150 6,330 — 86,573 
Universal life and annuity contract interest45,693 33,967 120,840 — — 200,500 
Other operating expenses14,437 14,278 25,478 12,348 10,655 77,196 
Federal income taxes (benefit)306 7,192 9,426 2,836 3,307 23,067 
Total expenses83,184 76,827 249,750 65,377 13,962 489,100 
Segment earnings (loss)$1,205 28,322 37,118 11,287 13,026 90,958 

Reconciliations of segment information to the Company's Condensed Consolidated Financial Statements are provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Premiums and Other Revenues:
    
Premiums and contract revenues$62,996 61,939 181,434 178,195 
Net investment income (loss)129,679 108,456 261,894 388,211 
Other revenues3,977 3,273 15,217 13,652 
Realized gains (losses) on investments6,050 (502)12,660 3,702 
Total condensed consolidated premiums and other revenues$202,702 173,166 471,205 583,760 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Federal Income Taxes:
    
Total segment Federal income taxes$1,233 5,109 11,073 23,067 
Taxes on realized gains (losses) on investments1,271 (106)2,659 777 
Total condensed consolidated Federal income taxes$2,504 5,003 13,732 23,844 

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Net Earnings:
    
Total segment earnings$6,046 20,385 47,175 90,958 
Realized gains (losses) on investments, net of taxes4,779 (396)10,001 2,925 
Total condensed consolidated net earnings$10,825 19,989 57,176 93,883 

 September 30,December 31,
 20202019
 (In thousands)
Assets:
  
Total segment assets$11,711,852 12,092,796 
Other unallocated assets709,134 460,651 
Total condensed consolidated assets$12,420,986 12,553,447 


(7) SHARE-BASED PAYMENTS

Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”) which provided 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 ("SARs"), in tandem with stock options or freestanding; (3) restricted stock or restricted stock units; and, (4) performance awards. The number of shares of Class A, $1.00 par value, common stock which were allowed to be issued under the 2008 Plan, or as to which SARs or other awards were allowed to be granted, could not exceed 300,000. This plan was assumed by NWLGI from National Western pursuant to the terms of the holding company reorganization in 2015. On June 15, 2016, stockholders of NWLGI approved an amended and restated 2008 Plan ("Incentive Plan"), which extended the term of the 2008 Plan for ten years from the date of stockholder approval. The Incentive Plan includes additional provisions, most notably regarding the definition of performance objectives which could be used in the issuance of the fourth type of award noted above (performance awards).

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All of the employees of the Company and its subsidiaries are eligible to participate in the current Incentive Plan. 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. At the end of 2018, all stock options granted under the 2008 Plan had been exercised, forfeited, or expired. SARs granted prior to 2016 vest 20% annually following three years of service following the grant date. Employee SARs granted 2016 and thereafter vest 33.3% annually following one year of service from the date of the grant. Directors' SARs grants vest 20% annually following one year of service from the date of grant.

Effective during August 2008, the Company adopted and implemented a limited stock buy-back program with respect to the 2008 Plan which provided stock option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders could 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 2008 Plan. This plan was assumed as well by NWLGI from National Western pursuant to the terms of the holding company reorganization. There are currently no stock options issued and outstanding.

The Incentive Plan allows for certain other share or unit awards which are solely paid out in cash based on the value of the Company's shares, or changes therein, as well as the financial performance of the Company under pre-determined target performance metrics. Certain awards, such as restricted stock units ("RSUs") provide solely for cash settlement based upon the market price of the Company's Class A common shares, often referred to as "phantom stock-based awards" in equity compensation plans. Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liability awards is remeasured at the end of each reporting period based on the change in fair value of a share. The liability and corresponding expense are adjusted accordingly until the award is settled. For employees, the vesting period for RSUs is 100% at the end of 3 years from the grant date. RSUs granted prior to 2019 are payable in cash at the vesting date equal to the closing price of the Company's Class A common share on the three years anniversary date. RSUs granted in 2019 are payable in cash at the 3 years vesting date equal to the 20-day moving average closing price of the Company’s Class A common share at that time.

Other awards may involve performance share units ("PSUs") which are units granted at a specified dollar amount per unit, typically linked to the Company's Class A common share price, that are subsequently multiplied by an attained performance factor to derive the number of PSUs to be paid as cash compensation at the vesting date. PSUs also vest three years from the date of grant. For PSUs, the performance period begins the first day of the calendar year for which the PSUs are granted and runs three calendar years. At that time, the three-year performance outcome will be measured against the pre-defined target amounts to determine the number of PSUs earned as compensation. PSUs granted prior to 2019 are paid at the closing price of the Company's Class A common share on the vesting date. PSUs granted in 2019 are payable at the 20-day moving average closing price of the Company’s Class A common share at the vesting date.

PSU awards covering the three year measurement period ended December 31, 2018 were paid out in the first quarter of 2019. The performance factor during the measurement period used to determine compensation payouts was 93.86% of the pre-defined metric target.

PSU awards covering the three year measurement period ended December 31, 2019 were paid out in the first quarter of 2020. The performance factor during the measurement period used to determine compensation payouts was 101.19% of the pre-defined metric target.

Directors of the Company are eligible to receive RSUs under the Incentive Plan. Unlike RSUs granted to officers, the RSUs granted to directors vest one year from the date of grant. RSUs granted prior to 2019 are payable in cash at the vesting date equal to the closing price of the Company's Class A common share at that time. RSUs granted in 2019 are payable in cash at the vesting date equal to the 20-day moving average closing price of the Company’s Class A common share at that time.

No awards were granted to officers and directors during the nine months ended September 30, 2020 and 2019.
The Company uses the current fair value method to measure compensation costs for awards granted under the share-based plans.
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2020 and December 31, 2019, the liability balance was $5.0 million and $11.2 million, respectively. A summary of awards by type and related activity is detailed below.

  Options Outstanding
Shares
Available
For Grant		SharesWeighted-
Average
Exercise
Price
Stock Options:   
Balance at January 1, 2020291,000 — $— 
Exercised— — $— 
Forfeited— — $— 
Expired— — $— 
Stock options granted— — $— 
Balance at September 30, 2020291,000 — $— 

 Liability Awards
SARRSUPSU
Other Share/Unit Awards:
Balance at January 1, 2020107,517 14,352 19,108 
Exercised(1,372)(2,357)(4,150)
Forfeited(1,797)(259)— 
Granted— — — 
Balance at September 30, 2020104,348 11,736 14,958 

SARs, RSUs, and PSUs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants upon their termination from the Company in accordance with the expiration provisions of the awards.

The total intrinsic value of share-based compensation exercised was $1.9 million and $2.5 million for the nine months ended September 30, 2020 and 2019, respectively. The total share-based compensation paid was $1.9 million and $2.5 million for the nine months ended September 30, 2020 and 2019, respectively. The total fair value of SARs, RSUs, and PSUs vested during the nine months ended September 30, 2020 and 2019 was $1.8 million and $3.0 million, respectively. No cash amounts were received from the exercise of stock options under the Plans during the periods reported.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes information about SARs outstanding at September 30, 2020. There were no options outstanding as of September 30, 2020.

 SARs Outstanding
Number
Outstanding		Weighted-
Average
Remaining
Contractual Life		Number
Exercisable
Exercise prices:   
$132.5619,118 1.2 years19,118 
$210.2223,550 3.2 years19,600 
$216.4811,149 5.4 years11,149 
$311.169,797 6.2 years9,797 
$310.55203 6.6 years203 
$334.349,264 7.0 years6,254 
$303.7711,462 8.0 years3,967 
$252.9119,805 9.1 years249 
Totals104,348  70,337 
   
Aggregate intrinsic value (in thousands)$960  $960 

The aggregate intrinsic value in the table above is based on the closing Class A stock price of $182.77 per share on September 30, 2020.

In estimating the fair value of the SARs outstanding at September 30, 2020 and December 31, 2019, the Company employed the Black-Scholes option pricing model with assumptions detailed below.

September 30,
2020		December 31,
2019
Expected term
1.2 to 9.1 years
1.9 to 10 years
Expected volatility weighted-average32.85 %22.19 %
Expected dividend yield0.20 %0.12 %
Risk-free rate weighted-average0.17 %1.61 %

The Company reviewed the contractual term relative to the SARs as well as perceived future behavior patterns of exercise. Volatility is based on the Company’s historical volatility over the expected term of the SARs by expected exercise date.

The pre-tax compensation cost/(benefit) recognized in the financial statements related to these plans was $(0.5) million and $(4.4) million for the three and nine months ended September 30, 2020 and $1.5 million and $0.1 million for the three and nine months ended September 30, 2019, respectively. The related tax expense/(benefit) recognized was $0.1 million and $0.9 million for the three and nine months ended September 30, 2020 and $(0.3) million and $0.0 million for the three and nine months ended September 30, 2019.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2020, the total pre-tax compensation expense related to non-vested share-based awards not yet recognized was $2.6 million. This amount is expected to be recognized over a weighted-average period of 1.3 years. The Company recognizes compensation cost over the graded vesting periods.


(8) COMMITMENTS AND CONTINGENCIES

(A)  Legal Proceedings

In the normal course of business, the Company is involved or may become involved in various legal actions in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. In recent years, carriers offering life insurance and annuity products have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices, and similar claims. As previously disclosed, the Company has been a defendant in prior years in such class action lawsuits. Given the uncertainty involved in these types of actions, the ability to make a reliable evaluation of the likelihood of an unfavorable outcome or an estimate of the amount of or range of potential loss is endemic to the particular circumstances and evolving developments of each individual matter on its own merits.

On September 28, 2017, a purported shareholder derivative lawsuit was filed in the 122nd District Court of Galveston County, State of Texas entitled Robert L. Moody, Jr. derivatively on behalf of National Western Life Insurance Company and National Western Life Group, Inc. v. Ross Rankin Moody, et al., naming certain current and former directors and current officers as defendants. The complaint challenged the directors’ oversight of insurance sales to non-U.S. residents and alleged that the defendants breached their fiduciary duties in the conduct of their duties as board members by failing to act (i) on an informed basis and (ii) in good faith or with the honest belief that their actions were in the best interests of the Company. The complaint sought an undetermined amount of damages, attorneys’ fees and costs, and equitable relief, including the removal of the Company’s Chairman and Chief Executive Officer and other board members and/or officers of the Company. The Company believes that the claims in the complaint were baseless and without merit, will continue to vigorously defend this lawsuit, and was awarded reimbursement of legal costs and expenses from plaintiff as detailed below. The Company believes, based on information currently available, that the final outcome of this lawsuit will not have a material adverse effect on the Company’s business, results of operations, or consolidated financial position. The companies and directors filed their respective Pleas to the Jurisdiction ("Pleas") contesting the plaintiff's standing to even pursue this action, along with their Answers, on October 27, 2017. On December 14, 2017, plaintiff filed a Response to the Pleas and on December 21, 2017, the Court heard oral argument on the Pleas. Plaintiff then filed a First Amended Petition on January 11, 2018. The companies and directors filed a Supplement to the Pleas on January 30, 2018, to which plaintiff responded on February 1, 2018, and the companies and directors replied on February 9, 2018. On May 3, 2018, the Court issued a memorandum to all attorneys of record stating that the Court would grant the defendants' Pleas and asked the attorney for defendants to prepare and submit proposed orders/judgments granting the requested relief for consideration by the Court. The defendants filed such proposed order granting the Pleas on May 7, 2018. On May 16, 2018 the Court issued an Order granting the Pleas and dismissing Robert L. Moody, Jr.’s claims with prejudice, and plaintiff then filed a Motion to Transfer Venue (“MTTV”). Defendants filed an Application for Fees, seeking to recover defendants’ legal costs and expenses from plaintiff, and a Response to the MTTV on June 8, 2018. In response plaintiff filed a Motion to Vacate, a Response to the Application for Fees, and his own Request for Attorney’s Fees on July 5, 2018. Defendants filed a Response to the Motion to Vacate and to plaintiff’s Request for Attorney’s Fees on July 11, 2018, and the Court heard oral arguments on July 16, 2018. Plaintiff filed supplemental briefing in support of his July 5, 2018 filings on July 25, 2018, and defendants filed their response to plaintiff's supplemental briefing on July 27, 2018. On August 8, 2018 the Court issued an Order denying plaintiff's Motion to Vacate. Pursuant to the Court’s instructions, on October 5, 2018, defendants filed an Order Granting Application for Expenses. Defendants then filed a Motion for Entry of Final Judgment and a Request for Submission Date on Motion for Entry of Final Judgment on October 11, 2018, which the Court set as October 30, 2018. Plaintiff filed his Objection to Proposed Final Judgment and Objection to Proposed Order on Attorneys’ Fees on October 25, 2018, to which defendants filed a response on October 30, 2018. On November 11, 2018, the Court issued its Final Judgment: ordering Plaintiff to pay the companies $1,314,054 for reasonable and necessary fees and expenses; denying Plaintiff’s Motion to Transfer Venue, and; dismissing Plaintiff’s counterclaim. Plaintiff has appealed the Court’s Final Judgment and that appeal is pending before the First District Court of Appeals in Houston, Texas.
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April of 2019, National Western defended a two-week jury trial in which it was alleged that it committed actionable Financial Elder Abuse in its issuance of a $100,000 equity indexed annuity to the Plaintiff in the case of Williams v Pantaleoni et al, Case No. 17CV03462, Butte County California Superior Court. The Court entered an Amended Judgment on the Jury Verdict on July 27, 2019 against National Western in the amount of $14,949 for economic damages and $2.9 million in non-economic and punitive damages. National Western vigorously disputes the verdicts and the amounts awarded, and in furtherance of such, filed a Motion for Judgment Notwithstanding Jury Verdict and a Motion for New Trial, both of which were rejected by the Court. On September 9, 2019, NWLIC filed its Notice of Appeal. On November 11, 2019, the judge awarded the Plaintiff attorney’s fees in the amount of $1.3 million. Both the Plaintiff and NWLIC have appealed this ruling.

Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from such other potential, pending, or threatened legal actions will have a material adverse effect on the financial condition or operating results of the Company.

Separately, Brazilian authorities commenced an investigation into possible violations of Brazilian criminal law in connection with the issuance of National Western insurance policies to Brazilian residents, and in assistance of such investigation a Commissioner appointed by the U.S. District Court for the Western District of Texas issued a subpoena in March of 2015 upon NWLIC to provide information relating to such possible violations. No conclusion can be drawn at this time as to its outcome or how such outcome may impact the Company’s business, results of operations or financial condition. National Western has been cooperating with the relevant governmental authorities in regard to this matter.

(B) Financial Instruments

In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the Condensed Consolidated Balance Sheets.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.

The Company had no commitments to fund new loans and $7.2 million of commitments to extend credit relating to existing loans at September 30, 2020. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company had commitments to make capital contributions to investment funds of $52.2 million as of September 30, 2020.


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

(A)Investment Gains and Losses

The Company uses the specific identification method in computing realized gains and losses. The table below presents realized gains and losses, excluding impairment losses, for the periods indicated.

Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Available for sale debt securities:    
Realized gains on disposal$888 197 3,379 2,548 
Realized losses on disposal— — — (84)
Held to maturity debt securities:
Realized gains on disposal2,501 1,246 6,620 2,197 
Realized losses on disposal— — — — 
Real estate gains (losses)2,661 — 2,661 6,888 
Other— — — — 
Totals$6,050 1,443 12,660 11,549 

Disposals in the held to maturity category during the periods shown represent calls initiated by the credit issuer of the debt security. It is the Company's policy to initiate disposals of debt securities in the held to maturity category only in instances in which the credit status of the issuer comes into question and the realization of all or a significant portion of the investment principal of the holding is deemed to be in jeopardy.

In the third quarter of 2020, the Company sold an investment real estate property for a realized gain of $2.7 million. Net real estate gains for the nine months ended September 30, 2019 primarily pertain to the Company's sale of its nursing home operations in Reno, Nevada and San Marcos, Texas as well as a property sold located in Austin, Texas. The sale of the Reno nursing home was completed effective during the first quarter of 2019 and a gain of $5.7 million was realized on the sale of the land and building associated with the operation. The sale of the San Marcos nursing home was concluded during the second quarter of 2019 and the Company recorded a loss of $(2.0) million associated with the sale of the land and building of this operation. The sale of the Company's prior home office was also completed during the second quarter of 2019 and realized a gain on the sale of $3.2 million.

For the three months ended September 30, 2020 and 2019 the percentage of total gains on bonds due to the call of securities was 99.9% and 99.6%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities. For the nine months ended September 30, 2020 and 2019 the percentage of gains on bonds due to the call of securities was 99.8% and 81.0%, respectively.

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

The table below presents amortized costs and fair values of debt securities held to maturity at September 30, 2020.

 Debt Securities Held to Maturity
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		Allowance for Credit Losses
 (In thousands)
U.S. agencies$73,153 2,934 — 76,087 (81)
U.S. Treasury3,798 156 — 3,954 — 
States and political subdivisions437,620 24,976 (124)462,472 (176)
Foreign governments1,128 150 — 1,278 — 
Public utilities812,251 71,098 — 883,349 (718)
Corporate4,549,262 401,764 (7,620)4,943,406 (4,111)
Commercial mortgage-backed3,019 34 — 3,053 — 
Residential mortgage-backed944,838 57,854 (1)1,002,691 — 
Asset-backed2,070 39 — 2,109 — 
Totals$6,827,139 559,005 (7,745)7,378,399 (5,086)

The table below presents amortized costs and fair values of debt securities available for sale at September 30, 2020.

 Debt Securities Available for Sale
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		Allowance for Credit Losses
 (In thousands)
States and political subdivisions$89,168 8,384 (2)97,550 — 
Foreign governments9,990 235 — 10,225 — 
Public utilities62,413 5,194 — 67,607 — 
Corporate2,895,799 256,716 (20,349)3,132,166 — 
Commercial mortgage-backed27,124 1,187 — 28,311 — 
Residential mortgage-backed10,653 1,247 (159)11,741 — 
Asset-backed61,339 1,759 (42)63,056 — 
Totals$3,156,486 274,722 (20,552)3,410,656 — 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below presents amortized costs and fair values of debt securities held to maturity at December 31, 2019.

 Debt Securities Held to Maturity
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (In thousands)
U.S. agencies$100,910 1,686 — 102,596 
U.S. Treasury3,782 140 — 3,922 
States and political subdivisions431,433 19,440 (84)450,789 
Foreign governments1,144 55 — 1,199 
Public utilities888,444 36,638 (83)924,999 
Corporate4,607,826 212,281 (718)4,819,389 
Commercial mortgage-backed3,032 52 — 3,084 
Residential mortgage-backed1,066,899 32,706 (716)1,098,889 
Asset-backed2,775 62 (1)2,836 
Totals$7,106,245 303,060 (1,602)7,407,703 

The table below presents amortized costs and fair values of debt securities available for sale at December 31, 2019.

 Debt Securities Available for Sale
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
 (In thousands)
States and political subdivisions$98,037 4,495 (3)102,529 
Foreign governments9,983 203 — 10,186 
Public utilities67,895 3,476 — 71,371 
Corporate2,921,431 141,705 (2,479)3,060,657 
Commercial mortgage-backed28,871 1,071 — 29,942 
Residential mortgage-backed12,815 1,077 (117)13,775 
Asset-backed67,088 1,397 — 68,485 
Totals$3,206,120 153,424 (2,599)3,356,945 

Unrealized losses for debt securities held to maturity and debt securities available for sale increased at September 30, 2020 from comparable balances at December 31, 2019 primarily due to the widening in interest rate spreads that occurred during the period as a result of COVID-19 effects on financial markets.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt securities balances at September 30, 2020 and December 31, 2019 include Ozark National holdings of $335.3 million and $307.2 million in held to maturity and $416.0 million and $415.7 million in available for sale. As part of the acquisition effective January 31, 2019 the Company employed purchase accounting procedures in accordance with GAAP which revalued the acquired investment portfolio to their fair values as of the date of the acquisition. These fair values became the book values for Ozark National from that point going forward. Accordingly, unrealized gains and losses for the Ozark National debt securities represent the changes subsequent to the purchase accounting book values established at the acquisition.

