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

For the Quarterly Period Ended March 31, 2019
o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
 
Commission File Number: 000-55522
 
 
NATIONAL WESTERN LIFE GROUP, INC.
(Exact name of Registrant as specified in its charter)
 
 
 
 
DELAWARE
47-3339380
(State of Incorporation)
(I.R.S. Employer Identification Number)
 
 
10801 N. MOPAC EXPY BLDG 3
 
AUSTIN, TEXAS 78759-5415
(512) 836-1010
(Address of Principal Executive Offices) (Zip Code)
(Telephone Number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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  x  Accelerated filer  o   Non-accelerated filer (Do not check if a smaller reporting company)  o Smaller reporting company o Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
As of May 9, 2019, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,020 and  Class B - 200,000.



nwlgi-logoa49.jpg
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
March 31, 2019 (Unaudited) and December 31, 2018
 
 
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
March 31,
2019
 
December 31,
2018
 
 
 
 
Investments:
 
 
 
Debt securities held to maturity, at amortized cost (fair value: $7,529,552 and $7,228,268)
$
7,428,925

 
7,285,254

Debt securities available for sale, at fair value (cost: $3,306,789 and $3,008,624)
3,334,485

 
2,946,059

Mortgage loans, net of allowance for possible losses ($675 and $675)
205,368

 
203,180

Policy loans
81,162

 
54,724

Derivatives, index options
71,001

 
14,684

Equity securities, at fair value (cost: $14,374 and $14,329)
19,196

 
17,491

Other long-term investments
68,167

 
56,851

 
 
 
 
Total investments
11,208,304

 
10,578,243

 
 
 
 
Cash and cash equivalents
91,936

 
131,976

Deferred policy acquisition costs
793,940

 
841,704

Deferred sales inducements
123,880

 
133,714

Value of business acquired
145,696

 

Accrued investment income
105,650

 
96,338

Federal income tax receivable

 
17,934

Other assets
179,470

 
131,782

 
 
 
 
Total assets
$
12,648,876

 
11,931,691


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

3

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
March 31,
2019
 
December 31,
2018
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,524,265

 
9,608,850

Traditional life reserves
828,189

 
135,436

Other policyholder liabilities
148,809

 
135,694

Deferred Federal income tax liability
41,705

 
39,384

Federal income tax payable
1,282

 

Other liabilities
121,726

 
111,550

 
 
 
 
Total liabilities
10,665,976

 
10,030,914

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

Class A - $.01 par value; 7,500,000 shares authorized; 3,436,020 issued and outstanding in 2019 and 2018
34

 
34

Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2019 and 2018
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income (loss)
4,910

 
(37,015
)
Retained earnings
1,936,238

 
1,896,040

 
 
 
 
Total stockholders’ equity
1,982,900

 
1,900,777

 
 
 
 
Total liabilities and stockholders' equity
$
12,648,876

 
11,931,691


Note:  The Condensed Consolidated Balance Sheet at December 31, 2018 has been derived from the audited Consolidated Financial Statements as of that date.

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


4

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands, except per share amounts)
 
2019
 
2018
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
37,953

 
38,520

Traditional life premiums
17,583

 
4,145

Net investment income
151,331

 
60,745

Other revenues
6,413

 
4,997

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
3

 
3

Portion of OTTI (gains) losses recognized in other comprehensive income
(3
)
 
(3
)
Net OTTI losses recognized in earnings

 

Other net investment gains (losses)
4,629

 
611

Total net realized investment gains (losses)
4,629

 
611

Total revenues
217,909

 
109,018

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
28,189

 
21,401

Amortization of deferred policy acquisition costs and value of business acquired
32,164

 
32,229

Universal life and annuity contract interest
80,916

 
(1,818
)
Other operating expenses
26,049

 
23,633

 
 
 
 
Total benefits and expenses
167,318

 
75,445

 
 
 
 
Earnings before Federal income taxes
50,591

 
33,573

 
 
 
 
Federal income taxes
10,393

 
6,698

 
 