The following table shows the gross unrealized losses and fair values of the Company's held to maturity debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at September 30, 2020.
 Debt Securities Held to Maturity
 Less than 12 Months12 Months or GreaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
 (In thousands)
States and political subdivisions$13,687 (55)1,757 (69)15,444 (124)
Public utilities— — — — — — 
Corporate148,574 (7,464)5,817 (156)154,391 (7,620)
Commercial mortgage-backed— — — — — — 
Residential mortgage-backed1,004 (1)— — 1,004 (1)
Asset-backed— — — — — — 
Totals$163,265 (7,520)7,574 (225)170,839 (7,745)

The following table shows the gross unrealized losses and fair values of the Company's available for sale debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at September 30, 2020.

 Debt Securities Available for Sale
 Less than 12 Months12 Months or GreaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
 (In thousands)
States and political subdivisions$558 (2)— — 558 (2)
Public utilities— — — — — — 
Corporate179,742 (17,784)28,389 (2,565)208,131 (20,349)
Commercial mortgage-backed— — — — — — 
Residential mortgage-backed— — 572 (159)572 (159)
Asset-backed15,131 (42)— — 15,131 (42)
Totals$195,431 (17,828)28,961 (2,724)224,392 (20,552)

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table shows the gross unrealized losses and fair values of the Company's held to maturity debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2019.

 Debt Securities Held to Maturity
 Less than 12 Months12 Months or GreaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
 (In thousands)
States and political subdivisions$5,013 (33)1,712 (51)6,725 (84)
Public utilities2,345 (83)— — 2,345 (83)
Corporate31,419 (337)17,191 (381)48,610 (718)
Residential mortgage-backed25,859 (63)43,498 (653)69,357 (716)
Asset-backed1,349 (1)— — 1,349 (1)
Totals$65,985 (517)62,401 (1,085)128,386 (1,602)

The following table shows the gross unrealized losses and fair values of the Company's available for sale debt securities by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2019.

 Debt Securities Available for Sale
 Less than 12 Months12 Months or GreaterTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
 (In thousands)
States and political subdivisions$470 (3)— — 470 (3)
Public utilities— — — — — — 
Corporate40,080 (105)28,582 (2,374)68,662 (2,479)
Residential mortgage-backed— — 710 (117)710 (117)
Totals$40,550 (108)29,292 (2,491)69,842 (2,599)

Debt securities. The gross unrealized losses for debt securities are made up of 68 individual issues, or 5.0% of the total debt securities held by the Company at September 30, 2020. The market value of these bonds as a percent of amortized cost approximates 93.3%. Of the 68 securities, 8, or 11.8%, fall in the 12 months or greater aging category; and 45 were rated investment grade at September 30, 2020.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amortized cost and fair value of investments in debt securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 Debt Securities Available for SaleDebt Securities Held to Maturity
 Amortized CostFair ValueAmortized CostFair Value
 (In thousands)
Due in 1 year or less$179,359 182,907 579,550 587,799 
Due after 1 year through 5 years1,361,831 1,450,221 3,004,262 3,204,761 
Due after 5 years through 10 years1,178,727 1,291,931 1,474,459 1,656,357 
Due after 10 years337,453 382,489 818,941 921,629 
 3,057,370 3,307,548 5,877,212 6,370,546 
Mortgage and asset-backed securities99,116 103,108 949,927 1,007,853 
Totals before allowance for credit losses3,156,486 3,410,656 6,827,139 7,378,399 
Allowance for credit losses— — (5,086)— 
Totals$3,156,486 3,410,656 6,822,053 7,378,399 

As disclosed in Note (2) New Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements, the Company adopted new accounting guidance as of January 1, 2020 for credit loss recognition of certain financial assets, including debt securities classified in the held to maturity category. The Company employs a cohort cumulative loss rate method in estimating current expected credit losses with respect to its held to maturity debt securities. This method applies publicly available industry wide statistics of default incidence by defined segmentations of debt security investments combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term. The Company utilizes Moody's loss rates by industry type and credit ratings and applies them to each major bond category. These bond categories are further segmented by credit ratings and by maturities of two years and less and more than two years. The following table presents the allowance for credit losses for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
 Debt Securities Held to MaturityDebt Securities Available for SaleDebt Securities Held to MaturityDebt Securities Available for Sale
 (In thousands)
Balance, beginning of period$4,940 — — — 
Provision January 1, 2020 for adoption of new accounting guidance— — 3,334 — 
(Releases)/provision during period146 — 1,752 — 
 
Balance, end of period$5,086 — 5,086 — 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Provisions to and releases from the allowance for credit losses are recorded in net investment income in the Condensed Consolidated Statements of Earnings (Loss). Previous accounting guidance required the Company to review its portfolio for potential other-than-temporary impairments which would require that affected securities be written down to an adjusted cost basis with the amount of the writedown recorded as part of net realized gains and losses in the Condensed Consolidated Statements of Earnings (Loss).

The Company determines current expected credit losses for available-for-sale debt securities in accordance with FASB ASC Subtopic 326-30 when fair value is less than amortized cost, interest payments are missed and the security is experiencing credit issues. At September 30, 2020, the Company performed additional analyses on certain available-for-sale securities whose market values were negatively impacted by the change in the economic environment precipitated by the COVID-19 pandemic crisis. Based on its review, the Company determined none of these investments required an allowance for credit loss at September 30, 2020. Under the previous guidance, debt securities were not considered to be other-than-temporarily impaired when a decline in market value was attributable to factors such as market volatility, liquidity, spread widening and credit quality in which it was anticipated that a recovery of all amounts due under the contractual terms of the security would occur and the Company had the intent and ability to hold the security until recovery or maturity. There was a $1.9 million and $7.8 million other-than-temporary impairment recorded on a single debt security during the three and nine months ended September 30, 2019, respectively. The Company's operating procedures include monitoring the investment portfolio on an ongoing basis for any changes in issuer facts and circumstances that might lead to future need for a credit loss allowance.

In the table below, held to maturity securities and their corresponding allowance for credit losses are represented according to credit ratings by nationally recognized statistical rating organizations.

Debt Securities Held to Maturity
Amortized CostAllowance for Credit LossesCarrying Value
(In thousands)
 AAA $95,861 — 95,861 
 AA 1,639,976 (379)1,639,597 
 A 2,224,126 (939)2,223,187 
 BBB 2,737,258 (3,292)2,733,966 
 BB and other below investment 129,918 (476)129,442 
 Bonds Total $6,827,139 (5,086)6,822,053 

(C)Transfer of Securities

During the three and nine months ended September 30, 2020 the Company made no transfers from the held to maturity category to securities available for sale.

(D) Mortgage Loans and Real Estate

A financing receivable is a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in a company's statement of financial position. The Company's mortgage, participation and mezzanine loans on real estate are the only financing receivables included in the Condensed Consolidated Balance Sheets.

Credit and default risk are minimized through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lease payments. This approach has proved to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Loans in foreclosure, loans considered impaired or loans past due 90 days or more are placed on a non-accrual status. If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any revenue into the Condensed Consolidated Statements of Earnings (Loss). The loan is independently monitored and evaluated as to potential impairment or foreclosure. If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly. The Company had no mortgage loans past due 90 days or more at September 30, 2020 or 2019 and as a result all interest income was recognized at September 30, 2020 and 2019. As a result of the economic climate change induced by the COVID-19 virus, various mortgage loan borrowers of the Company have requested a temporary forbearance of principal payments on loans in the range of three to nine months. During the nine months ended September 30, 2020 there were eight loans representing an aggregate principal balance of $29.2 million with borrowers meeting specified criteria of the Company that forbearance terms were agreed to.

The following table represents the mortgage loan portfolio by loan-to-value ratio.

September 30, 2020December 31, 2019
Amount%Amount%
(In thousands)(In thousands)
Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%$52,987 17.4 $52,778 19.3 
50% to 60%57,744 18.9 56,929 20.8 
60% to 70%148,694 48.7 117,377 43.0 
70% to 80%45,647 15.0 46,013 16.9 
80% to 90%— — — — 
Greater than 90%— — — — 
Gross balance305,072 100.0 273,097 100.0 
Allowance for credit losses(2,357)(0.8)(675)(0.2)
Totals$302,715 99.2 $272,422 99.8 

(1) Loan-to-Value Ratio is determined using the most recent appraised value. Appraisals are required at the time of funding and may be updated if a material change occurs from the original loan agreement.

All mortgage loans are analyzed quarterly in order to monitor the financial quality of these assets. Based on ongoing monitoring, mortgage loans with a likelihood of becoming delinquent are identified and placed on an internal “watch list.” Among the criteria that may indicate a potential problem include: major tenant vacancies or bankruptcies, late payments, and loan relief/restructuring requests. The mortgage loan portfolio is analyzed for the need for a valuation allowance on any loan that is on the internal watch list, in the process of foreclosure or that currently has a valuation allowance.

Prior to January 1, 2020, mortgage loans were considered impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreement. When it was determined that a loan was impaired, a loss was recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value was typically based on the loan's observable market price or the fair value of the collateral less cost to sell. Impairments and changes in the valuation allowance were reported in net realized investment gains (losses) in the Condensed Consolidated Statements of Earnings (Loss). The Company held a valuation allowance of $0.7 million at December 31, 2019.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Effective January 1, 2020, the Company implemented FASB ASU 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model (“CECL”). The objective of the CECL model is for the reporting entity to recognize its estimate of current expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. For mortgage loan investments the Company is using the Weighted Average Remaining Maturity ("WARM") method, which uses an average annual charge-off rate applied to each mortgage loan risk category. Under this new accounting guidance, at January 1, 2020 a balance of $1.2 million was recorded which incorporated the previous year-end balance under the prior accounting method. The adjustment resulted in a charge to retained earnings as a change in accounting, net of tax, of $0.4 million. Subsequent changes in the allowance for current expected credit losses are reported in net investment income in the Condensed Consolidated Statements of Earnings (Loss).

The following table represents the mortgage loan allowance for credit losses.
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
 (In thousands)
Balance, beginning of the period$2,227 675 675 675 
Provision January 1, 2020 for adoption of new accounting guidance— — 504 — 
Provision during the period130 — 1,178 — 
Releases— — — — 
Total ending allowance for credit losses$2,357 675 2,357 675 

The Company's direct investments in real estate are not a significant portion of its total investment portfolio and totaled approximately $33.9 million and $34.6 million at September 30, 2020 and December 31, 2019, respectively. The Company recognized operating income on real estate properties of approximately $2.2 million and $2.1 million for the first nine months of 2020 and 2019, respectively. In the third quarter of 2020, the Company sold a property located in Travis County, Texas for a realized gain of $2.7 million.


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(10) FAIR VALUES OF FINANCIAL INSTRUMENTS

For financial instruments, the FASB provides guidance which defines fair value, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about fair value measurements. In compliance with this GAAP guidance, 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 are 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). 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’s assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets are over-the-counter derivative contracts. The Company’s Level 3 liabilities consist of share-based compensation obligations, certain product-related embedded derivatives, and contingent consideration in the acquisition of businesses. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables set forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated:

 September 30, 2020
 TotalLevel 1Level 2Level 3
 (In thousands)
Debt securities, available for sale$3,410,656 — 3,410,656 — 
Equity securities18,610 18,610 — — 
Derivatives, index options93,367 — — 93,367 
Other invested assets1 1 — — 
Total assets$3,522,634 18,611 3,410,656 93,367 
Policyholder account balances (a)$116,802 — — 116,802 
Other liabilities (b)4,951 — — 4,951 
Total liabilities$121,753 — — 121,753 

During the three and nine months ended September 30, 2020, the Company made no transfers into or out of Levels 1, 2 or 3.
 December 31, 2019
 TotalLevel 1Level 2Level 3
 (In thousands)
Debt securities, available for sale$3,356,945 — 3,356,945 — 
Equity securities23,594 23,594 — — 
Derivatives, index options157,588 — — 157,588 
Other invested assets2 2 — — 
Total assets$3,538,129 23,596 3,356,945 157,588 
Policyholder account balances (a)$155,902 — — 155,902 
Other liabilities (c)15,301 — — 15,301 
Total liabilities$171,203 — — 171,203 

(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.
(c)  Represents the liability for share-based compensation and the contingent consideration for businesses acquired.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present, by pricing source and fair value hierarchy level, the Company's assets that are measured at fair value on a recurring basis:

 September 30, 2020
 TotalLevel 1Level 2Level 3
 (In thousands)
Debt securities, available for sale:    
Priced by third-party vendors$3,410,656 — 3,410,656 — 
Priced internally— — — — 
Subtotal3,410,656 — 3,410,656 — 
Equity securities, available for sale:    
Priced by third-party vendors18,610 18,610 — — 
Priced internally— — — — 
Subtotal18,610 18,610 — — 
Derivatives, index options:    
Priced by third-party vendors93,367 — — 93,367 
Priced internally— — — — 
Subtotal93,367 — — 93,367 
Other invested assets:
Priced by third-party vendors1 1 — — 
Priced internally— — — — 
Subtotal1 1 — — 
Total$3,522,634 18,611 3,410,656 93,367 
Percent of total100.0 %0.5 %96.8 %2.7 %
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


 December 31, 2019
 TotalLevel 1Level 2Level 3
 (In thousands)
Debt securities, available for sale:    
Priced by third-party vendors$3,356,945 — 3,356,945 — 
Priced internally— — — — 
Subtotal3,356,945 — 3,356,945 — 
Equity securities, available for sale:    
Priced by third-party vendors23,594 23,594 — — 
Priced internally— — — — 
Subtotal23,594 23,594 — — 
Derivatives, index options:    
Priced by third-party vendors157,588 — — 157,588 
Priced internally— — — — 
Subtotal157,588 — — 157,588 
Other invested assets:
Priced by third-party vendors2 2 — — 
Priced internally— — — — 
Subtotal2 2 — — 
Total$3,538,129 23,596 3,356,945 157,588 
Percent of total100.0 %0.7 %94.8 %4.5 %
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NATIONAL WESTERN LIFE GROUP, INC.
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 September 30, 2020
AssetsOther Liabilities
Derivatives, Index OptionsTotal AssetsPolicyholder Account BalancesStock OptionsContingent ConsiderationTotal Other Liabilities
 (In thousands)
Beginning balance, July 1, 2020$66,738 66,738 87,573 5,497 — 93,070 
Total realized and unrealized gains (losses):
Included in net earnings31,520 31,520 34,119 (546)— 33,573 
Included in other comprehensive income— — — — — 
Purchases, sales, issuances and settlements, net:
Purchases11,426 11,426 11,427 — — 11,427 
Sales— — — — — — 
Issuances— — — — — — 
Settlements(16,317)(16,317)(16,317)— — (16,317)
Transfers into (out of) Level 3— — — — — — 
Balance at end of period$93,367 93,367 116,802 4,951 — 121,753 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income$50,636 50,636 — — — — 
Benefits and expenses— — 50,636 (546)— 50,090 
Total$50,636 50,636 50,636 (546)— 50,090 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months Ended September 30, 2019
AssetsOther Liabilities
Derivatives, Index OptionsTotal AssetsPolicyholder Account BalancesStock OptionsContingent ConsiderationTotal Other Liabilities
 (In thousands)
Beginning balance, July 1, 2019$89,900 89,900 100,638 7,991 3,871 112,500 
Total realized and unrealized gains (losses):
Included in net earnings3,296 3,296 (3,534)1,462 94 (1,978)
Included in other comprehensive income— — — — — — 
Purchases, sales, issuances and settlements, net:
Purchases19,872 19,872 19,872 — — 19,872 
Sales— — — — — — 
Issuances— — — — — — 
Settlements(6,704)(6,704)(6,704)— — (6,704)
Transfers into (out of) Level 3— — — — — — 
Balance at end of period$106,364 106,364 110,272 9,453 3,965 123,690 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income$(2,020)(2,020)— — — — 
Benefits and expenses— — (2,020)1,462 94 (464)
Total$(2,020)(2,020)(2,020)1,462 94 (464)

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Nine Months Ended September 30, 2020
AssetsOther Liabilities
Derivatives, Index OptionsTotal AssetsPolicyholder Account BalancesStock OptionsContingent ConsiderationTotal Other Liabilities
 (In thousands)
Beginning balance, January 1, 2020$157,588 157,588 155,902 11,225 4,076 171,203 
Total realized and unrealized gains (losses):
Included in net earnings(34,865)(34,865)(9,744)(4,395)(4,076)(18,215)
Included in other comprehensive income— — — — — — 
Purchases, sales, issuances and settlements, net:
Purchases50,287 50,287 50,287 — — 50,287 
Sales— — — — — — 
Issuances— — — — — — 
Settlements(79,643)(79,643)(79,643)(1,879)— (81,522)
Transfers into (out of) Level 3— — — — — — 
Balance at end of period$93,367 93,367 116,802 4,951 — 121,753 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income$6,966 6,966 — — — — 
Benefits and expenses— — 6,966 (4,395)(4,076)(1,505)
Total$6,966 6,966 6,966 (4,395)(4,076)(1,505)


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the Nine Months Ended September 30, 2019
AssetsOther Liabilities
Derivatives, Index OptionsTotal AssetsPolicyholder Account BalancesStock OptionsContingent ConsiderationTotal Other Liabilities
 (In thousands)
Beginning balance, January 1, 2019$14,684 14,684 44,781 11,923 — 56,704 
Total realized and unrealized gains (losses):
Included in net earnings63,127 63,127 36,938 52 265 37,255 
Included in other comprehensive income— — — — — — 
Purchases, sales, issuances and settlements, net:
Purchases56,494 56,494 56,494 — — 56,494 
Sales— — — — — — 
Issuances— — — — 3,700 3,700 
Settlements(27,941)(27,941)(27,941)(2,522)— (30,463)
Transfers into (out of) Level 3— — — — — — 
Balance at end of period$106,364 106,364 110,272 9,453 3,965 123,690 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income$42,794 42,794 — — — — 
Benefits and expenses— — 42,794 52 265 43,111 
Total$42,794 42,794 42,794 52 265 43,111 


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the valuation method for financial assets and liabilities categorized as level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

 September 30, 2020
 Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
 (In thousands)
Assets:
Derivatives, index options$93,367 Broker pricesImplied volatility
12.96% - 53.69% (19.74%)
Total assets$93,367 
Liabilities:
Policyholder account balances$116,802 Deterministic cash flow modelProjected option cost
0.0% - 38.69% (5.18%)
Share based compensation4,951 Black-Scholes modelExpected term
1.2 to 9.1 years
Expected volatility32.85%
Total liabilities$121,753 

 December 31, 2019
 Fair ValueValuation TechniqueUnobservable InputRange (Weighted Average)
 (In thousands)
Assets:
Derivatives, index options$157,588 Broker pricesImplied volatility
13.10% - 19.90% (15.25%)
Total assets$157,588 
Liabilities:
Policyholder account balances$155,902 Deterministic cash flow modelProjected option cost
0.0% - 17.55% (3.14%)
Share based compensation11,225 Black-Scholes modelExpected term
1.9 to 10 years
Expected volatility22.19%
Contingent consideration on businesses acquired4,076 Probabilistic MethodDiscount rate10.0%
Projected renewal premium
$57.2 - $82.4 million ($71.9)
Total liabilities$171,203 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Realized gains (losses) on debt securities are reported in the Condensed Consolidated Statements of Earnings (Loss) as net investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on available for sale debt securities are reported as other comprehensive income (loss) within the stockholders' equity section of the Condensed Consolidated Balance Sheet.

The fair value hierarchy classifications are reviewed each reporting period. Reclassification of certain financial assets and liabilities may result based on 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.

The carrying amounts and fair values of the Company's financial instruments are as follows:

September 30, 2020
 Fair Value Hierarchy Level
Carrying
Values		Fair
Values		Level 1Level 2Level 3
 (In thousands)
ASSETS    
Debt securities held to maturity$6,822,053 7,378,399 — 7,378,399 — 
Debt securities available for sale3,410,656 3,410,656 — 3,410,656 — 
Cash and cash equivalents507,025 507,025 507,025 — — 
Mortgage loans302,715 303,910 — — 303,910 
Real estate33,927 48,547 — — 48,547 
Policy loans75,714 128,615 — — 128,615 
Other loans19,712 20,004 — — 20,004 
Derivatives, index options93,367 93,367 — — 93,367 
Equity securities18,610 18,610 18,610 — — 
Life interest in Libbie Shearn Moody Trust9,230 12,775 — — 12,775 
Other investments4,514 22,581 1 — 22,580 
LIABILITIES
Deferred annuity contracts$6,697,569 5,422,599 — — 5,422,599 
Immediate annuity and supplemental contracts417,663 449,676 — — 449,676 
Contingent consideration on businesses acquired— — — — — 
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2019
 Fair Value Hierarchy Level
Carrying
Values		Fair
Values		Level 1Level 2Level 3
 (In thousands)
ASSETS    
Debt securities held to maturity$7,106,245 7,407,703 — 7,407,703 — 
Debt securities available for sale3,356,945 3,356,945 — 3,356,945 — 
Cash and cash equivalents253,524 253,524 253,524 — — 
Mortgage loans272,422 270,931 — — 270,931 
Real estate34,588 57,204 — — 57,204 
Policy loans80,008 123,650 — — 123,650 
Other loans13,547 13,698 — — 13,698 
Derivatives, index options157,588 157,588 — — 157,588 
Equity securities23,594 23,594 23,594 — — 
Life interest in Libbie Shearn Moody Trust9,230 12,775 — — 12,775 
Other investments197 16,182 2 — 16,180 
LIABILITIES
Deferred annuity contracts (1)$7,014,833 5,931,352 — — 5,931,352 
Immediate annuity and supplemental contracts400,465 422,931 — — 422,931 
Contingent consideration on businesses acquired4,076 4,076 — — 4,076 
(1) Revised to correct for an adjustment related to the understatement of reserve liabilities of $15.0 million. See Note 1.

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-index 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 Condensed Consolidated Balance Sheets. 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 and accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its fixed-index 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 may be paid to the Company depending on the performance of the underlying index or indices 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 Condensed 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 Statements of Earnings (Loss). Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Condensed Consolidated Statements of Earnings (Loss). 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 Statements of Earnings (Loss).

Although there is credit risk in the event of nonperformance by counterparties to the index options, the Company does not expect any of its 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.

The tables below present the fair value of derivative instruments as of September 30, 2020 and December 31, 2019, respectively.

 September 30, 2020
 Asset DerivativesLiability Derivatives
Balance
Sheet
Location		Fair
Value		Balance
Sheet
Location		Fair
Value
(In thousands)(In thousands)
Derivatives not designated as hedging instruments    
Equity index optionsDerivatives, Index Options$93,367   
Fixed-index products Universal Life and Annuity Contracts$116,802 
Total $93,367  $116,802 
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 December 31, 2019
 Asset DerivativesLiability Derivatives
Balance
Sheet
Location		Fair
Value		Balance
Sheet
Location		Fair
Value
(In thousands)(In thousands)
Derivatives not designated as hedging instruments    
Equity index optionsDerivatives, Index Options$157,588   
    
Fixed-index products  Universal Life and Annuity Contracts$155,902 
Total $157,588  $155,902 

The table below presents the effect of derivative instruments in the Condensed Consolidated Statements of Earnings (Loss) for the three months ended September 30, 2020 and 2019.

September 30,
2020		September 30,
2019
Derivatives Not Designated
As Hedging Instruments		Location of Gain
or (Loss) Recognized
In Income on Derivatives		Amount of Gain or
(Loss) Recognized in
Income on Derivatives
  (In thousands)
Equity index optionsNet investment income (loss)$31,520 3,296 
Fixed-index productsUniversal life and annuity contract interest(34,119)3,533 
  $(2,599)6,829 

The table below presents the effect of derivative instruments in the Condensed Consolidated Statements of Earnings (Loss) for the nine months ended September 30, 2020 and 2019.
September 30,
2020		September 30,
2019
Derivatives Not Designated
As Hedging Instruments		Location of Gain
or (Loss) Recognized
In Income on Derivatives		Amount of Gain or
(Loss) Recognized in
Income on Derivatives
  (In thousands)
Equity index optionsNet investment income$(34,865)63,127 
Fixed-index productsUniversal life and annuity contract interest9,744 (36,937)
  $(25,121)26,190 
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The embedded derivative liability, the change of which is recorded in universal life and annuity contract interest in the Condensed Consolidated Statements of Earnings (Loss), includes projected interest credits that are offset by the expected collectability by the Company of asset management fees on fixed-index products. The anticipated asset management fees to be collected increases or decreases based upon the most recent performance of index options and adds to or reduces the offset applied to the embedded derivative liability (increasing or decreasing contract interest expense). For the three months ended September 30, 2020 and 2019, the change in the embedded derivative liability due to the expected collectability of asset management fees increased/(decreased) contract interest expense by $3.7 million and $(6.8) million, respectively. For the nine months ended September 30, 2020 and 2019, contract interest expense was increased/(decreased) by $29.3 million and $(27.1) million, respectively, for the expected collectability of asset management fees. Beginning in the second quarter of 2020, the Company changed its budget for purchasing options to match the collection of asset management fees with the payoff from out of the money options, thereby removing the option premium currently being paid for the probability or expectation of collecting asset management fees ("out of the money" hedging). As the current one year options outstanding expire and are replaced by out of the money hedges, the embedded derivative liability component due to the projected collectability of asset management fees will be eliminated.


(12) BUSINESS COMBINATIONS

Effective January 31, 2019, the Company acquired Ozark National and NIS following the receipt of regulatory approvals. NWLGI and National Western paid cash in an aggregate amount of approximately $205.4 million in exchange for all of the outstanding stock of Ozark National (wholly owned by National Western) and NIS (wholly owned by NWLGI). In addition to the cash price paid, National Western recorded a contingent liability for an "earn-out payment" based upon the subsequent persistency of Ozark National's acquired in force business achieving thresholds as specified in the Stock Purchase Agreement ("Agreement"). The earn-out payment to the seller per the Agreement had a maximum limit of $5.0 million. Using a probabilistic method for valuing contingent consideration, the Company at January 31, 2019 recorded a liability of $3.7 million representing the estimated fair value of the additional consideration estimated to be paid as part of the acquisition. The contingent consideration was revalued during the earn-out term using the same probabilistic method and had a fair value of $4.1 million as of December 31, 2019. Changes in the fair value during year ended December 31, 2019 were recorded through Other operating expenses.

During the quarter ended June 30, 2020, the Company and and the Seller executed an agreement under which the parties agreed that the Company had fulfilled its payment obligation under the Stock Purchase Agreement executed October 3, 2018. As a result, the Company reversed the contingent earn-out liability balance of $4.2 million recorded at March 31, 2020 and reflected this amount in Other revenues.

In addition to the purchase price, the Company incurred $3.3 million of acquisition-related costs. In accordance with GAAP, these costs are included in Other operating expenses in the Condensed Consolidated Statements of Earnings (Loss) for the nine months ended September 30, 2019 and are not considered part of the purchase price.

The acquisition has been accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Purchase accounting, as defined by ASC 805, requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values shown below were determined based on management’s best estimates, employing fair valuation methodologies commonly utilized in preparing financial statements in accordance with GAAP, and are subject to revision for one year following the acquisition date. The excess of the purchase price paid above net tangible assets acquired has been assigned to identifiable intangible assets and goodwill. The following table presents the fair values of the net assets acquired as of January 31, 2019.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
January 31, 2019
Fair value
Assets(In thousands)
Debt securities held to maturity$261,059 
Debt securities available for sale400,719 
Policy loans28,128 
Real estate4,600 
Cash and cash equivalents16,275 
Accrued investment income6,116 
Value of business acquired145,768 
Reinsurance recoverables21,895 
Other intangible assets9,600 
Other assets acquired12,075 
Total assets acquired906,235 
Liabilities
Traditional life reserves691,297 
Other policyholder liabilities13,867 
Other liabilities acquired5,840 
711,004 
Net identifiable assets acquired195,231 
Goodwill13,864 
Net assets acquired$209,095 

Identifiable Intangible Assets

The following table presents the fair value of identifiable intangible assets acquired at January 31, 2019:

Fair ValueWeighted-Average Amortization Period
(In thousands)
Trademarks / trade names$2,800 15
Internally developed software3,800 7
Insurance licenses3,000 NA
$9,600 
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The gross carrying amounts and accumulated amortization for each specifically identifiable intangible asset were as follows.

September 30, 2020December 31, 2019
Weighted-Average Amortization PeriodGross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
(In thousands)
Trademarks/trade names15$2,800 (311)2,800 (171)
Internally developed software73,800 (905)3,800 (498)
Insurance licensesN/A3,000 — 3,000 — 
$9,600 (1,216)9,600 (669)

The value of trademarks was estimated using the relief from royalty method, based on the assumption that in lieu of ownership, an organization would be willing to pay a royalty in order to receive the related benefits of using the brand. The value of insurance licenses was estimated using the market approach to value, based on values paid for licenses in recent shell company transactions. The value of internally developed software was estimated using the replacement cost method. Trademarks, trade names and internally developed software are amortized using a straight-line method over the estimated useful lives. These intangible assets will be evaluated for impairment if indicators of impairment arise. Insurance licenses were determined to have an indefinite useful life. The Company evaluates the useful life insurance licenses at each reporting period to determine whether the useful life remains indefinite.

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Value of Business Acquired ("VOBA")

VOBA is a purchase accounting convention for life insurance companies in business combinations based upon an actuarial determination of the difference between the fair value of policyholder liabilities acquired and the same policyholder liabilities measured in accordance with the acquiring company's accounting policies. The difference, referred to as VOBA, is an intangible asset subject to periodic amortization. As of the January 31, 2019 acquisition date, the VOBA balance recorded was $145.8 million. Changes in VOBA were as follows for the periods shown:

 September 30,December 31,
 20202019
(In thousands)
Balance, beginning of year$138,071 — 
Business acquired— 145,768 
Amortization:
Amortization, excluding unlocking(5,645)(7,697)
Balance as of end of period$132,426 138,071 

Estimated future amortization of VOBA, net of interest (in thousands), as of September 30, 2020, is as follows:

Expected Amortization
(In thousands)
Remainder of 2020$1,844 
2021$7,002 
2022$6,646 
2023$6,337 
2024$6,060 
Goodwill
The changes in the carrying amount of goodwill (in thousands) were as follows:

 September 30,December 31,
 20202019
 (In thousands)
Gross goodwill as of beginning of year$13,864 — 
Goodwill resulting from business acquisition— 13,864 
Gross goodwill, before impairments13,864 13,864 
Accumulated impairment as of beginning of year— — 
Current year impairments— — 
Net goodwill as of end of period$13,864 13,864 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Due to the severe change in economic climate as a result of the COVID-19 pandemic, the Company evaluated the goodwill balance for potential impairment as of September 30, 2020 and determined that there was evidence to support not impairing the balance.
Financial Information

Subsequent to the acquisition date of January 31, 2019, Ozark National and NIS total revenues of $77.1 million and net earnings of $11.7 million were included in Condensed Consolidated Statements of Earnings (Loss) for the nine month period ended September 30, 2019. Their results for segment reporting purposes are combined in the Acquired Businesses segment.

The following unaudited comparative pro forma total revenues and net earnings represent Condensed Consolidated Results of Operations for the Company which assume amounts estimated had the acquisition of Ozark National and NIS by the Company been effective January 1, 2018.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Total revenues$202,702 173,166 471,205 593,402 
Net earnings (loss)$10,825 19,989 57,176 95,341 

The pro forma amounts shown above include the estimated total revenues and net earnings of the acquired businesses for each period incorporating amortization of identifiable intangible assets acquired and fair value adjustments to acquired invested assets and traditional life insurance reserves.


(13) SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date of filing and no reportable items were identified.


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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 Group, Inc. and its subsidiaries (the "Company") are 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 Securities and Exchange Commission (SEC) filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues. However, as a matter of policy, the Company 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 the financial condition and results of operations (“MD&A”) of National Western Life Group, Inc. ("NWLGI") for the three and nine months ended September 30, 2020 follows. Where appropriate, discussion specific to the insurance operations of National Western Life Insurance Company is denoted by "National Western" or "NWLIC". 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 and with the 2019 Annual Report filed on Form 10-K with the SEC.

Effective January 31, 2019, the Company completed its previously announced acquisition of Ozark National Life Insurance Company ("Ozark National") and N.I.S. Financial Services, Inc. ("NIS") following the receipt of regulatory approvals. NWLGI and National Western paid cash in an aggregate amount of approximately $205.4 million in exchange for all of the outstanding stock of Ozark National (wholly owned by National Western) and NIS (wholly owned by NWLGI). The results of Ozark National and NIS are included in the Company's Condensed Consolidated Financial Statements for their respective business activity subsequent to the acquisition date and reference to each is made in this MD&A where appropriate.

Overview

National Western provides life insurance products for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contract holders. The Company accepts funds from policyholders or contract holders 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. The Company maintains its home office in Austin, Texas where substantially all of its approximately 300 employees are located.

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Due to the business of accepting funds to pay future obligations in later years and the underlying economics, the relevant factors affecting the Company’s overall business and profitability include the following:
 ●the level of sales and premium revenues collected
 ●the volume of life insurance and annuity business in force
 ●persistency of policies and contracts
 ●the ability to price products to earn acceptable margins over benefit costs and expenses
 ●return on investments sufficient to produce acceptable spread margins over interest crediting rates
 ●investment credit quality which minimizes the risk of default or impairment
 ●levels of policy benefits and costs to acquire business
 ●the ability to manage the level of operating expenses
 ●effect of interest rate changes on revenues and investments including asset and liability matching
 ●maintaining adequate levels of capital and surplus
 ●corporate tax rates and the treatment of financial statement items under tax rules and accounting
 ●actual levels of surrenders, withdrawals, claims and interest spreads
 ●changes in assumptions for amortization of deferred policy acquisition expenses and deferred sales inducements
 ●changes in the fair value of derivative index options and embedded derivatives pertaining to fixed-index life and annuity products
 ●pricing and availability of adequate counterparties for reinsurance and index option contracts
 ●litigation subject to unfavorable judicial development, including the time and expense of litigation

The Company monitors these factors continually as key business indicators. The discussion that follows in this Item 2 includes these indicators and presents information useful to an overall understanding of the Company's business performance for the nine months ended September 30, 2020, incorporating required disclosures in accordance with the rules and regulations of the SEC.

Insurance Operations - Domestic

National Western is currently licensed to do business in all states, except New York, and the District of Columbia. Products marketed are annuities, universal life insurance, fixed-index universal life, and traditional life insurance, which include both term and whole life products. Domestic sales in terms of premium levels have historically been more heavily weighted toward annuities. Most of these annuities can be sold either as tax qualified or non-qualified products. More recently, a greater proportion of sales activity has been derived from single premium life insurance products, predominantly those with an equity-index crediting mechanism. Presently, nearly all of National Western's domestic life premium sales come from single premium life products. At September 30, 2020, National Western maintained approximately 114,500 annuity contracts in force and 47,000 domestic life insurance policies in force representing nearly $3.5 billion in face amount of coverage.

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. National Western's agents are independent contractors who are compensated on a commission basis. It currently has approximately 28,300 domestic independent agents contracted.

Although reported separately for segment disclosure purposes, effective January 31, 2019, domestic insurance operations include the activities of Ozark National. Ozark National is a Missouri domiciled, stock life insurance company currently licensed to conduct business in thirty states. Organized and incorporated in 1964, its largest markets by state are Missouri, Iowa, Minnesota, Nebraska, and Kansas. Ozark National utilizes a unique distribution system to market its flagship Balanced Program which consists of a coordinated sale of a non-participating whole life insurance product with a mutual fund investment product offered through its affiliated broker-dealer, NIS. Due to Ozark National's coordinated sale, their agents hold a securities license in addition to an insurance license. At September 30, 2020, Ozark National maintained approximately 180,000 life insurance policies in force representing $6.1 billion in face amount of coverage. It maintains its home office facility in Kansas City, Missouri where its approximately 70 employees are located.

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Insurance Operations - International

National Western's international operations had generally focused on foreign nationals in upper socioeconomic classes of other countries. The Company did not conduct business or maintain offices or employees in any other country, but historically did accept applications at its home office in Austin, Texas, and issued policies from there to non-U.S. residents. Insurance products issued were primarily to residents of countries in South America consisting of product offerings not available in the local markets. International life insurance products issued to international residents were almost entirely universal life and traditional life insurance products.

Issuing universal life and traditional life insurance policies to residents of countries in these different regions had provided diversification that helped to minimize large fluctuations that could arise due to various economic, political, and competitive pressures occurring from one country to another. These policies also provided diversification of earnings relative to the Company's domestic life insurance segment. The Company continues to service and maintain a block of international policies in force. At September 30, 2020, National Western had approximately 46,500 international life insurance policies in force representing nearly $12.7 billion in face amount of coverage.

There were some inherent risks of accepting international applications which are not present within the domestic market that were reduced substantially by the Company in several ways. As previously described, National Western accepted applications from foreign nationals of other countries in upper socioeconomic classes who had substantial financial resources. This targeted customer base, coupled with National Western's conservative underwriting practices, have historically resulted in claims experience, due to natural causes, similar to that in the United States. The Company has minimized exposure to foreign currency risks by requiring payment of premiums and claims in United States dollars. In addition, the Company adopted an extensive anti-money laundering compliance program in order to fully comply with all applicable U.S. monitoring and reporting requirements pertaining to money laundering and other illegal activities. All of the above served to minimize risks.

SALES

Life Insurance

The following table sets forth information regarding life insurance sales activity as measured by total premium for single premium life insurance products and annualized first year premiums for all other life insurance products. 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 EndedNine Months Ended
September 30,September 30,
 2020201920202019
 (In thousands)
Single premium life$56,610 51,929 141,557 127,496 
Traditional life798 1,189 2,139 3,840 
Universal life— 20 6 113 
Totals$57,408 53,138 143,702 131,449 

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Life insurance sales, as measured by total and annualized first year premiums, increased 8% in the third quarter of 2020 as compared to the third quarter of 2019 reflecting the current recovery in new sales activity from the contraction earlier in 2020 due to the COVID-19 pandemic. Sales for the three months ended September 30, 2020, included $0.8 million from Ozark National representing their traditional life sales activity. This amount is a decline from $1.2 million in sales achieved in the third quarter of 2019 indicative of Ozark National's business model which is heavily dependent upon in person contact for agent recruiting and obtaining applications for coverage from prospective policyholders. For the nine months ended September 30, 2020, total life insurance sales increased 9% from the level in 2019 representative of the strong sales momentum in the first quarter prior to the impacts of the COVID-19 social distancing protocols and the subsequent resumption in sales activity as states opened up their sheltering requirements. Included in these nine month amounts were $2.1 million and $3.7 million in sales from Ozark National for 2020 and 2019, respectively.

National Western's life insurance product portfolio includes single premium universal life ("SPUL") and equity-index universal life ("EIUL") products as well as hybrids of the EIUL and SPUL products, combining features of these core products. Equity-index universal life products have been the predominant product sold in the domestic life market for a number of years. Most of these sales are single premium mode products (one year, five year, or ten year) designed for transferring accumulated wealth tax efficiently into life insurance policies with limited underwriting due to lesser net insurance amounts at risk (face amount of the insurance policy less cash premium contributed). These products were designed and implemented years ago targeting the accumulated savings of the segment of the population entering their retirement years. The wealth transfer life products have been valuable offerings for the Company's distributors as evidenced by their comprising over 98% of total life sales in the first nine months of 2020.
The average new policy face amounts, excluding insurance riders, since 2016 are as shown in the following table.