 
 
Net earnings
$
40,198

 
26,875

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
11.37

 
$
7.60

Class B
$
5.68

 
$
3.80

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
11.37

 
$
7.60

Class B
$
5.68

 
$
3.80


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


5

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Net earnings
$
40,198

 
26,875

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
42,743

 
(34,754
)
Net unrealized liquidity gains (losses)
1

 

Reclassification adjustment for net amounts included in net earnings
(868
)
 
(33
)
 
 
 
 
Net unrealized gains (losses) on securities
41,876

 
(34,787
)
 
 
 
 
Foreign currency translation adjustments
553

 
1,168

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(504
)
 
2,801

 
 
 
 
Other comprehensive income (loss)
41,925

 
(30,818
)
 
 
 
 
Comprehensive income (loss)
$
82,123

 
(3,943
)

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


6

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
36

 
36

Shares exercised under stock option plan

 

 
 
 
 
       Balance at end of period
36

 
36

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
41,716

 
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 period
(30,286
)
 
33,664

Change in unrealized gains (losses) during period, net of tax
41,875

 
(34,787
)
Cumulative effect of change in accounting principle, net of tax

 
(4,414
)
 
 
 
 
   Balance at end of period
11,589

 
(5,537
)
 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(7
)
 
(10
)
Amortization
2

 
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
)
 
(2
)
 
 
 
 
   Balance at end of period
(6
)
 
(10
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

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

 

Change in shadow deferred policy acquisition costs

 

Recoveries, net of tax

 

 
 
 
 
  Balance at end of period
(2
)
 
(1
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 
 
 
 
 

7

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
 
 
 
 
2019
 
2018
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
4,577

 
3,223

Change in translation adjustments during period
553

 
1,168

 
 
 
 
  Balance at end of period
5,130

 
4,391

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(11,297
)
 
(22,595
)
Amortization of net prior service cost and net loss, net of tax
(504
)
 
2,801

 
 
 
 
  Balance at end of period
(11,801
)
 
(19,794
)
 
 
 
 
Accumulated other comprehensive income (loss) at end of period
4,910

 
(20,951
)
 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,896,040

 
1,776,141

Cumulative effect of change in accounting principle, net of tax

 
4,414

   Net earnings
40,198

 
26,875

   Stockholder dividends

 

 
 
 
 
   Balance at end of period
1,936,238

 
1,807,430

 
 
 
 
Total stockholders' equity
$
1,982,900

 
1,828,231


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



8

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
40,198

 
26,875

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

 
 

Universal life and annuity contract interest
80,916

 
(1,818
)
Surrender charges and other policy revenues
(8,049
)
 
(8,988
)
Realized (gains) losses on investments
(4,629
)
 
(611
)
Accretion/amortization of discounts and premiums, investments
490

 
123

Depreciation and amortization
4,455

 
3,021

(Increase) decrease in value of equity securities
(1,951
)
 
541

(Increase) decrease in value of derivatives
(42,003
)
 
44,394

(Increase) decrease in deferred policy acquisition and sales inducement costs
20,342

 
11,673

(Increase) decrease in accrued investment income
(3,195
)
 
(2,966
)
(Increase) decrease in other assets
(1,790
)
 
(7,635
)
Increase (decrease) in liabilities for future policy benefits
(776
)
 
2,594

Increase (decrease) in other policyholder liabilities
(753
)
 
9,101

Increase (decrease) in Federal income tax liability
19,114

 
(13,451
)
Increase (decrease) in deferred Federal income tax
(8,823
)
 
11,864

Increase (decrease) in other liabilities
(4,142
)
 
(1,844
)
 
 
 
 
Net cash provided by operating activities
89,404

 
72,873

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Debt securities available for sale
73,257

 

Other investments
13,193

 
140

Proceeds from maturities and redemptions of:
 

 
 

Debt securities held to maturity
137,732

 
113,157

Debt securities available for sale
55,569

 
7,156

Derivatives, index options
3,047

 
59,321

Property and equipment

 
9

Purchases of:
 