 Average New Policy Face Amount
 NWLIC DomesticOzark NationalNWLIC International
Year ended December 31, 2016149,200 — 327,300 
Year ended December 31, 2017148,100 — 299,300 
Year ended December 31, 2018162,600 — 290,900 
Year ended December 31, 2019179,900 45,200 — 
Nine Months Ended September 30, 2020186,600 44,800 — 

Contracts issued to international residents historically had larger face amounts of life insurance coverage per policy compared to those issued to domestic policyholders. The Company's efforts were directed toward accepting applications from upper socioeconomic residents of international countries. National Western's average face amount of insurance coverage per policy for domestic life insurance contracts has exhibited an upward trend reflecting the shift in sales toward single premium life products, primarily fixed-index, as part of its wealth transfer strategy for domestic life sales.

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The table below sets forth information regarding life insurance in force for each date presented.

Insurance In Force as of
 September 30,December 31,
 20202019
 ($ in thousands)
National Western
Universal life: 
Number of policies31,720 33,760 
Face amounts$4,435,110 4,746,100 
Traditional life:
Number of policies26,670 28,400 
Face amounts$2,446,590 2,671,120 
Fixed-index life:
Number of policies35,120 36,170 
Face amounts$9,226,100 9,635,810 
Total life insurance: 
Number of policies93,510 98,330 
Face amounts$16,107,800 17,053,030 
Ozark National
Total life insurance (all traditional):
Number of policies180,050 183,380 
Face amounts$6,079,480 6,246,800 

At September 30, 2020, National Western’s face amount of life insurance in force was comprised of $12.6 billion from the international line of business and $3.5 billion from the domestic line of business. At December 31, 2019, these amounts were $13.7 billion and $3.4 billion for the international and domestic lines of business, respectively.

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 National Western's sales productivity.

Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Fixed-index annuities$76,255 55,865 221,992 171,483 
Other deferred annuities1,875 3,898 5,475 11,747 
Immediate annuities2,270 140 10,991 1,873 
Totals$80,400 59,903 238,458 185,103 

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Annuity sales increased 34% in the third quarter of 2020 compared to 2019 and were 29% higher in the nine months ended September 30, 2020 relative to the comparable period in 2019. The increased sales activity, in the midst of the COVID-19 pandemic, reflects National Western's expansion of its sales and marketing personnel beginning in the second half of 2019 and a related expansion of sales and marketing initiatives in this line of business.

The Company's mix of annuity sales has historically shifted with interest rate levels and the relative performance of the equity market. With the decline in interest rates subsequent to the subprime crisis, fixed-index products have comprised the majority of annuity sales generally accounting for 90% or more of all annuity sales the past several years. During the first nine months of 2020, this percentage approximated 93% reflecting both the historically low levels in interest rates and the overall upward trend in equities since bottoming out in 2009 during the financial crisis at that time. For all fixed-index products, the Company purchases over the counter call 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-index products also provide the contract holder the alternative to elect a fixed interest rate crediting option.

With the advent of a low interest rate policy engineered by the Federal Reserve in response to the subprime financial crisis, Company management evaluated the potential ramifications of continuing a high level of annuity sales in a depressed interest rate environment. Under the auspices of the Company's enterprise risk management ("ERM") processes, taking into consideration the Federal Reserve's announced intention to maintain interest rates at historically reduced levels over a prolonged period of time, the decision was made to curtail new sales to desired levels in order to minimize the level of assets added at low yield rates. While National Western does not subsidize its interest crediting rates on new policies in order to obtain market share, the Company's ERM considerations determined that managing to a lower level of annuity sales was prudent given the environment.

In addition to the above, National Western, similar to other annuity product providers, faced a scenario of declining yields on its investment portfolio as securities backing annuity policies and their credited rates were subsequently reinvested at substantially lower yields in the depressed interest rate environment. The compression on interest rate margins resulted in decrements to fixed interest rate renewal rates provided to annuity contractholders often to the minimum interest rate guarantee levels prescribed by state insurance regulators under non-forfeiture laws. The low renewal interest crediting rates discouraged repeat sales to existing clients and prompted a movement toward competitor annuities that offered multi-year interest rate guarantees.

As a result of the foregoing, the Company initiated rebuilding of sales momentum in its annuity sales. In the latter half of 2019, it added to its marketing staff individuals with extensive experience and expertise in annuity production in the life insurance industry and began developing products targeting new channels of distribution in addition to its current partnerships with national marketing organizations.

The level of annuity business in force requires a focused discipline on asset/liability analysis. The Company monitors its asset/liability matching within the self-constraints of desired capital levels and risk tolerance. National Western's capital level remains substantially above industry averages and regulatory targets. Management has performed analyses of the capital strain associated with incrementally higher levels of annuity new business and determined that National Western's capital position is more than sufficient to handle an increase in sales activity.

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The following table sets forth information regarding annuities in force for each date presented.

Annuities In Force as of
 September 30,December 31,
 20202019
 ($ in thousands)
Fixed-index annuities  
Number of policies68,590 70,790 
GAAP annuity reserves$5,260,656 5,467,786 
Other deferred annuities 
Number of policies33,960 36,550 
GAAP annuity reserves$1,297,869 1,420,237 (1)
Immediate annuities 
Number of policies11,940 12,530 
GAAP annuity reserves$368,333 349,389 
Total annuities 
Number of policies114,490 119,870 
GAAP annuity reserves$6,926,858 7,237,412 

(1) Revised to correct for an adjustment related to the understatement of reserve liabilities of $15.0 million. See Note (1) Consolidation and Basis of Presentation in the accompanying Notes to Condensed Consolidated Financial Statements included in this report.

Impact of Recent Business Environment

The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by improving employment data and increases in personal income. Important metrics indicating sustained economic growth over the longer term principally revolve around employment and confidence, both consumer and business sentiment.

While the morbidity exposure of COVID-19 to the life insurance industry is uncertain at this point, it is not expected to result in significant excess mortality claims. The Company (National Western and Ozark National) has incurred approximately $3.6 million in net death claims for which COVID-19 was identified as the cause of death. The biggest near-term risk to life insurance companies has been the decline in value of invested assets due to downgrades in credit market securities, derivative investments experiencing fair value declines resulting in unrealized losses, impairment-related losses or sizable additions being made to the allowance for current credit expected losses in financial statements. Consequently, there has been balance sheet asset deterioration, charges to capital, and lower reported earnings.

In recent years, in the attempt to acquire additional investment yield in the low rate environment, life insurers substantially increased allocations to BBB- rated bonds. In a recession, many of these investment grade corporate credits are at risk for downgrades, as well as the potential to default. Risk-based capital (RBC) formulas assess higher required capital charges as investment quality declines. A meaningful shift of BBB- rated debt securities to non-investment grade categories could have significant implications in terms of required capital levels which would depress RBC ratios of impacted insurers. Life insurance companies also have a large exposure to real estate in its investment portfolios through commercial mortgage, direct real estate investment, and mortgage-backed securities. These investments are highly dependent upon occupancy and payment of rent and lease obligations. The quarantine and shelter-at-home lockdown affect the ability to meet these payment obligations.

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Life insurance revenues are driven more by renewal premiums than sales. Most state insurance departments have issued directives instructing insurers to allow premium payments to fall into arrears. New life insurance sales face the challenge of having to forego face-to-face consultation with agents and distributors. In addition, full medical underwriting which is a cornerstone of evaluating risk in an insurer making the decision to offer coverage and at what level of coverage will likely be unavailable or difficult to complete as medical test for life insurance applications will not be considered as "essential" in the pandemic environment.

With regard to the credit market, although not probable in the current environment, industry analysts and observers generally agree that a sudden jump in interest rate levels would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal levels of product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. Ultimately, a mix of monetary policy adjustments, fiscal policy, and economic fundamentals will determine the future direction of interest rate movements and the speed of such shifts. It is uncertain at what pace interest rate movements may occur in the future and what impact, if any, such movements would have on the Company's business, results of operations, cash flows, or financial condition.

In an environment such as this, the need for a strong capital position that can cushion against unexpected bumps is critical for stability and ongoing business activity. The Company's operating strategy continues to be focused on maintaining capital levels substantially above regulatory and rating agency requirements. Our business model is predicated upon steady growth in invested assets while managing the block of business within profitability objectives. A key premise of our financial management is maintaining a high quality investment portfolio, well matched in terms of duration with policyholder obligations, that continues to outperform the industry with respect to adverse impairment experience. This discipline enables the Company to sustain resources more than adequate to fund future growth and absorb abnormal periods of cash outflows.


RESULTS OF OPERATIONS

The Company's Condensed 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 derivative and realized investment gains and losses from operating revenues. 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 derivative 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 condensed 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 Condensed Consolidated Financial Statements.

Consolidated Operations

Premiums and other revenues. The following details Company revenues.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Universal life and annuity contract charges$40,303 37,840 112,478 112,703 
Traditional life premiums22,693 24,099 68,956 65,492 
Net investment income (excluding derivatives)98,159 105,160 296,759 325,084 
Other revenues3,977 3,273 15,217 13,652 
Derivative gain (loss)31,520 3,296 (34,865)63,127 
Net realized investment gains (losses)6,050 (502)12,660 3,702 
Total revenues$202,702 173,166 471,205 583,760 

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Universal life and annuity contract charges - Revenues for universal life and annuity contracts were lower for the first nine months in 2020 compared to 2019 with the component sources shown below. Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, surrender charges assessed against policyholder account balances, and amortization of deferred premium loads less reinsurance premiums, as shown in the following table.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Contract Revenues:
Cost of insurance and administrative charges$30,975 31,788 93,122 94,119 
Surrender charges6,192 8,633 21,219 25,608 
Other charges7,668 1,831 11,007 6,268 
Gross contract revenues44,835 42,252 125,348 125,995 
Reinsurance premiums(4,532)(4,412)(12,870)(13,292)
Net contract revenues$40,303 37,840 112,478 112,703 

Cost of insurance charges were $24.6 million in the quarter ended September 30, 2020 compared to $25.4 million in the third quarter of 2019, and were $74.2 million for the nine months ended September 30, 2020 compared to $76.7 million for the same period in 2019. Cost of insurance charges typically trend with the size of the universal life insurance block in force and the amount of new business issued during the period. The volume of universal life insurance in force at September 30, 2020 declined to $13.7 billion from approximately $14.4 billion at December 31, 2019 and $15.6 billion at December 31, 2018. Administrative charges pertaining to new business issued were $6.4 million for the three months ended September 30, 2020 and $6.4 million for the same period in 2019, and increased to $18.9 million for the first nine months of 2020 compared to $17.4 million for the first nine months of 2019, reflecting higher sales activity in the current periods.

Surrender charges assessed against policyholder account balances upon withdrawal decreased in the three and nine months ended September 30, 2020 versus the comparable prior year periods. While the Company earns surrender charge income that is assessed upon policy terminations, the Company's overall profitability is enhanced when policies remain in force and additional contract revenues are realized and the Company continues to make an interest rate spread equivalent to the difference it earns on its investments and the amount that it credits to policyholders. In the three and nine months ended September 30, 2020, lapse rates on annuity products were higher than the prior year periods. However, surrender charge income recognized is also dependent upon the duration of policies at the time of surrender (i.e. later duration policy surrenders have lower surrender charges assessed and earlier policy surrenders having a higher surrender charge assessed). The lower surrender charge revenue reflects later duration policies terminating having lower surrender charges.

Other charges include the net amortization into income of the premium load on single premium life insurance products which is deferred at the inception of the policy. As these products have become a substantial portion of domestic life insurance sales, the amortization of accumulated deferrals has surpassed current period premium loads deferred. As part of the Company's annual unlocking analysis performed in the third calendar quarter, a prospective unlocking of the unearned revenue reserve was done in both 2020 and 2019. The effect of the unlocking in the three and nine months ended September 30, 2020 was an increase of $5.9 million in other charges revenue while the effect in the three and nine months ended September 30, 2019 was an increase of $0.5 million. Refer to the Amortization of Deferred Policy Acquisition Costs and Value of New Business Acquired later in this section for further discussion of the Company's unlocking process.

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Traditional life premiums - Traditional life premiums include the activity of Ozark National. Ozark National's principal product is a non-participating whole life insurance policy with premiums remitted primarily on a monthly basis. The product is sold in tandem with a mutual fund investment product offered through its broker-dealer affiliate, NIS. Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. A sizable portion of National Western's traditional life business resided in the International Life segment. However, National Western's overall life insurance sales focus has historically been primarily centered around universal life products. The addition of Ozark National's business of repetitive paying permanent life insurance adds an important complement to National Western's life insurance sales. Included in the amount for the quarter ended September 30, 2020 is $18.5 million of life insurance renewal premium from Ozark National compared to $18.7 million in the third quarter of 2019. For the nine months ended September 30, 2020 and 2019, the Ozark National life insurance renewal premium amounts were $56.1 million and $50.3 million, respectively. Universal life products, especially National Western's equity indexed universal life products, which offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index, have been the more popular product offerings in the Company's markets.

Net investment income - To ensure the Company will be able to honor 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. A detail of net investment income (with and without index option gains and losses) is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Gross investment income:    
Debt and equities$92,892 99,204 276,971 304,755 
Mortgage loans3,350 2,922 8,974 9,097 
Policy loans812 883 2,447 2,590 
Short-term investments261 845 1,959 2,054 
Other invested assets1,610 1,897 8,555 8,479 
Total investment income98,925 105,751 298,906 326,975 
Less: investment expenses766 591 2,147 1,891 
Net investment income (excluding derivatives)98,159 105,160 296,759 325,084 
Derivative gain (loss)31,520 3,296 (34,865)63,127 
Net investment income (loss)$129,679 108,456 261,894 388,211 

For the nine months ended September 30, 2020, debt and equity securities generated approximately 93% of total net investment income, excluding derivative gain (loss). The Company's strategy is to invest substantially all of its cash flows in fixed debt securities within its guidelines for credit quality, duration, and diversification. National Western's debt and equity securities investment income continues to experience higher yielding debt securities maturing or being called by borrowers and being replaced with lower yielding securities in the current interest rate environment. Investment yields on new bond purchases during the first nine months of 2020 approximated 3.47% as compared to the 4.06% yield achieved during the full year 2019. During the third quarter of 2020, interest rate levels were relatively level with the ten-year treasury bond increasing a few basis points. While credit spreads narrowed during the third quarter, the ongoing strategy of purchasing slightly longer duration securities helped to partially offset the low rate rate environment. National Western's weighted average portfolio yield was 3.72% at September 30, 2020 declining from 3.74% at June 30, 2020 and 3.78% at December 31, 2019. Ozark National's weighted average portfolio yield at September 30, 2020 was 3.69%.

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Changes in fair values of equity securities are included in net investment income in the Condensed Consolidated Statements of Earnings (Loss). For the three months ended September 30, 2020 and 2019, unrealized gains of $0.9 million and $0.2 million, respectively, are included in investment income. For the nine months ended September 30, unrealized losses of $3.2 million in 2020 are netted in investment income while unrealized gains of $2.2 million are included in investment income in the same period for 2019. The carrying value of the Company's portfolio of equity securities was $18.6 million at September 30, 2020.

The Company's mortgage loan activity in the first nine months of 2020 was initially impacted by the pandemic crisis and the low interest rate levels which subsequently materialized. This environment slowed down the underwriting of new loan applications until clarity regarding the impacts of closing down the economy upon commercial real estate became available. The portfolio balance has increased to $302.7 million at September 30, 2020 from $272.4 million at December 31, 2019. During the nine months ended September 30, 2020 the Company originated new mortgage loans in the amount of $41.5 million compared to $47.7 million in the comparable period of 2019.

As disclosed in the accompanying Notes to Condensed Consolidated Financial Statements included in this report, the Company adopted new accounting guidance pertaining to current expected credit losses on financial instruments ("CECL"). The adoption as of January 1, 2020 was reported as a change in accounting with initial balances recorded and charged to retained earnings. Remeasurement of the CECL allowance as of September 30, 2020 resulted in an increase in the allowance of $2.9 million for the nine months ended September 30, 2020 and an increase in allowance of $0.3 million for the three months ended September 30, 2020 which are included in gross investment income. The year-to-date allowance increase is allocated nearly $1.8 million for debt securities held to maturity and slightly under $1.2 million for mortgage loans.

In order to evaluate underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding derivative gain (loss), which is a common practice in the insurance industry. Although this is considered a non-GAAP financial measure, Company management believes this financial measure provides useful supplemental information by removing the swings associated with fair value changes in derivative instruments. Net investment income and average invested assets shown below includes cash and cash equivalents. Net investment income performance is summarized as follows:

 Nine Months Ended September 30,
 20202019
 (In thousands)
Excluding derivatives:  
Net investment income (loss)$296,759 325,084 
Average invested assets, at amortized cost$10,982,593 10,902,847 
Annual yield on average invested assets3.60 %3.98 %
Including derivatives:  
Net investment income (loss)$261,894 388,211 
Average invested assets, at amortized cost$11,108,071 10,963,371 
Annual yield on average invested assets3.14 %4.72 %

The decline in average invested asset yield, excluding derivatives, for the first nine months of 2020 is due to the Company continuing to obtain low yields on newly invested cash flows as higher yielding assets mature or are called, the current period mark-to-market unrealized loss on equity securities, and the current period allowance for expected credit losses.

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The average yield on bond purchases during the nine months ended September 30, 2020 to fund National Western insurance operations was 3.47% representing a 2.18% spread over treasury rates. The weighted average quality of new purchases during the first nine months of 2020 was "BBB+" which was slightly higher than the "BBB" average quality of new investments in 2019 but consistent with periods prior to 2019. The composite duration of purchases during the first nine months of 2020 was longer than that of purchases made in previous years as the Company purchased a higher proportion of investments for its life insurance line of business which has a longer liability duration than that of the annuity line of business. The Company's general investment strategy is to purchase debt securities with maturity dates approximating ten years in the future. Accordingly, an appropriate measure for benchmarking the direction of interest rate levels for the Company's debt security purchases is the ten year treasury bond rate. After ending 2019 at a rate of 1.92%, the daily closing yield of the ten-year treasury bond ranged as low as 0.51% during the first nine months of 2020 finishing the period at 0.69%.

The pattern in average invested asset yield, including derivatives, incorporates increases and decreases in the fair value of index options purchased by National Western to support its fixed-index products. Fair values of the purchased call options recorded a net loss during the first nine months of 2020 while a net gain was recorded during the first nine months of 2019, corresponding to the movement in the S&P 500 Index during these periods (the primary index the fixed-index products employ). Refer to the derivatives discussion below for a more detailed explanation.

Other revenues - Other revenues pertain to NIS, the broker-dealer affiliate of Ozark National; the operations of Braker P III ("BP III"), a subsidiary created at the end of 2016 to own and manage a commercial office building BP III acquired; and the Company's previously owned two nursing home operations in Reno, Nevada and San Marcos, Texas.

Revenues associated with NIS were $2.6 million and $2.3 million in the quarter ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, NIS revenues were $7.2 million and $5.9 million, respectively. NIS revenues in the first nine months of 2019 were for the period subsequent to its acquisition effective January 31, 2019.

Revenues associated with BP III were $1.1 million and $1.0 million in the quarter ended September 30, 2020 and 2019, respectively, and $3.4 million and $3.0 million in the first nine months of 2020 and 2019, respectively. The increased revenues in 2020 reflect tenant leases that were subsequently entered into. The facility is currently fully leased.

The Company closed on the sale of its Reno nursing home operations effective February 1, 2019 and on the sale of its San Marcos nursing home operations effective May 1, 2019. Revenues of $4.3 million in the first nine months of 2019 include Reno and San Marcos operating revenues up to their respective sales dates. In addition, net gains from the sale of personal property and equipment at the Reno facility of $1.4 million are included in 2019 revenues.

The Company's acquisition of Ozark National (by National Western) included a contingent payment provision that was dependent upon the subsequent persistency of Ozark National's in force block of business that was acquired. The Company had been progressively accruing for this potential obligation in its financial statements. Prior to the end of the quarter ended June 30, 2020, the Company executed an agreement with the seller under which both parties agreed that the Company had fulfilled its payment obligation under the Stock Purchase Agreement executed October 3, 2018. Consequently, the Company reversed the contingent payment amounts previously accrued and recognized as Other revenues $4.1 million in the nine months ended September 30, 2020.

Derivative gain (loss) - Index options are derivative financial instruments used to hedge the equity return component of National Western's fixed-index products. Derivative gain or loss includes the amounts realized from the sale or expiration of the options. Since the index options do not meet the requirements for hedge accounting under GAAP, they are marked to fair value on each reporting date and the resulting unrealized gain or loss is reflected as a component of net investment income. As the options hedging the notional amount of policyholder contract obligations are purchased as close as possible to like amounts, the amount of the option returns tends to correlate closely with indexed interest credited.

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Gains and losses from index options are substantially due to changes in equity market conditions. Index options are intended to act as hedges to match the returns on the product's underlying reference index and the rise or decline in the index relative to the index level at the time of the option purchase which causes option values to likewise rise or decline. As income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the Company's fixed-index products also fluctuates in a similar manner and direction. For the three and nine months ended September 30, 2020 and 2019, the Company recorded realized and unrealized gains/(losses) from index options as shown below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Derivatives:    
Unrealized gain (loss)$35,075 15,619 (58,077)98,490 
Realized gain (loss)(3,555)(12,323)23,212 (35,363)
Total gain (loss) included in net investment income$31,520 3,296 (34,865)63,127 
Total contract interest$85,879 59,445 119,625 200,500 

The economic impact of option performance in the Company's financial statements is not generally determined solely by the option gain or loss included in net investment income as there is a corresponding amount recorded in the contract interest expense line. The Company's profitability with respect to these options is largely dependent upon the purchase cost of the option remaining within the financial budget for acquiring options embedded in the product pricing. Option prices vary with interest rates, volatility, and dividend yields among other things. As option prices vary, the Company manages for the variability by making offsetting adjustments to product caps, participation rates, and management fees. For the periods shown, the Company's option costs have been close to or within the product pricing budgets.

The financial statement investment spread, the difference between investment income and interest credited to contractholders, is subject to variations from option performance during any given period. For example, many of the Company's equity-index annuity products provide for the collection of asset management fees. These asset management fees are assessed when returns on expiring options are positive, and they are collected prior to passing any additional returns above the assessed management fees to the policy contractholders. During periods of positive returns, the collected asset management fees serve to increase the financial statement spread by increasing option realized gains reported as investment income in an amount greater than interest credited to policy contractholders which is reported as contract interest expense. Asset management fees collected in the first nine months of 2020 and 2019 were approximately $24.7 million and $8.1 million, respectively. For the three months ended September 30, 2020 and 2019, asset management fees collected were $6.7 million and $0.5 million, respectively.

Net realized investment gains (losses) - Realized gains (losses) on investments include proceeds from bond calls, sales and impairment write-downs as well as gains and losses on the sale of real estate property. The net gains reported for the nine months ended September 30, 2020 consisted of gross gains of $12.7 million offset by gross losses of $0.0 million. The net gains reported for the nine months ended September 30, 2019 consisted of gross gains of $13.7 million offset by gross losses of $10.0 million.

In the third quarter of 2020, the Company sold a real estate investment property realizing a gain of $2.7 million. Included in gross gains in 2019 is $5.7 million from the sale of land and building associated with the nursing home in Reno, Nevada and a $3.2 million gain on the sale of the Company's former home office facility. Gross losses during the first nine months of 2019 include a $7.8 million other-than-temporary impairment of a debt security and a $2.0 million loss on the building pertaining to the San Marcos, Texas nursing home which was sold during the period.

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Prior to January 1, 2020 and the adoption of the new accounting guidance on current expected credit losses, the Company recorded impairment write-downs when a decline in value was considered to be other-than-temporary and full recovery of the investment was not expected. Impairments due to credit factors were recorded in the Company's Condensed Consolidated Statements of Earnings (Loss) while non-credit (liquidity) impairment losses were included in Condensed Consolidated Statements of Comprehensive Income (Loss). Under the new accounting guidance, credit loss allowances for available for sale debt securities are recorded following the same process previously applied for impairment accounting. Credit loss allowances are recorded through net investment income in the Condensed Consolidated Statements of Earnings (Loss). Impairment or valuation write-downs recorded prior to January 1, 2020 in the Company’s Condensed Consolidated Statement of Earnings (Loss) were completed under accounting guidance prior to the adoption of the accounting standard update 2016-13, Financial Instruments-Credit Losses. Such impairments related to bonds and totaled $1.9 million and $7.8 million for the three and nine months ended September 30, 2019.
The Company had recorded an impairment of $2.2 million during the first quarter of 2019 on real estate property associated with its nursing home operations in San Marcos, Texas based upon a pending agreement to sell the operations. Upon closing of the sale in the second quarter of 2019, a realized loss of $2.0 million was recognized and the impairment allowance reversed.

Benefits and Expenses. The following table details benefits and expenses.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Life and other policy benefits$26,940 39,918 94,005 101,764 
Amortization of deferred policy acquisition costs and value of business acquired50,800 22,998 111,937 86,573 
Universal life and annuity contract interest85,879 59,445 119,625 200,500 
Other operating expenses25,754 25,813 74,730 77,196 
Totals$189,373 148,174 400,297 466,033 

Life and other policy benefits - Death claim benefits, the largest component of policy benefits, were $50.9 million in the first nine months of 2020 compared to $50.3 million for the first nine months of 2019. Of the amount included in the nine months ended September 30, 2020, $25.1 million was associated with National Western business and $25.8 million pertained to Ozark National. In the nine months of 2019, these amounts were $27.7 million and $22.6 million for National Western and Ozark National, respectively, (Ozark National for the eight months subsequent to the January 31, 2019 acquisition date). Death claim amounts are subject to variation from period to period. For the first nine months of 2020, the number of National Western life insurance claims increased 20% from the comparable period in 2019 while the average dollar amount per net claim decreased to $40,000 from approximately $50,000. The increase in number of claims reflects additional claims reported through National Western's periodic search of the Social Security Administration's Master Death Claim database which was conducted in the first quarter of 2020. National Western's overall mortality experience has generally been consistent with or better than its product pricing assumptions. The average net claim for Ozark National during the 2020 and 2019 nine month periods was $15,300 and $16,100, respectively. Mortality exposure is managed through reinsurance treaties under which National Western's retained maximum net amount at risk on any one life is capped at $500,000. Ozark National's retained maximum net amount at risk is capped at $200,000 under its reinsurance treaties with limited exceptions related to the conversion of child protection and guaranteed insurability riders.

Both National Western and Ozark National have established specific coding to track the death claim experience associated with COVID-19. During the nine months ended September 30, 2020, National Western had incurred 51 death claims on life insurance policies in which the reported cause of death was due to the coronavirus (COVID-19) totaling a net claim amount (after reinsurance) of $2.4 million. During the same period, Ozark National incurred 76 confirmed COVID-19 death claims aggregating to a net claim amount of approximately $1.2 million. The COVID-19 claim activity is included in the claim disclosures made in the preceding paragraph.

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Life and other policy benefits also includes policy liabilities held associated with the Company's traditional life products, policies with life contingencies, and riders such as the guaranteed minimum withdrawal benefit rider ("WBR"), a popular rider to National Western's equity-indexed annuity products. Prior to unlocking adjustments, the increases in these liabilities for National Western were $6.2 million and $7.5 million in the quarters ended September 30, 2020 and 2019, respectively, and $16.9 million and $17.0 million, respectively, for the nine months then ended. In the third quarter of 2020, the Company unlocked its assumptions pertaining to the WBR benefit as well as mortality experience on payout annuities with life contingencies. The effect of the prospective unlocking in the three and nine months ended September 30, 2020 was a reduction in the policy liability balance in the amount of $11.9 million. In the three and nine months ended September 30, 2019 the Company also performed a prospective unlocking the effect of which was a $0.7 million increase in the policy liability balance.

Life and other policy benefits in the quarters ended September 30, 2020 and 2019 includes changes in traditional life reserves and miscellaneous benefit payments associated with Ozark National's operations of $7.6 million and $8.5 million, respectively, and $24.6 million and $21.3 million, respectively, for the nine months then ended. The amounts for the first nine months of 2019 reflect activity subsequent to the acquisition date of January 31, 2019.

Amortization of deferred policy acquisition costs and value of business acquired - Life insurance companies are required to defer certain expenses that vary with, and are primarily related to, the cost of acquiring new business. The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses. Recognition of these deferred policy acquisition costs (“DPAC”) as an expense in the Condensed Consolidated Financial Statements occurs over future periods in relation to the expected 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 universal life and annuity contract 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 actual experience. DPAC balances are also adjusted each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (“true-up”) with the adjustment reflected in current period amortization expense. In accordance with GAAP guidance, the Company must also write-off deferred acquisition costs and unearned revenue liabilities upon internal replacement of certain contracts as well as annuitizations of deferred annuities.

The following table identifies the effects of unlocking adjustments on DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three and nine months ended September 30, 2020 and 2019.

Amortization of DPACThree Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Unlocking adjustments$22,358 (8,643)22,358 (8,643)
Other amortization components26,597 29,680 83,933 89,348 
Totals$48,955 21,037 106,291 80,705 

Amortization expense for the three and nine months ended September 30, 2020 was comprised of DPAC amortization by National Western of $48.9 million and $105.9 million, respectively, and by Ozark National of $0.1 million and $0.4 million, respectively. Ozark National's deferred policy acquisition cost balance was initiated February 1, 2019 following its acquisition by National Western.

The Company's practice is to annually review during the third quarter its actuarial assumptions regarding the emergence of profits pertaining to its blocks of businesses and to update or "unlock" those assumptions which deviate significantly from actual experience. During the quarter ended September 30, 2020, the Company unlocked DPAC balances associated with its Life and Annuity segments the effect of which was to decrease DPAC balances by $22.4 million (and increase amortization expense). The Life DPAC balance was unlocked for assumptions involving lapse rates, mortality, and investment portfolio yield rates and related interest spreads. The Annuity DPAC balance was unlocked for assumptions concerning surrender rates, annuitization rates, investment portfolio yield rates, withdrawal benefit rider election rates, and mortality experience on payout annuities.

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During the quarter ended September 30, 2019, the Company unlocked DPAC balances associated with its Life and Annuity segments the effect of which was to increase DPAC balances by $8.6 million (and reduce amortization expense). The Life DPAC balance was unlocked for assumptions involving mortality, lapse rates, maintenance expenses, and investment portfolio yields and related interest spreads. The Annuity DPAC balance was unlocked for assumptions concerning surrender rates, annuitization rates, the election rate of the Company's withdrawal benefit rider, and the investment portfolio yield supporting annuity contract amounts.

The Company is required to evaluate its emergence of profits continually and management believes that the current amortization patterns of deferred policy acquisition costs are reflective of actual experience. It is the Company's practice, absent intervening events or experience, to annually perform any necessary DPAC balance unlockings in the third calendar quarter of each year.

As the DPAC balance is an asset on the Company's Condensed Consolidated Balance Sheets, GAAP provides for an earned interest return on the unamortized balance each period. The earned interest serves to increase the DPAC balance and reduce other amortization component expense. The rate at which the DPAC balance earns interest is the average credited interest rate on the Company's universal life and annuity policies in force, including credited interest on equity-indexed policies. The amount of earned interest on DPAC balances recorded for the three months ended September 30, 2020 and 2019 was $2.7 million and $2.6 million, respectively, decreasing other amortization component expense. The amount of interest earned on DPAC balances for the nine months ended September 30, 2020 and 2019 was $13.3 million and $8.2 million, respectively. The increased interest amount in the first nine months of 2020 reflects higher returns on equity-index products, particularly life insurance products..

As part of the purchase accounting required with the acquisition of Ozark National effective January 31, 2019, the Company recorded an intangible asset of $145.8 million referred to as the value of business acquired ("VOBA"). VOBA represents the difference between the acquired assets and liabilities of Ozark National measured in accordance with the Company's accounting policies and the fair value of these same assets and liabilities. The VOBA balance sheet amount is amortized following a methodology similar to that used for amortizing deferred policy acquisition costs. In the quarters ended September 30, 2020 and 2019, the Company's VOBA amortization expense was $1.8 million and $2.0 million, respectively, and $5.6 million and $5.9 million, respectively, for the nine months then ended. The amount for the first nine months of 2019 reflects eight months of amortization subsequent to the acquisition date of January 31, 2019.

Universal life and annuity contract interest - The Company closely monitors its credited interest rates on interest sensitive policies (National Western products), 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 described above. The difference between yields earned on investments over policy credited rates is often referred to as the "interest spread".

National Western's approximated average credited rates through the first nine months, excluding and including equity-indexed products, were as follows:

 September 30,September 30,
 2020201920202019
 (Excluding fixed-index products)(Including fixed-index products)
Annuity1.93 %1.94 %2.04 %2.02 %
Interest sensitive life3.37 %3.37 %0.83 %6.26 %

Contract interest reported in financial statements also encompasses the performance of the index options associated with the Company's fixed-index products. As previously noted, the market value changes of these derivative features resulted in net realized and unrealized gains/(losses) of $(34.9) million and $63.1 million for the nine months ended September 30, 2020 and 2019, respectively. These amounts consisted of realized gains of $23.2 million and unrealized losses of $(58.1) million for the year-to-date 2020 period, and realized losses of $(35.4) million and unrealized gains of $98.5 million for the comparable 2019 time frame. In the third quarter of 2020, this figure was comprised of realized losses of $(3.6) million and unrealized gains of $35.1 million. In the third quarter of 2019, the amount was made up of realized losses of $(12.3) million and unrealized gains of $15.6 million. These returns similarly increased/(decreased) the computed average credited rates for the periods shown above. Policyholders of equity-indexed products cannot receive an interest credit below 0% according to the policy contract terms.

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Contract interest expense includes other items which may increase or decrease reported contract interest in a particular reporting period. For the three and nine months ended September 30, 2020 and 2019, these other items include the amounts shown in the table below.

Contract Interest ExpenseThree Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Reserve changes$4,052 7,722 16,405 22,928 
Unlocking adjustments17,180 10,274 17,180 10,274 
Asset management fees collected(6,740)(497)(24,682)(8,063)
Projected asset management fees3,657 (6,811)29,292 (27,138)
Other embedded derivative components822 39 (6,455)5,908 
Totals$18,971 10,727 31,740 3,909 

Contract interest expense includes reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitizations, and amortization of deferred sales inducement balances. These items are offset by policy charges assessed for policies having the withdrawal benefit rider (WBR). As changes in these items collectively impact contract interest expense, financial statement interest spread is also affected. Netted against reserve changes for the first nine months of 2020 is $18.0 million for assessed WBR policy charges compared to $17.0 million in the same period for 2019.

Generally, the impact of the market value change of index options on asset values aligns closely with the movement of the embedded derivative liability held for the Company's fixed-index products such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). However, other aspects of the embedded derivatives can cause deviations to occur between the change in index option asset values included in net investment income and the change in the embedded derivative liability included in contract interest. As noted in the discussion of net investment income, the collection of asset management fees in a period can cause investment income to increase marginally higher than contract interest expense since these collected fees are deducted from indexed interest credited to policyholders. The increase in collected asset management fees for the three and nine months ended September 30, 2020 relative to their comparable periods in 2019 reflects the level of realized option gains incurred during these periods.

Accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year due to the Company's historical practice of purchasing options priced to incorporate an expected probability of collecting asset management fees (referred to as "at the money hedging"). This projection for the embedded derivative liability is based upon the most recent performance of the reference equity index. Increases in projected asset management fees to be collected reduce contract interest expense while decreases in projected asset management fees to be collected increase contract interest expense. In the nine month periods ended September 30, 2020 and 2019 contract interest was increased by $29.3 million and decreased by $(27.1) million, respectively, for the projected change in asset management fees to be collected. In the second quarter of 2020, the Company changed its embedded derivative hedging process to incorporate "out of the money" hedging which reduces option costs and eliminates probability projections of collected asset management fees going forward. As the current inventory of annual hedges roll over during the next six months, the embedded derivative liability component for projected asset management fees to be collected will be phased out.

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Other embedded derivative components include changes pertaining to other modeling differences, changes in future interest adjustments, and the change in the host contract component of the embedded derivative products. In the first quarter of 2020, the Company incurred an additional charge to contract interest pertaining to an assumption regarding the embedded derivative option budget which was made several years ago when the Company's investment portfolio yield was higher. The combination of the embedded derivative option budget being out of date relative to the Company's current investment portfolio yield and the historically low interest rate levels introduced an embedded derivative floor which prevented the Company's contract interest expense from declining in tandem with the option value decreases recorded in net investment income. The additional contract interest charge in the quarter ended March 31, 2020 for this occurrence was $12.1 million. In the quarter ended June 30, 2020, the Company unlocked for this out of date embedded derivative option budget assumption to reflect the Company's current investment portfolio yield. This unlocking had the effect of removing the embedded derivative floor and reversing the $12.1 million contract interest charge recorded in the first quarter of 2020. As these amounts offset each other, contract interest for the three and nine month periods ended September 30, 2020 reflect no effect for this occurrence.

Another contract interest expense component is the amortization of deferred sales inducements. Similar to deferred policy acquisition costs, the Company defers sales inducements in the form of first year credited interest bonuses on annuity products that are directly related to the production of new business. These bonus interest 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. In addition, deferred sales inducement balances are also reviewed periodically to ascertain whether actual experience has deviated significantly from that assumed (unlock) and are adjusted to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (true-up). These adjustments, plus or minus, are included in contract interest expense. As previously discussed in the amortization of deferred policy acquisition costs section, the Company unlocked its assumptions for the annuity line of business in the third quarters of 2020 and 2019 including the deferred sales inducement balance. The effect of these prospective unlockings was to decrease the deferred sales inducement balance by $4.4 million and $0.7 million (and increase contract interest expense) during the three and nine month periods ended September 30, 2020 and 2019, respectively. These amounts are included in the previous table in the Unlocking adjustments line.
Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, nursing home expenses, real estate expenses, brokerage expenses, and compensation costs. These expenses for the three and nine months ended September 30, 2020 and 2019 are summarized in the table that follows.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
General insurance expenses$9,553 7,980 30,670 30,669 
Nursing home expenses36 32 77 3,272 
Compensation expenses7,629 9,307 19,855 21,299 
Commission expenses2,927 3,110 8,502 7,483 
Real estate expenses1,395 1,323 4,335 3,833 
Brokerage expenses (NIS)1,372 1,196 3,745 3,108 
Taxes, licenses and fees2,842 2,865 7,546 7,532 
Totals$25,754 25,813 74,730 77,196 

General insurance expenses include software amortization expense associated with National Western's proprietary policy administration system which was phased into production over the past few years as well as other acquired software. Expenses pertaining to these items were $3.0 million and $2.9 million in the third quarter of 2020 and 2019, respectively, and $9.1 million and $9.0 million in the first nine months of 2020 and 2019, respectively. This category of expenses also includes employee benefit plan expenses for the various employee health and retirement plans the Company sponsors. Related expenses for the third quarter of 2020 and 2019 were $3.3 million and $2.1 million, respectively, and for the first nine months of 2020 and 2019 were $9.8 million and $6.0 million. Refer to Note (5) Pension and Other Postretirement Plans in the accompanying Notes to Condensed Consolidated Financial Statements in this report for discussion of the financial statement expenses of the Company's defined benefit pension plans. For the nine months ended September 30, 2019, general insurance expenses include a $3.3 million broker fee paid in connection with the acquisition of Ozark National and NIS which closed during this period.

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Nursing home expenses reflect the operations of the Company's two nursing home operations which were sold during 2019. The Reno, Nevada nursing home was sold effective February 1, 2019 while the San Marcos, Texas nursing home sale closed effective May 1, 2019. The Company must maintain the entities for a specified time period subsequent to each sale and incur various record safekeeping and other administrative expenses in the interim.

Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock appreciation rights ("SARs"), restricted stock units ("RSUs") and performance share units ("PSUs"). The related share-based compensation costs move in tandem not only with the number of awards outstanding but also with the movement in the market price of the Company's Class A common stock as a result of marking the SARs, RSUs, and PSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positive or negative in any given period. In the amounts shown above, share-based compensation expense totaled $(0.5) million in the third quarter of 2020 and $1.5 million in the third quarter of 2019. For the nine-month periods shown, share-based compensation expense was $(4.4) million in 2020 and $0.1 million in 2019. The negative expense levels reflect a change in the Company's Class A common share price from $290.88 at December 31, 2019 to $182.77 at September 30, 2020, and from $300.70 at December 31, 2018 to $268.37 at September 30, 2019. No performance share awards were granted in the first nine months of 2020 and 2019. Ozark National compensation expenses were $0.9 million and $0.8 million in the third quarter of 2020 and 2019, respectively, and $2.6 million and $1.9 million in the nine months ended September 30, 2020 and 2019, respectively.

Real estate expenses pertain to the commercial building operated by Braker P III. Expense increases in the 2020 periods relative to comparable 2019 periods reflect the addition of new tenants and associated operating expenses.

NIS brokerage expense in the first nine months of 2019 reflects its activity subsequent to the acquisition by the Company effective January 31, 2019.

Federal Income Taxes. Federal income taxes on earnings from operations reflect an effective tax rate of 19.4% for the nine months ended September 30, 2020 compared to 20.3% for the nine months ended September 30, 2019. The Federal corporate tax rate decreased to 21% effective in 2018 under the Tax Cuts and Jobs Act ("Tax Act") passed in December 2017. The Company's effective tax rate is typically lower than the Federal statutory rate due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from stocks, absent other permanent tax items.

While the Company's overall effective tax rate remains close to the statutory rate level, the Company's current tax expense is elevated due to a provision of the Tax Act which imposed a limitation on the amount of tax reserves a life insurer is able to deduct in arriving at its taxable income. The limitation is the greater of net surrender value or 92.81% of the reserve method prescribed by the National Association of Insurance Commissioners. Implementation of this provision was required as of January 1, 2018 and the Company ultimately determined that the resultant tax reserve adjustment was a decrease of $332.9 million. The Tax Act provided that this tax reserve adjustment could be brought into taxable income ratably over a period of eight (8) years. Based upon the tax reserve adjustment derived, the effect of the Tax Act limiting the tax reserve deductible in the current tax computation serves to increase the Company's taxable income by approximately $41.6 million per year through 2025. At the Federal statutory rate of 21%, the impact upon current tax expense is an increase of approximately $8.7 million per year or approximately $2.2 million each quarter.


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Segment Operations

Summary of Segment Earnings

A summary of segment earnings/(losses) for the three and nine months ended September 30, 2020 and 2019 is provided below. The segment earnings/(losses) exclude realized gains and losses on investments, net of taxes. The 2019 amounts shown for Acquired Businesses represent results subsequent to their January 31, 2019 acquisition date.

Domestic
Life
Insurance		International
Life
Insurance		AnnuitiesAcquired BusinessesAll
Others		Totals
 (In thousands)
Segment earnings (losses):     
Three months ended:     
September 30, 2020$(756)26,557 (26,478)3,661 3,062 6,046 
September 30, 2019$(416)7,835 5,581 4,493 2,892 20,385 
Nine months ended: 
September 30, 2020$998 44,769 (22,317)12,144 11,581 47,175 
September 30, 2019$1,205 28,322 37,118 11,287 13,026 90,958 

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 September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Premiums and other revenues:    
Premiums and contract revenues$17,734 11,387 40,971 32,897 
Net investment income (loss)21,201 12,885 23,293 51,379 
Other revenues10 49 40 113 
Total premiums and other revenues38,945 24,321 64,304 84,389 
Benefits and expenses:    
Life and other policy benefits3,785 6,099 13,831 13,850 
Amortization of deferred policy acquisition costs10,540 2,181 16,322 8,898 
Universal life insurance contract interest20,352 11,267 17,831 45,693 
Other operating expenses5,185 5,297 15,123 14,437 
Total benefits and expenses39,862 24,844 63,107 82,878 
Segment earnings (loss) before Federal income taxes(917)(523)1,197 1,511 
Provision (benefit) for Federal income taxes(161)(107)199 306 
Segment earnings (loss)$(756)(416)998 1,205 
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Revenues from domestic life insurance operations include life insurance premiums on traditional type products and contract revenues from universal life insurance. Revenues from traditional products are simply 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 September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Universal life insurance revenues$19,739 13,150 46,426 37,947 
Traditional life insurance premiums894 1,125 2,790 3,268 
Reinsurance premiums(2,899)(2,888)(8,245)(8,318)
Totals$17,734 11,387 40,971 32,897 

National Western's domestic life insurance in force, in terms of policy count, has been declining for some time. The pace of new policies issued has lagged the number of policies terminated from death or surrender causing a declining level of policies in force from which contract revenue is received. Consequently, the number of domestic life insurance policies in force has declined from 49,000 at December 31, 2018 to 47,900 at December 31, 2019, and to 47,000 at September 30, 2020. Policy lapse rates in the first nine months of 2020 approximated 6.5% compared to 6.0% and 6.5% in 2019 and 2018, respectively. The lapse rate in the first nine months of 2020 includes the effect of the pandemic induced economic crisis which caused consumers to access available sources of liquidity. While policy count rates have declined, the face amount of life insurance in force has increased from $3.2 billion at December 31, 2018 to less than $3.4 billion at December 31, 2019 and to more than $3.4 billion at September 30, 2020.

Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. The number of domestic life policies issued in the first nine months of 2020 was 2% lower than in the comparable period for 2019 and the volume of insurance issued was 1% higher than that in 2019.

Universal life insurance revenues also include surrender charge income realized on terminating policies and, in the case of domestic universal life, amortization into income of the premium load on single premium policies which is deferred. The net premium load amortization was $11.0 million and $6.3 million in the nine months ended September 30, 2020 and 2019, respectively. The net amortization amount in 2020 includes $5.8 million from the Company's annual unlocking of actuarial assumptions during the third quarter.

Premiums collected on universal life products are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual domestic universal life premiums collected are detailed below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Universal life insurance:    
First year and single premiums$56,330 52,044 141,191 127,596 
Renewal premiums5,084 4,835 13,474 13,847 
Totals$61,414 56,879 154,665 141,443 

During the past several years, sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products are targeting wealth transfer strategies involving the movement of accumulated wealth in alternative investment vehicles, including annuities, into life insurance products. As a result, renewal premium levels have not been exhibiting a corresponding level of increase.
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Net investment income for this segment of business, excluding derivative gain/(loss), has been gradually increasing due to the increased new business activity described above (single premium policies) and a higher level of investments needed to support the corresponding growth in policy obligations, especially those for single premium policies. The increase in net investment income has been partially muted by lower investment yields from debt security investment purchases during this time frame. Net investment income also includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal products.

A detail of net investment income (loss) for domestic life insurance operations is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Net investment income (excluding derivatives)$11,760 11,550 34,040 33,073 
Derivative gain (loss)9,441 1,335 (10,747)18,306 
Net investment income (loss)$21,201 12,885 23,293 51,379 

As seen in the above table, reported net investment income (loss) includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal life products. The gain or loss on index options follows the movement of the S&P 500 Index (the primary index for the Company's fixed-index products) with realized gains or losses being recognized on the anniversary of each index option based upon the S&P 500 Index level at each expiration date relative to the index level at the time the index option was purchased, and unrealized gains and losses being recorded for index options outstanding based upon the S&P 500 Index at the balance sheet reporting date as compared to the index level at the time each respective option was purchased.

Life and policy benefits for a smaller block of business are subject to variation from period to period. Claim count activity during the first nine months of 2020 increased 22% compared to the first nine months of 2019 while the average net claim amount (after reinsurance) decreased to $29,200 from $35,100. The increased amount of claims is the result of the Company performing a search during the 1st quarter of 2020 of the Social Security Administration's Master Death data base for past dated unreported death claims. The low face amount per claim relative to current issued amounts of insurance per policy reflects the older block of domestic life insurance policies sold consisting of final expense type products (i.e. purchased to cover funeral costs). Claims on these older blocks of policies are more susceptible to not being reported timely to the Company. GAAP reporting requires that claims be recorded net of any cash value amounts that have been accumulated in the policies. The Company's overall mortality experience for this segment has been consistent with pricing assumptions.

As noted previously in the discussion of Results of Operations, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience with the adjustment reflected in current period amortization expense. To the extent required, unlocking adjustments may also be recorded to DPAC balances. The following table identifies the effects of unlocking adjustments on domestic life insurance DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three and nine months ended September 30, 2020 and 2019.

Amortization of DPACThree Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Unlocking adjustments$7,391 (360)7,391 (360)
Other amortization components3,149 2,541 8,931 9,258 
Totals$10,540 2,181 16,322 8,898 


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During the quarter ended September 30, 2020, the Company unlocked DPAC balances associated with its Domestic Life segment for mortality, lapse rates, and investment spread. The effect of the prospective unlocking was to decrease DPAC balances by $7.4 million (and increase amortization expense). During the quarter ended September 30, 2019, the Company unlocked DPAC balances for the same assumptions noted above the effect of which was to increase DPAC balances by $0.4 million (and decrease amortization expense).
In the Consolidated Operations discussion of amortization of deferred acquisition costs it was noted that interest earned on DPAC balances serves to offset (decrease) amortization expense and that the interest rate used is the crediting rate experience during the period. The decrease in amortization expense in 2020 year-to-date relative to 2019 reflects higher interest earned on universal life DPAC balances due to increased crediting rates resulting from greater realized gains from index options.

Contract interest expense includes the fluctuations that are the result of the effect upon the embedded derivative for the performance of underlying equity indices associated with fixed-index universal life products. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact for the embedded derivative component in the equity-index universal life product is reflected in contract interest expense for approximately the same amounts as in net investment income for each respective period.

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 September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Premiums and other revenues:    
Premiums and contract revenues$21,551 25,065 67,479 74,905 
Net investment income (loss)10,354 6,872 12,507 30,165 
Other revenues (loss)6 25 54 79 
Total premiums and other revenues31,911 31,962 80,040 105,149 
Benefits and expenses:    
Life and other policy benefits2,278 5,074 9,293 10,195 
Amortization of deferred policy acquisition costs6,496 (3,047)19,392 11,195 
Universal life insurance contract interest(14,023)14,637 (15,368)33,967 
Other operating expenses5,434 5,493 13,047 14,278 
Total benefits and expenses185 22,157 26,364 69,635 
Segment earnings (losses) before Federal income taxes31,726 9,805 53,676 35,514 
Provision (benefit) for Federal income taxes5,169 1,970 8,907 7,192 
Segment earnings (loss)$26,557 7,835 44,769 28,322 

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As with domestic life operations, revenues from the international life insurance segment include both premiums on traditional type products and contract revenues from universal life insurance. A comparative detail of premiums and contract revenues is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Universal life insurance revenues$20,910 23,767 65,386 71,987 
Traditional life insurance premiums2,274 2,822 6,718 7,892 
Reinsurance premiums(1,633)(1,524)(4,625)(4,974)
Totals$21,551 25,065 67,479 74,905 

Universal life revenues and operating earnings are largely generated from the amount of life insurance in force. The volume of in force for this segment, primarily universal life, has contracted from $15.4 billion at December 31, 2018 to $13.7 billion at December 31, 2019 and to $12.7 billion at September 30, 2020.

Another component of international universal life revenues includes surrender charges assessed upon surrender of contracts by policyholders. While the termination rate has edged higher, the resulting additional surrender charge fee revenue has been less due to lower surrender charge fees assessed later in the contract term according to the policy contract provisions. The following table illustrates National Western's recent international life termination experience.
Amount in $'sAnnualized Termination Rate
(millions)
Volume In Force Terminations
Nine Months Ended September 30, 20201,044.4 10.2 %
Year ended December 31, 20191,671.5 10.9 %
Year ended December 31, 20181,706.3 10.0 %
Year ended December 31, 20172,309.7 12.2 %
Year ended December 31, 20162,340.6 11.6 %
Year ended December 31, 20152,659.1 12.3 %

As noted previously, premiums collected on universal life products are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual international universal life premiums collected are detailed below.
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Universal life insurance:    
First year and single premiums$— 19 — 954 
Renewal premiums13,756 16,857 40,733 50,496 
Totals$13,756 16,876 40,733 51,450 

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National Western's most popular international products were its fixed-index universal life products in which the policyholder could elect to have the interest rate credited to their policy account values linked in part to the performance of an outside equity index. These products issued were not generally available in the local markets when sold. Included in the totals in the above table are collected premiums for fixed-index universal life products of approximately $23.9 million and $31.0 million for the first nine months of 2020 and 2019, respectively. The declining trend in renewal premiums during these periods corresponds with the decline in policies in force due to increased termination activity as discussed above.

As previously noted, net investment income and contract interest include period-to-period changes in fair values pertaining to call options purchased to hedge the interest crediting feature on the fixed-index universal life products. With the relatively large size of the fixed-index universal life block of business, the period-to-period changes in fair values of the underlying options have a significant effect on net investment income and universal life contract interest. A detail of net investment income for international life insurance operations is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Net investment income (excluding derivatives)$6,761 7,260 20,407 22,960 
Derivative gain (loss)3,593 (388)(7,900)7,205 
Net investment income (loss)$10,354 6,872 12,507 30,165 

The gain or loss on index options follows the movement of the reference indice with realized gains or losses being recognized on the anniversary of each index option based upon the reference indice level at expiration date relative to the index level at the time the index option was purchased. Unrealized gains and losses are recorded for index options outstanding based upon their fair values, largely determined by the reference indice level, at the balance sheet reporting date as compared to the original purchase cost of each respective option.

Life and policy benefits primarily consist of death claims on policies. National Western's clientèle for international products are generally wealthy individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased historically tended to be larger amounts. Life and policy benefit expense for the international life segment reflects the larger policies historically purchased, however mortality due to natural causes is comparable to that in the United States. The Company's maximum risk exposure per insured life is capped at $500,000 through reinsurance. The average international life net claim amount (after reinsurance) in the first nine months of 2020 decreased to $142,000 from $175,500 in the first nine months of 2019 while the number of claims incurred increased 11%. Measured over a period of years, the Company's international life mortality experience has generally been better than pricing assumptions.

The Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels, and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on international life insurance DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three and nine months ended September 30, 2020 and 2019.

Amortization of DPACThree Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(In thousands)
Unlocking adjustments$(20)(10,860)(20)(10,860)
Other amortization components6,516 7,813 19,412 22,055 
Totals$6,496 (3,047)19,392 11,195 

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During the quarter ended September 30, 2020, the Company unlocked DPAC balances associated with its International Life segment for lapse rates, mortality, and investment spread. The effect of the prospective unlocking was to marginally increase DPAC balances (and decrease amortization expense). In the quarter ended September 30, 2019, DPAC balances were unlocked for mortality, maintenance expenses, lapse rates, and investment spread the effect of which was to increase DPAC balances by $10.9 million and decrease amortization expense.

Contract interest expense includes fluctuations that are the result of the effect upon the embedded derivative for the performance of underlying equity indices associated with fixed-index universal life products. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact of the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for approximately the same amounts as the purchased call options are reported in net investment income for each respective period. Amounts realized on purchase call options generally approximate the amounts credited to policyholders. As part of the mortality unlocking analysis done in the third quarter of 2020, the Company decreased its excess death benefit reserves by $22.8 million for favorable experience. The reduction in reserve is reported as an offset to contract interest expense in the three and nine months ended September 30, 2020. In the quarter and nine months ended September 30, 2019, the Company's mortality unlocking decreased its excess benefit reserve by $7.9 million.

Operating expenses are allocated to lines of business based upon a functional cost analysis of the activity by the business area giving rise to incurred expenses. A greater proportion of the Company's overall expenses have been allocated to the Domestic Life and Annuity segments and away from the International Life segment due to the decreased activity relative to the former two segments.

Annuity Operations

A comparative analysis of results of operations for National Western's annuity segment is detailed below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Premiums and other revenues:    
Premiums and contract revenues$4,187 5,336 13,536 16,061 
Net investment income87,889 78,000 196,187 270,727 
Other revenues84 8 80 80 
Total premiums and other revenues92,160 83,344 209,803 286,868 
Benefits and expenses:    
Life and other policy benefits3,383 12,550 20,452 33,856 
Amortization of deferred policy acquisition costs31,794 21,688 70,159 60,150 
Annuity contract interest79,550 33,541 117,162 120,840 
Other operating expenses9,205 8,596 28,787 25,478 
Total benefits and expenses123,932 76,375 236,560 240,324 
Segment earnings (loss) before Federal income taxes(31,772)6,969 (26,757)46,544 
Provision (benefit) for Federal income taxes(5,294)1,388 (4,440)9,426 
Segment earnings (loss)$(26,478)5,581 (22,317)37,118 

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Premiums and contract charges primarily consist of surrender charge income recognized on terminated policies. The amount of the surrender charge income recognized is determined by the volume of surrendered contracts as well as the duration of each contract at the time of surrender given the pattern of declining surrender charge rates over time that is common to most annuity contracts. The Company's lapse rate for annuity contracts in the first nine months of 2020 was 8.3% which was higher compared to the 7.7% rate during the same period in 2019. In the first nine months of 2020, an outcome of the COVID-19 pandemic crisis was a movement of consumers toward fortifying liquidity positions. This manifested in greater withdrawal and surrender activity. In addition, annuity contracts with fixed interest rates are more prone to terminate as contracts approach the end of their surrender charge period.

Deposits collected on annuity contracts are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual annuity deposits collected for the three and nine months ended September 30, 2020 and 2019 are detailed below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Fixed-index annuities$76,199 57,109 224,591 175,222 
Other deferred annuities2,210 4,496 6,293 13,173 
Immediate annuities2,348 1,604 15,423 5,384 
Totals$80,757 63,209 246,307 193,779 

Fixed-index products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since National Western does not offer variable products or mutual funds, fixed-index products provide an important alternative to the Company's existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were 91% and 90% for the nine months ended September 30, 2020 and 2019, respectively. The percentage of fixed-index products to total annuity sales reflects the low interest rate environment and the overall uptrend in the equities market.

Some of the Company's deferred products, including fixed-index annuity products, contain a first year interest bonus, in addition to the base first year interest rate, which is credited to the account balance when premiums are applied. These sales inducements are deferred in conjunction with other capitalized policy acquisition costs. The amounts currently deferred to be amortized over future periods amounted to approximately $5.7 million and $2.3 million during the first nine months of 2020 and 2019, respectively. Amortization of deferred sales inducements is included as a component of annuity contract interest as described later in this discussion of Annuity Operations.

A detail of net investment income for annuity operations is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Net investment income (excluding derivatives)$69,403 75,651 212,405 233,111 
Derivative gain (loss)18,486 2,349 (16,218)37,616 
Net investment income$87,889 78,000 196,187 270,727 

As seen in the above table, net investment income also includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal products. The gain or loss on index options follows the movement of the reference indice with realized gains or losses being recognized on the anniversary of each index option based upon the reference indice at the expiration date relative to the index level at the time the index option was purchased. Unrealized gains and losses are recorded for index options outstanding based upon their fair value, largely determined by the reference indice level, at the balance sheet reporting date as compared to the original purchase cost of each respective option.
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Since the embedded derivative option in the policies is bifurcated when determining the contract reserve liability, the impact of the market value change of index options on asset values generally aligns closely with the movement of the embedded derivative liability such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). See further discussion below regarding contract interest activity.

Consistent with the domestic and international life segments, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on annuity DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three and nine months ended September 30, 2020 and 2019.