 
 

Debt securities held to maturity
(20,690
)
 
(142,867
)
Debt securities available for sale
(20,474
)
 
(126,544
)
Equity securities
(262
)
 
(376
)
Derivatives, index options
(18,264
)
 
(22,556
)
Other investments
(6,908
)
 
(96
)
Property and equipment
(77
)
 
(2,553
)
Payment to acquire businesses, net of cash acquired
(189,120
)
 

 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

9

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
15,171

 
3,365

Cost of mortgage loans acquired
(17,271
)
 
(24
)
Decrease (increase) in policy loans
1,690

 
890

 
 
 
 
Net cash provided by/(used in) investing activities
26,593

 
(110,978
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
92,153

 
154,914

Return of account balances on universal life and annuity contracts
(248,890
)
 
(252,988
)
 
 
 
 
Net cash provided by (used in) financing activities
(156,737
)
 
(98,074
)
 
 
 
 
Effect of foreign exchange
700

 
1,479

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(40,040
)
 
(134,700
)
Cash and cash equivalents at beginning of period
131,976

 
217,624

 
 
 
 
Cash and cash equivalents at end of period
$
91,936

 
82,924

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
19

 
10

Income taxes
$
1

 
8,283

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(4,105
)
 
(3,007
)
 
 
 
 
Noncash investing activities:
 
 
 
Contingent consideration to acquire businesses

$
3,700

 


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



10

Table of Contents

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 March 31, 2019, and the results of its operations and its cash flows for the three months ended March 31, 2019 and March 31, 2018. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2019 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, 2018 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, 2018 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 the two months ended March 31, 2019, subsequent to their acquisition effective January 31, 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, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate. 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.

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 months ended March 31, 2019 and March 31, 2018.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(In thousands)
 
 
 
 
 
Other net investment gains (losses)
 
$
1,099

 
40

Net OTTI losses recognized in earnings
 

 

Earnings before Federal income taxes
 
1,099

 
40

Federal income taxes
 
231

 
7

 
 
 
 
 
Net earnings
 
$
868

 
33



11

Table of Contents

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

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements not yet adopted

On April 25, 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 various aspects of the following guidance previously issued related to financial instruments, based on feedback from stakeholders.

A. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Areas for improvement. The amendments clarify guidance and implementation 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. Additionally, the amendments correct certain cross-references.

B. ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Liabilities. The amendments clarify the scope of the original Update, and add clarification on the guidance and implementation around fair value disclosure requirements for nonpublic entities, measurement alternatives for equity securities without readily determinable fair values at nonrecurring fair value measurement, remeasurement of equity securities without readily determinable fair values at historical exchange rates, and associated disclosure requirements.

C. ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments clarify the guidance and implementation around partial-term fair value hedges of interest rate risk, amortization of fair value hedge basis adjustments, disclosure of fair value hedge basis adjustments, consideration of the hedged contractually specified interest rate under the hypothetical derivative method, scope for nonpublic entities, and application of a first-payments-received cash flow hedging technique to overall cash flows on a group of variable interest payments.

The amendments contained in this update will be effective for the same fiscal years in which the original ASU becomes effective, or, if already implemented, annual periods beginning after the issuance of this update. The Company will be primarily affected by the clarifications provided to ASU 2016-13, which is still pending adoption.

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.