Amortization of DPACThree Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
(In thousands)
Unlocking adjustments$14,987 2,577 14,987 2,577 
Other amortization components16,807 19,111 55,172 57,573 
Totals$31,794 21,688 70,159 60,150 

During the quarter ended September 30, 2020, the Company unlocked DPAC balances associated with its Annuity segment for assumptions pertaining to lapse rates, annuitization rates, and portfolio investment yield rates supporting the block of business. The effect of the prospective unlocking was to decrease DPAC balances by approximately $15.0 million (and increase amortization expense). The Company also unlocked its DPAC balances in the quarter ended September 30, 2019 the effect of which was to decrease DPAC balances by $2.6 million (and increase amortization expense).

Amortization of DPAC balances is proportional to estimated expected gross profits ("EGPs") for a line of business. The EGPs of the block of annuity policies that are not fixed-index have been steadily decreasing with the declining amount of policies in force, as well as DPAC unlocking in recent years for unfavorable experience. In addition, experience which deviates from the EGPs assumed can similarly increase or decrease the amortization of DPAC.

Annuity contract interest includes the equity component return associated with the call options purchased to hedge National Western's fixed-index annuities. The detail of fixed-index annuity contract interest as compared to contract interest for all other annuities is as follows:

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Fixed-index annuities$33,435 12,001 31,076 61,226 
All other annuities40,010 16,861 73,331 46,114 
Gross contract interest73,445 28,862 104,407 107,340 
Bonus interest deferred and capitalized(2,829)(852)(5,700)(2,257)
Bonus interest amortization8,934 5,531 18,455 15,757 
Total contract interest$79,550 33,541 117,162 120,840 

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The fluctuation in reported contract interest amounts for fixed-index annuities is driven by sales levels, the level of the business in force and the effect of positive or negative market returns of option values on projected interest credits. As noted in the net investment income discussion, the amounts shown for contract interest for fixed-index annuities generally align with the derivative gains/(losses) included in net investment income as due to the market change of index options aligning closely with the movement of the embedded derivative liability held for these products.

In addition to the unlocking adjustments discussed above impacting DPAC balances, the Company also unlocked its mortality assumptions in regards to payout annuities (contracts paying systematic benefits). Combined these unlocking assumptions during the third quarter of 2020 had the effect of increasing excess annuitization and excess death benefit reserves by $34.1 million. The increase in these reserves is reported as additional contract interest in the three and nine months ended September 30, 2020.

As noted in the discussion in the Consolidated Operations section, collection of asset management fees on positive returns of expiring options is subtracted from contract interest credited to policyholders. This offset serves to lessen the increase in contract interest expense relative to the option gains reported in the Company's net investment income. Asset management fees collected during the three and nine months ended September 30, 2020 were $6.7 million and $24.7 million, respectively, compared to $0.5 million and $8.1 million in the corresponding period of 2019.

As previously noted, accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year as an offset to projected policyholder interest credits. The projections are based upon the recent performance of options as of balance sheet reporting dates. The change in this projection, plus or minus, is included in contract interest for the period being reported on. In the three month periods ended September 30, 2020 and 2019, contract interest was increased $3.7 million and decreased $(6.8) million, respectively, for these projection changes. For the nine months ended September 30, 2020 and 2019, contract interest was increased/(decreased) $29.3 million and $(27.1) million, respectively. The increase to contract interest expense reflects lower estimated asset management fees to be collected while the decrease to contract interest expense represents an increase to the amount of asset management fees estimated to be collected. The Annuity segment contains the products which charge asset management fees.

As noted in the discussion on the results of Consolidated Operations, other embedded derivative components include changes pertaining to other modeling differences, changes in future interest adjustments, and the change in the host contract component of the embedded derivative products. In the first quarter of 2020, the Company incurred an additional charge to contract interest pertaining to an assumption regarding the embedded derivative option budget which introduced an embedded derivative floor preventing the Company's contract interest expense from declining in tandem with the option value decreases recorded in net investment income. In the quarter ended June 30, 2020, the Company unlocked for this out of date embedded derivative option budget assumption to reflect the Company's current investment portfolio yield. This unlocking had the effect of removing the embedded derivative floor and reversed the $12.1 million contract interest charge recorded in the first quarter of 2020.

Annuity contract interest includes true-up adjustments for the deferred sales inducement balance which are done each period similar to that done with respect to DPAC balances with the adjustment reflected in current period contract interest expense. To the extent required, the Company may also record unlocking adjustments to deferred sales inducement balances in conjunction with DPAC balance unlockings. In conjunction with the unlocking adjustments previously discussed, the Company unlocked its deferred sales inducement balance in the third quarters of 2020 and 2019 the effect of which was to reduce the balance by $4.4 million and $0.6 million, respectively. These reductions increased contract interest expense by like amounts.

While the unlocking adjustments discussed above had the cumulative effect of increasing DPAC amortization expense and contract interest expense, they also had the effect of decreasing certain policy benefit liability balances, namely the liability for guaranteed minimum withdrawal benefits (GMWB) and the deferred profit liability. In the three and nine months ended September 30, 2020, these liability balances decreased by $11.9 million. This reduction in liability balances is similarly reflected as a reduction in life and other policy benefits expense. In the three and nine months ended September 30, 2019, the Company's unlockings also reduced the GMWB liability balance by $0.7 million.

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Acquired Businesses

Effective January 31, 2019, Ozark National and NIS were acquired and their results included in the Condensed Consolidated Financial Statements of the Company. Ozark National and NIS have been combined into a separate segment "Acquired Businesses" given their inter-related marketing and sales approach which consists of a coordinated sale of a non-participating whole life insurance product (Ozark National) and a mutual fund investment product (NIS). An analysis of results of operations for the Company's acquired businesses segment is detailed below. The results for the nine months ended September 30, 2019 include activity subsequent to the acquisition date.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Premiums and other revenues:    
Premiums and contract charges$19,524 20,151 59,448 54,332 
Net investment income6,434 6,300 19,284 16,283 
Other revenues2,628 2,318 7,369 6,049 
Total premiums and other revenues28,586 28,769 86,101 76,664 
Benefits and expenses:    
Life and other policy benefits17,494 16,195 50,429 43,863 
Amortization of deferred policy acquisition costs and value of business acquired1,970 2,176 6,064 6,330 
Other operating expenses4,498 4,772 13,361 12,348 
Total benefits and expenses23,962 23,143 69,854 62,541 
Segment earnings (loss) before Federal income taxes4,624 5,626 16,247 14,123 
Provision (benefit) for Federal income taxes963 1,133 4,103 2,836 
Segment earnings (loss)$3,661 4,493 12,144 11,287 

Revenues from acquired businesses principally include life insurance premiums on traditional type products. Unlike universal life, revenues from traditional products are simply life premiums recognized as income over the premium-paying period of the related policies. The detail of premiums is provided below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Traditional life insurance premiums$20,049 21,841 61,153 55,829 
Other insurance premiums and considerations105 100 328 304 
Reinsurance premiums(630)(1,790)(2,033)(1,801)
Totals$19,524 20,151 59,448 54,332 

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Ozark National's traditional life block of business at September 30, 2020 included approximately 180,050 policies in force representing nearly $6.1 billion of life insurance coverage. The repetitive pay nature of Ozark National's business promotes a higher level of persistency with an annualized lapse rate of 4.1% through September 30, 2020 which bettered the 4.6% rate experienced in the first nine months of 2019. Traditional life premiums by first year and renewal are detailed below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Traditional life insurance premiums:    
First year premiums$905 1,476 3,151 3,940 
Renewal premiums19,144 20,365 58,002 51,889 
Totals$20,049 21,841 61,153 55,829 

Other revenues consists primarily of brokerage revenue of NIS. Brokerage revenues of $7.2 million and $5.9 million for the nine months ended September 30, 2020 and 2019, respectively, had associated brokerage expense of $3.7 million and $3.1 million which is included in Other operating expenses.

The average face value of Ozark National's policies in force at September 30, 2020 was approximately $33,800. Life and policy benefits for smaller face amounts are subject to variation from quarter to quarter. Incurred net death claims, after reinsurance, for the first nine months of 2020 were $25.8 million representing an average net claim of $15,300. Incurred net death claims in the nine month period ended September 30, 2019 were $22.6 million representing a net average claim of $16,100. Included in the activity for 2020 were confirmed COVID-19 net claims of approximately $1.2 million. Ozark National's maximum retention on any single insured life is $200,000 with limited exceptions related to the conversion of child protection and guaranteed insurability riders. The balance of life and policy benefits during the quarters and nine months ended September 30, 2020 and 2019 consisted of increases in insurance reserves and payments of other policy benefits.

As part of the purchase accounting required with the acquisition of Ozark National effective January 31, 2019, the Company recorded an intangible asset of $145.8 million referred to as the value of business acquired ("VOBA"). VOBA represents the difference between the acquired assets and liabilities of Ozark National measured in accordance with the Company's accounting policies and the fair value of these same assets and liabilities. The VOBA balance sheet amount is amortized following a methodology similar to that used for amortizing deferred policy acquisition costs.

Subsequent to its acquisition effective January 31, 2019, Ozark National began deferring policy acquisition costs and amortizing these deferrals similar to the methodology employed by National Western. The following table identifies the amortization expense of Ozark National's DPAC and VOBA for the three and nine months ended September 30, 2020 and 2019.

Amortization of DPAC and VOBAThree Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Unlocking$— — — — 
VOBA amortization expense1,845 1,961 5,646 5868
DPAC amortization expense125 215 418 462
Totals$1,970 2,176 6,064 6,330 
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Other Operations

The Company's primary business encompasses its domestic and international life insurance operations, its annuity operations, and its acquired businesses. However, the Company also has real estate and other investment operations through its wholly owned subsidiaries, and owned nursing home operations through the early part of 2019.

Pre-tax operating amounts include the results of BP III, the entity owning and operating the Company's home office facility in Austin, Texas. BP III incurred pre-tax losses of $(0.9) million and $(0.8) million for the nine months ended September 30, 2020 and 2019, respectively. National Western maintains its home office in this facility leasing approximately 40% of the space available. The lease payments made by National Western to BP III have been eliminated in consolidation.

Nursing home operations generated $0.0 million and $1.1 million of pre-tax operating earnings in the first nine months of 2020 and 2019, respectively. As discussed in the Consolidated Operations section, the Company closed on the sale of its Reno, Nevada nursing home operations in the first quarter of 2019, and on the sale of its San Marcos, Texas nursing home operations in the second quarter of 2019. Pre-tax operating earnings in the first nine months of 2019 include operating results for each entity to the date of their respective sales and net gains from the sale of Reno personal property and equipment of $1.4 million.

The remaining pre-tax earnings of $14.8 million and $16.1 million in Other Operations during the nine-month periods includes investment income from real estate, municipal bonds, and common and preferred equities held in subsidiary company portfolios principally for tax-advantage purposes. Included in these amounts are semi-annual distributions from a life interest in the Libbie Shearn Moody Trust which is held in NWLSM, Inc. Pre-tax distributions from this trust were $2.8 million and $3.6 million in the nine-month periods ended September 30, 2020 and 2019, respectively. In addition, the Company holds a modest portfolio of equity securities, primarily in NWL Financial, Inc., whose fair value changes are recorded in net investment income. For the nine months ended September 30, 2020 and 2019, the market value changes for these securities were $(3.2) million and $2.2 million, respectively.

Pre-tax earnings in the nine months ended September 30, 2020 also includes $4.1 million pertaining to the release of a contingent purchase price liability associated with the Ozark National acquisition which the buyer and seller mutually agreed had been satisfied. Pre-tax earnings in the first nine months of 2019 also include expenses of $3.3 million related to the purchase of Ozark National and NIS which were not eligible for inclusion in the purchase price.


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.

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The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below. The Company emphasizes investment grade debt securities.

 September 30, 2020December 31, 2019
Carrying
Value		%Carrying
Value		%
(In thousands)(In thousands)
Debt securities$10,232,709 94.7 $10,463,190 94.7 
Mortgage loans302,715 2.8 272,422 2.5 
Policy loans75,714 0.7 80,008 0.7 
Derivatives, index options93,367 0.9 157,588 1.4 
Real estate33,927 0.3 34,588 0.3 
Equity securities18,610 0.2 23,594 0.2 
Other44,652 0.4 27,502 0.2 
Totals$10,801,694 100.0 $11,058,892 100.0 

Invested assets at September 30, 2020 include Ozark National and NIS amounts as follows: Debt securities of $751.3 million; Policy loans of $26.0 million; and Real estate of $4.6 million. These invested asset amounts at December 31, 2019 were: Debt securities of $722.9 million; Policy loans of $27.1 million; and Real Estate of $4.6 million.

Debt Securities

The Company maintains a diversified portfolio which consists mostly of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities primarily include U.S. Government agency pass-through securities and collateralized mortgage obligations ("CMO"). The Company's investment guidelines prescribe limitations by type of security as a percent of the total investment portfolio and all holdings were within these threshold limits. As of September 30, 2020 and December 31, 2019, the Company's debt securities portfolio consisted of the following classes of securities:

 September 30, 2020December 31, 2019
Carrying
Value		%Carrying
Value		%
(In thousands)(In thousands)
Corporate$7,677,317 75.0 $7,668,483 73.3 
Residential mortgage-backed securities956,579 9.4 1,080,674 10.3 
Public utilities879,140 8.6 959,815 9.2 
State and political subdivisions534,994 5.2 533,962 5.1 
U.S. agencies73,072 0.7 100,910 1.0 
Asset-backed securities65,126 0.6 71,260 0.7 
Commercial mortgage-backed31,330 0.3 32,974 0.3 
Foreign governments11,353 0.1 11,330 0.1 
U.S. Treasury3,798 0.1 3,782 — 
Totals$10,232,709 100.0 $10,463,190 100.0 

The Company holds minimal levels of U.S. Treasury securities due to their low yields and deposits most of these holdings with various state insurance departments in order to meet security deposit on hand requirements in these jurisdictions.

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The Company has deemphasized mortgage-backed securities for a number of years given the low interest rate environment and the lack of incremental yield relative to other classes of debt securities. Rating agencies generally view mortgage-backed securities as having additional risk for insurers holding interest sensitive liabilities given the potential for asset/liability disintermediation. Consequently, the Company holds predominantly agency mortgage-backed securities. Because mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing in collateralized mortgage obligations ("CMO"), which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I ("PAC I"), very accurately defined maturity ("VADM"), 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.
The majority of the Company's investable cash flows are directed toward the purchase of long-term debt securities. The Company's investment policy calls for investing in debt securities that are investment grade, meet quality and yield objectives, and provide adequate liquidity for obligations to policyholders. Particular attention is paid to avoiding concentration in any one industry classification or in large singular credit exposures. Debt securities with intermediate maturities are targeted by the Company as they more closely match the intermediate nature of the Company's policy liabilities and provide an appropriate strategy for managing cash flows. Long-term debt securities purchased to fund National Western insurance company operations are summarized below.

Nine Months Ended September 30,Year Ended December 31,
20202019
($ In thousands)
Cost of acquisitions$435,787 $299,442 
Average credit qualityBBB+BBB
Effective annual yield3.47 %4.06 %
Spread to treasuries2.18 %1.79 %
Effective duration12.3 years12.0 years

Beginning in 2019, the Company began purchasing a greater proportion of longer maturity debt securities to match the increased duration of its growing life insurance policy liabilities. Purchases in prior periods were concentrated in effective durations between eight and nine years. The lower dollar amount of investment purchases in 2019 reflects the Company's $205.4 million acquisition of Ozark National and NIS, the purchase price of which was funded by otherwise investable cash flows.

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In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investment 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 debt securities portfolio with 97.3%, as of September 30, 2020, held in investment grade securities. In the table below, investments in debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.

 September 30, 2020December 31, 2019
Carrying
Value		%Carrying
Value		%
(In thousands)(In thousands)
AAA$111,254 1.1 $113,875 1.1 
AA1,764,419 17.2 2,112,238 20.2 
A3,123,227 30.5 3,347,199 32.0 
BBB4,960,692 48.5 4,806,181 45.9 
BB and other below investment grade273,117 2.7 83,697 0.8 
Totals$10,232,709 100.0 $10,463,190 100.0 

Although the Company's investment guidelines, as well as state insurance law, allow for the purchase of below investment grade securities, it has been the Company's practice to only purchase debt securities which are investment grade at the time of acquisition. The investments held in debt securities below investment grade are the result of subsequent downgrades of the securities. These holdings are further summarized below.

 Below Investment Grade Debt Securities
Amortized
Cost		Carrying
Value		Fair
Value		% of
Invested
Assets
 (In thousands, except percentages)
September 30, 2020$282,550 273,117 267,268 2.5 %
December 31, 2019$85,493 83,697 84,516 0.8 %

The Company's percentage of below investment grade securities as of September 30, 2020 compared with the percentage at December 31, 2019 increased due to net downgrades of several credit issuers, most notably in the oil and gas/energy sector as well as certain retail industry issuers. These industries in particular were affected by the economic slowdown invoked by the global pandemic crisis. The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets remain low compared to industry averages.

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Holdings in below investment grade securities as of September 30, 2020 are summarized below by category, including their comparable fair value as of December 31, 2019. The Company continually monitors developments in these industries for issues that may affect security valuation.

 Below Investment Grade Debt Securities
Amortized CostCarrying ValueFair ValueFair Value
Industry CategorySeptember 30, 2020September 30, 2020September 30, 2020December 31, 2019
 (In thousands)
Retail$33,423 27,606 27,606 34,047 
Asset-backed securities4,019 4,105 4,143 4,156 
Residential mortgage-backed732 573 572 628 
Oil & gas113,507 108,626 103,941 93,399 
Manufacturing119,469 120,553 118,876 120,746 
Other11,876 12,130 12,130 12,211 
Total before Allowance for credit losses283,026 273,593 267,268 265,187 
Allowance for credit losses(476)(476)— — 
Totals$282,550 273,117 267,268 265,187 

The Company closely monitors its 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. As a result of the investment downgrades which occurred in the first nine months of 2020 due to the economic stresses caused by the COVID-19 pandemic, additional analyses were performed of the individual credits whose market values were most significantly impacted. While additional losses are not currently anticipated, based on the existing status and condition of these securities, continued credit deterioration of some securities or the markets in general is possible, which may result in future allowances or write-downs.

Generally accepted accounting principles through the end of 2019 required that investments in debt securities be written down to fair value when declines in value were judged to be other-than-temporary. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Refer to Note 10, Fair Values of Financial Instruments, of the accompanying Condensed Consolidated Financial Statements for further discussion.

During the nine months ended September 30, 2019, the Company recorded a $7.8 million other-than-temporary impairment on a single debt security issuer. Under prior GAAP guidance pertaining to the recognition and accounting for other-than-temporary impairments and their classification as either a credit loss or non non-credit loss, the Company recognized a cumulative total of $8.5 million of other-than-temporary impairments of which $8.5 million was deemed credit related and recognized as realized investment losses in earnings, and $0.0 million, net of amortization, which was deemed non-credit related and recognized in other comprehensive income.

As disclosed in Note (2) New Accounting Pronouncements in the accompanying Notes to Condensed Consolidated Financial Statements in this report, the Company adopted new accounting guidance effective January 1, 2020 for credit loss recognition of certain financial assets, including debt securities classified in the "held to maturity" category. The Company employed a cohort cumulative loss rate method in estimating current expected credit losses with respect to its held to maturity debt securities as of January 1, 2020, June 30, 2020, and September 30, 2020. This method applies publicly available industry wide statistics of default incidence by defined segmentations of debt security investments combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term. The following table presents the allowance for credit losses for the periods shown.

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Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Debt Securities Allowance for Credit Losses:
Balance, beginning of the period$4,940 — — — 
Provision at January 1, 2020 for adoption of new accounting guidance— — 3,334 — 
(Releases)/provision during the period146 — 1,752 — 
Balance, end of period$5,086 — 5,086 — 

The $0.1 million allowance increase during the three months ended September 30, 2020 represents an increase in the balance from the allowance recorded at June 30, 2020.

The Company is required to classify its investments in debt 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 September 30, 2020, 31.6% of the Company's total debt securities, based on fair values, were classified as securities available for sale. These holdings in available for sale 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.
September 30, 2020
Fair
Value		Amortized
Cost		Allowance for Credit LossesUnrealized
Gains (Losses)
 (In thousands)
Debt securities held to maturity$7,378,399 6,827,139 (5,086)551,260 
Debt securities available for sale3,410,656 3,156,486 — 254,170 
Totals$10,789,055 9,983,625 (5,086)805,430 

Mortgage Loans and Real Estate

The Company originates loans on high quality, income-producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, hotels, and health care facilities. The location of these properties is typically in major metropolitan areas that offer a potential for property value appreciation. Credit and default risk is minimized through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lease payments. This approach has proved over time to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.

The Company targets a minimum specified yield on mortgage loan investments determined by reference to currently available debt security instrument yields plus a desired amount of incremental basis points. During the past several years, the low interest rate environment, along with a competitive marketplace, resulted in fewer loan opportunities being available that met the Company's required rate of return. Mortgage loans originated by the Company totaled $121.4 million for the year ended December 31, 2019 but were $41.5 million for the nine months ended September 30, 2020 reflecting the uncertainty in risk assessment introduced by the pandemic crisis. Principal repayments on mortgage loans for the nine months ended September 30, 2020 were $6.0 million.

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Loans in foreclosure, loans considered impaired, or loans past due 90 days or more are placed on a non-accrual status. If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any revenue in the Condensed Consolidated Statements of Earnings (Loss). The loan is independently monitored and evaluated as to potential impairment or foreclosure. If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly. The Company currently has no loans past due 90 days. As a result of the economic climate change induced by the COVID-19 virus, various mortgage loan borrowers of the Company have requested a temporary forbearance of principal payments on loans in the range of three to nine months. During the nine months ended September 30, 2020 there were eight loans representing an aggregate principal balance of $29.2 million with borrowers meeting specified criteria of the Company that forbearance terms were agreed to.

The Company held net investments in mortgage loans, after allowances for possible losses, totaling $302.7 million and $272.4 million at September 30, 2020 and December 31, 2019, respectively. The diversification of the portfolio by geographic region and by property type was as follows:

 September 30, 2020December 31, 2019
Amount%Amount%
 (In thousands) (In thousands) 
Mortgage Loans by Geographic Region:
West South Central$200,049 65.6 $191,089 70.0 
South Atlantic34,991 11.5 35,698 13.1 
East North Central16,605 5.3 17,248 6.3 
West North Central12,422 4.1 12,505 4.6 
East South Central27,727 9.1 8,063 2.9 
Pacific6,282 2.1 6,436 2.4 
Middle Atlantic1,996 0.7 2,058 0.7 
Mountain5,000 1.6 — — 
Gross balance305,072 100.0 273,097 100.0 
Allowance for credit losses(2,357)(0.8)(675)(0.2)
Totals$302,715 99.2 $272,422 99.8 


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 September 30, 2020December 31, 2019
Amount%Amount%
 (In thousands) (In thousands) 
Mortgage Loans by Property Type:
Retail$93,684 30.7 $91,790 33.6 
Office83,743 27.5 95,362 34.9 
Storage facility58,404 19.1 30,619 11.2 
Apartments29,872 9.8 30,000 11.0 
Industrial20,567 6.7 5,733 2.1 
Hotel8,496 2.8 8,997 3.3 
Land/Lots4,676 1.5 4,829 1.8 
All other5,630 1.9 5,767 2.1 
Gross balance305,072 100.0 273,097 100.0 
Allowance for credit losses(2,357)(0.8)(675)(0.2)
Totals$302,715 99.2 $272,422 99.8 

As disclosed in Note (2) New Accounting Pronouncements in the accompanying Notes to Condensed Consolidated Financial Statements in this report, the Company adopted new accounting guidance for credit loss recognition of certain financial assets, including mortgage loans. The Company employed the Weighted Average Remaining Maturity ("WARM") method in estimating current expected credit losses with respect to mortgage loan investments as of January 1, 2020, June 30, 2020, and September 30, 2020. The WARM method applies publicly available data of default incidence of commercial real estate properties by several defined segmentations combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term. The following table presents the allowance for credit losses for the periods shown.

Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
(In thousands)
Mortgage Loans Allowance for Credit Losses:
Balance, beginning of the period$2,227 675 675 675 
Provision January 1, 2020 for adoption of new accounting guidance— — 504 — 
Provision during the period130 — 1,178 — 
Releases— — — — 
Balance, end of period$2,357 675 2,357 675 

The Company's direct investments in real estate are not a significant portion of its total investment portfolio and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western. The Company's real estate investments totaled approximately $33.9 million and $34.6 million at September 30, 2020 and December 31, 2019, respectively. In the third quarter of 2020, the Company sold a property located in Travis County Texas for realized gain of $2.7 million.

The Company recognized operating income of approximately $2.2 million and $2.1 million on real estate properties in the first nine months of 2020 and 2019, respectively. The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition.

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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 the Company is interest rate risk. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and fair value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The fair values of fixed income debt securities correlate to external market interest rate conditions as 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, market dislocations, declination in credit quality, or increasing event-risk concerns.

Interest Rate Risk

A gradual increase in interest rates from current levels would generally be a positive development for the Company. Rate increases would be expected to provide incremental net investment income, produce increased sales of fixed rate products, and limit the potential erosion of the Company's interest rate spread on products due to minimum guaranteed crediting rates in products. Alternatively, a rise in interest rates would reduce the fair value of the Company's investment portfolio and if long-term rates rise dramatically within a relatively short time period the Company could be exposed to disintermediation risk. Disintermediation risk is the risk that policyholders will surrender their policies in a rising interest rate environment forcing the Company to liquidate assets when they are in an unrealized loss position.

A decline in interest rates could cause certain mortgage-backed securities in the Company's portfolio to be more likely to pay down or prepay. In this situation, the Company typically will be unable to reinvest the proceeds at comparable yields. Lower interest rates will likely also cause lower net investment income, subject the Company to reinvestment rate risks, and possibly reduce profitability through reduced interest rate margins associated with products with minimum guaranteed crediting rates. Alternatively, the fair value of the Company's investment portfolio will increase when interest rates decline.

The correlation between fair values and interest rates for debt securities is reflected in the tables below.

September 30,
2020		June 30,
2020		December 31,
2019
 (In thousands except percentages)
Debt securities - fair value$10,789,055 10,805,815 10,764,648 
Debt securities - amortized cost$9,983,625 10,069,988 10,312,365 
Fair value as a percentage of amortized cost108.07 %107.31 104.39 %
Net unrealized gain (loss) balance$805,430 735,827 452,283 
Ten-year U.S. Treasury bond – (decrease) increase in yield for the period0.03 %(0.01)%(0.77)%

The Company's unrealized gain (loss) balance for debt securities held at September 30, 2020 and December 31, 2019 is shown in the following table.

 Net Unrealized Gain (Loss) Balance
At September 30, 2020At
June 30, 2020		At
December 31,
2019		Quarter
Change in
Unrealized
Balance		Year-to-date Change in
Unrealized
Balance
(In thousands)
Debt securities held to maturity$551,260 528,920 301,458 22,341 249,802 
Debt securities available for sale254,170 206,907 150,825 47,263 103,345 
Totals$805,430 735,827 452,283 69,604 353,147 

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Debt securities held to maturity are recorded at their amortized cost. Accordingly, the unrealized amounts shown in the table above for Debt securities held to maturity are not incorporated into the Company's Condensed Consolidated Financial Statements at September 30, 2020 and December 31, 2019, respectively.

Changes in interest rates can have a sizable effect on the fair values of the Company's debt securities. The market interest rate of the ten-year U.S. Treasury bond decreased 123 basis points from 1.92% at year-end 2019 to 0.69% by the end of the first nine months of 2020. Therefore the increase in the unrealized gain balance position is an expected portfolio value movement. As noted in the Form 10-Q filing for the quarter ended March 31, 2020, the decline in the unrealized gain balance as of that date, in spite of the rapid drop in U.S. Treasury rates, was due to the widening in corporate bond spreads that occurred during that period as a result of COVID-19 effects on financial markets. In the quarter ended June 30, 2020, although U.S. Treasury rates were substantially unchanged, the prior quarter widening of corporate bond spreads largely reversed as market risk uncertainty declined significantly and corporate bond spreads decreased accordingly. Given that 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 a lesser effect on the Company's Condensed Consolidated Balance Sheet.

The Company manages interest rate risk principally through ongoing cash flow testing as required for insurance regulatory purposes. Computer 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 computer 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 has the ability to adjust interest rates, participation rates, and asset management fees and caps, as applicable, in response to changes in investment portfolio yields for a substantial portion of its business in force. The ability to adjust these rates is subject to competitive forces in the market for the Company’s products. Surrender rates could increase and new sales could be negatively affected if crediting rates are not competitive with the rates on competing products offered by other insurance companies and financial service entities. The Company designs its interest sensitive and annuity products with features encouraging persistency, such as surrender and withdrawal penalty provisions. Typically, surrender charge rates gradually decrease each year the contract is in force.

The Company performed detailed sensitivity analysis as of December 31, 2019, for its interest rate-sensitive assets and liabilities. The changes in market values of the Company's debt securities in the first nine months of 2020 were reasonable given the expected range of results of this analysis.

Credit Risk

The Company is exposed to credit risk through counterparties and within its investment portfolio. Credit risk relates to the uncertainty associated with an obligor's continued ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. As previously discussed, the Company manages credit risk through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management and the Company's Board of Directors.

In connection with the Company’s use of call options to hedge the equity return component of its fixed-indexed annuity and life products, the Company is exposed to the risk that a counterparty fails to perform under terms of the option contract. The Company purchases one-year option contracts from multiple counterparties and evaluates the creditworthiness of all counterparties prior to the purchase of the contracts. For consideration in contracting with a counterparty, the rating required by the Company is a credit rating of “A” or higher. Accordingly, all options are purchased from nationally recognized financial institutions with a demonstrated performance for honoring their financial obligations and possessing substantial financial capacity. In addition, each counterparty is required to execute a credit support agreement obligating the counterparty to provide collateral to the Company when the fair value of the Company’s exposure to the counterparty exceeds specified amounts. Counterparty credit ratings and credit exposure are monitored continuously by National Western’s Investment Department with adjustments to collateral levels managed as incurred under the credit support agreements.

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The Company is also exposed to credit spread risk related to market prices of investment securities and cash flows associated with changes in credit spreads. Credit spread tightening will reduce net investment income associated with new purchases of fixed debt securities and will increase the fair value of the investment portfolio. Credit spread widening will reduce the fair value of the investment portfolio and will increase net investment income on new purchases.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds. To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. National Western maintains a line of credit facility of $75 million which it may access for short-term cash needs. As part of the acquisition of Ozark National and NIS effective January 31, 2019, National Western borrowed $75 million to partly fund the closing cash purchase price of $205.4 million. The amounts borrowed were subsequently repaid during the first quarter of 2019 and there have been no borrowings under the line of credit since that time including as at September 30, 2020.

A primary liquidity concern for life insurers is the risk of an extraordinary level of early policyholder withdrawals, particularly with respect to annuity products which can move more rapidly with interest rate changes. The Company includes provisions within its annuity and universal life insurance policies, such as surrender and market value adjustments, that help limit and discourage early withdrawals.

The actual amounts paid by product line in connection with surrenders and withdrawals for the three and nine months ended September 30, for each respective year, are noted in the table below.

 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In thousands)
Product Line:    
Traditional Life$4,059 4,375 12,413 13,397 
Universal Life22,065 29,395 78,864 73,888 
Annuities146,238 173,160 490,622 528,668 
Total$172,362 206,930 581,899 615,953 

The above contractual withdrawals, as well as the level of surrenders experienced, and the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are typically less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may need to undergo a new underwriting process in order to obtain a new insurance policy elsewhere. Cash flow projections and tests under various market interest rate scenarios and assumptions are performed to assist in evaluating liquidity needs and adequacy. Given the economic decline precipitated by the COVID-19 pandemic, Company management conducted additional liquidity scenario testing during the first nine months of 2020 using more severe assumptions and concluded that liquid assets were more than adequate under these scenarios. Accordingly, the Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.

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Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $279.4 million and $244.2 million for the nine months ended September 30, 2020 and 2019, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $860.4 million and $676.3 million for the nine months ended September 30, 2020 and 2019, respectively. Operating and investing activity cash flow items could be reduced if interest rates rise at an accelerated rate in the future. Net cash inflows/(outflows) from the Company's universal life and investment annuity deposit product operations totaled $(372.9) million and $(454.7) million during the nine months ended September 30, 2020 and 2019, respectively, reflecting lower levels of annuity sales in combination with a higher incidence of annuity cash surrenders and withdrawals.

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 September 30, 2020, the Company maintained commitments for its normal operating and investment activities. During the first quarter of 2020, National Western became a member of the Federal Home Loan Bank of Dallas (FHLB) through an initial minimum required stock investment of $4.3 million. Through this membership, National Western will have a specified borrowing capacity based upon the amount of collateral it establishes.

The Company has declared and paid an annual dividend on its common shares since 2005. The Company's practice has been to take a conservative approach to dividends, and the Board of Directors has adopted a strategic position to substantially reinvest earnings internally. This conservative approach yields the following benefits: (1) providing capital to finance the development of new business; (2) enabling the Company to take advantage of potential acquisitions and other competitive situations as they arise; (3) building a strong capital base to support the Company's financial strength ratings; (4) maintaining the Company's liquidity and solvency during difficult economic and market conditions; and (5) enhancing the Company's regulatory capital position. For similar reasons, despite the fact the Company's market price of its Class A common shares has been trading at a discount to the book value per share for some time, there are no imminent plans for the Company to repurchase its shares.

As the largest subsidiary of NWLGI, National Western serves as the primary funding source for NWLGI. The capacity of National Western to pay dividends to NWLGI is limited by law in the state of Colorado to earned profits (statutory unassigned surplus). At December 31, 2019, the maximum amount legally available for distribution without further regulatory approval is $152.8 million.


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is Company practice to not enter into off-balance sheet arrangements or 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 National Western and Ozark National.

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 the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of reserving methods.

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The table below summarizes future estimated cash payments under existing contractual obligations.

 Payment Due by Period
TotalLess Than
1 Year		1 - 3
Years		3 - 5
Years		More Than
5 Years
 (In thousands)
Loan commitments$7,200 7,200 — — — 
Commitments for capital calls to investment funds52,213 9,213 37,000 — 6,000 
Lease obligations951 413 538 — — 
Claims payable (1)74,265 74,265 — — — 
Other long-term reserve liabilities reflected on the balance sheet (2)13,233,047 1,047,679 1,920,811 1,701,997 8,562,560 
Total$13,367,676 1,138,770 1,958,349 1,701,997 8,568,560 

(1) Claims payable include benefit and claim liabilities for life, accident and health policies 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, critical illness, accident and health claims including an estimate of claims incurred but not reported.

(2)  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. Due to the significance of the assumptions used, the actual cash outflows will differ both in amount and timing, possibly materially, from these estimates.

Subsequent to acquiring a commercial office building at the end of 2016 through its wholly owned subsidiary Braker P III, LLC ("BP III"), the Company entered into lease agreements with various tenants for available space not occupied by the Company. Total revenues recorded pertaining to these leases for the three-month periods ended September 30, 2020 and 2019 amounted to $1.1 million and $1.0 million, respectively, and for the nine months ended amounted to $3.4 million and $3.0 million, respectively. Under their respective terms these leases expire at various dates from 2023 through 2026.

The table below summarizes future estimated cash receipts under all existing lease agreements, including those in addition to the BP III lease agreements discussed above.

Estimated Cash Receipts by Period
TotalLess Than
1 Year		1 - 3
Years		3 - 5
Years		More Than
5 Years
(In thousands)
Real estate revenue$41,813 5,985 10,999 9,013 15,816 


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CHANGES IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES

Changes in Accounting Principles

Effective January 1, 2020 the Company implemented ASU 2016-13, Financial Instruments - Credit Losses. This standard replaced the previous incurred loss recognition model with an expected loss recognition model for certain financial assets. Adoption of the standard resulted in an incremental allowance for credit losses as of January 1, 2020 of $3.8 million, and a charge to retained earnings, net of tax, of $3.0 million as a change in accounting. There were no other changes in accounting principles during the periods reported in this Form 10-Q.

REGULATORY AND OTHER ISSUES

Statutory Accounting Practices

Regulations that affect the Company and the insurance industry are often the result of actions taken 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, both National Western and Ozark National's current statutory capital and surplus are significantly in excess of the current 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 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 were no changes in the Company's internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(e) under the Exchange Act, during the quarter ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. With respect to the ongoing COVID-19 pandemic crisis, the Company's businesses were included in the financial services sector categorized as a Critical Infrastructure Sector by the Department of Homeland Security and mandated to maintain normal work schedules which it has done throughout. While the Company has adopted working remote for a sizable portion of its home office employees, existing internal controls over financial reporting have been maintained and augmented where necessary given the unique situation presented in this environment.
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Internal controls over financial reporting change as the Company modifies or enhances its systems and processes to meet business needs. Any significant changes in controls are evaluated prior to implementation to help ensure continued effectiveness of internal controls and the control environment.

In August 2020, the Company experienced a data event in which an intruder accessed and exfiltrated certain data from our network. Based on our investigation to date, we believe that the intruder accessed or exfiltrated personal information for approximately 985,000 individuals. The Company was able to quickly restore its network and systems to continue business operations and policy servicing. While our investigation of the matter is ongoing, we have notified law enforcement and are in the process of notifying regulators and taking appropriate steps to begin notifying the impacted individuals.



PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 8(A) "Legal Proceedings" of the accompanying Condensed Consolidated Financial Statements included in this Form 10-Q.


ITEM 1A. RISK FACTORS

The risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 included a discussion of the potential ramifications of natural or man-made disasters and catastrophes including pandemic disease. As a business identified as being part of a Critical Infrastructure Security by the Department of Homeland Security, our companies and businesses have retained normal operations and business hours throughout the COVID-19 pandemic crisis. Although the majority of our home office staff have been redeployed to remote work sites following social distancing protocols, our companies have continued to accept applications for insurance, issue policies, invest and manage assets, pay policy benefits and expenses, maintain information technology operations, and adhere to a sound system of internal controls over financial reporting. Since operations have not been interrupted or suspended, the Company has not activated the business continuity plans that it has in place. The exposure to adverse mortality experience has been evaluated and deemed to not significantly impact the Company's financial position. The exposure to financial service companies has principally manifested in degradations in asset values, management of adequate liquidity and capital resources, and successfully maintaining competitiveness and product profitability in an exceptionally low interest rate environment. Although the impact has not been significant to date, no conclusion can be drawn at this time whether the ongoing affects of COVID-19 upon the global economy will have a material effect on our business, results of operations and financial condition.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective August 22, 2008, National Western adopted and implemented a limited stock buy-back program associated with the 2008 Incentive Plan which provides Option Holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. This plan was assumed by NWLGI from National Western in 2015 pursuant to the terms of the holding company reorganization implemented at that time. The program provides Option Holders with the ability to 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. As of September 30, 2020, there are no options outstanding under the plan.

Purchased shares are reported in the Company's Condensed Consolidated Financial Statements as authorized and unissued. At December 31, 2019 and September 30, 2020 there were no stock options vested or unvested and outstanding under these plans.

PeriodTotal Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsApproximate Dollar Value of Shares that May yet Be Purchased Under the Plans or Programs
July 1, 2020 through July 31, 2020— $— N/AN/A
August 1, 2020 through August 31, 2020— $— N/AN/A
September 1, 2020 through September 30, 2020— $— N/AN/A
Total— $— N/AN/A


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ITEM 4.  Removed and Reserved.


ITEM 6.  EXHIBITS

(a) Exhibits
-Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
-Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
-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.
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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 GROUP, INC.
(Registrant)


Date:November 6, 2020/S/ Ross R. Moody
Ross R. Moody
Chairman of the Board, President and
Chief Executive Officer
(Authorized Officer)
Date:November 6, 2020/S/ Brian M. Pribyl
Brian M. Pribyl
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
(Principal Accounting Officer)

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