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

These updates are required to be applied retrospectively to the earliest period presented in the financial statements for periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
In August 2018, the FASB issued a new Concepts Statement No. 8 Conceptual Framework for Financial Reporting - Chapter 8, Notes to Financial Statements. This was issued as part of a disclosure framework project aimed at improving disclosures in financial statements. This issuance provides conceptual guidance that may be followed when determining items to include as disclosures in the notes to financial statements. In conjunction with this issuance, the FASB also issued two accounting standard updates (“ASU”) which identified a particular FASB Topic and evaluated its disclosures through the new conceptual framework of Concepts Statement No. 8, Chapter 8. This process resulted in the issuance of the following two ASUs.
In August 2018, FASB issued ASU 2018-13 Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure requirements for Fair Value Measurement. This update removed disclosures for 1) amount of and reasons for transfers between Level 1 and Level 2 for fair value hierarchy, 2) policy for timing of transfers between levels, 3) valuation process for Level 3 fair value measurements. This update also added disclosure requirement as follows: 1) changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements held at end of reporting period; 2) range and weighted average (or other reasonable quantitative measurement) of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments will be effective for interim periods beginning after December 15, 2019. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.
In August 2018, FASB issued ASU 2018-14 Compensation-Retirement Benefits - Defined Benefit Plans-General (Subtopic 715-20) Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This update removed disclosures for 1) amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) amount and timing of plan assets expected to be returned to the employer, 3) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, 4) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of the net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. This update also added disclosures as follow: 1) weighted-average interest crediting rates for cash balance plans and other plans with promised crediting rates, 2) explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Finally, this update clarified that the following information for defined benefit pension plans should be disclosed: 1) projected benefit obligation (PBO) and fair value of plan assets for plans with PBO in excess of plan assets, 2) accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments will be effective for fiscal periods ending after December 31, 2020. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.
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. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.
Recent accounting pronouncements adopted
In August 2018, the SEC released a final rule updating disclosure requirements, Disclosure Update and Simplification, which resulted in the additional interim disclosure of an analysis of changes in stockholders’ equity to be required for the current and comparative quarter and year-to-date interim periods. Registrants are required to provide an analysis of changes in each caption of stockholders’ equity and noncontrolling interests, which will be accompanied by dividends per share and in the aggregate for each class of shares. The disclosure must be presented in the form of a reconciliation, either as a separate statement or in the footnotes. The adoption of this ASU in 2019 did not have a material effect on the results of operations or financial position of the Company as this information in year-to-date format is already provided.

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

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period for premiums is being shortened to the earliest call date. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The adoption of this ASU in 2019 did not have a material effect on the results of operations or financial position of the Company.
In February 2016, the FASB issued new guidance on leasing transactions (ASU 2016-02, Leases - Topic 842). The new guidance is effective for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective transition approach (subject to optional practical expedients). The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. Early adoption is permitted. The Company elected to early adopt this guidance in 2018. There was no material impact to the Company’s financial position, results of operations or cash flows as the result of the adoption of this ASU in 2018.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future Consolidated Financial Statements.


(3)
 STOCKHOLDERS' EQUITY

NWLIC is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The restrictions are based on the lesser of statutory earnings from operations, excluding capital gains, from the prior calendar year or 10% of statutory surplus of the company as of the previous calendar year-end.  Under these guidelines the maximum dividend payment which may be made without prior approval in 2019 is $30.7 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% of the statutory surplus of the company from the prior 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 2019 without prior approval is $20.4 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 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. Consequently, any additional dividends during 2019 will require prior approval of the Missouri Department of Insurance. As the sole owner of Ozark National, all dividends declared by Ozark National going forward are payable entirely to NWLIC and are eliminated in consolidation.
 
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 first quarter of 2018, National Western declared and paid a $3.0 million dividend to NWLGI. Ozark National did not declare or pay cash dividends on its shares during the two month period ended March 31, 2019.

NWLGI did not declare or pay cash dividends on its common shares during the three months ended March 31, 2019 and 2018.


(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income 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.


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

Net income 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 March 31,
 
2019
 
2018
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
40,198

 
 
 
26,875

 
 
Dividends - Class A shares

 
 
 

 
 
Dividends - Class B shares

 
 
 

 
 
 
 
 
 
 
 
 
 
Undistributed earnings
$
40,198

 
 
 
26,875

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$

 

 

 

Allocation of undistributed income
39,061

 
1,137

 
26,115

 
760

 
 
 
 
 
 
 
 
Net earnings
$
39,061

 
1,137

 
26,115

 
760

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options

 

 

 

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

 
200

 
3,436

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
11.37

 
5.68

 
7.60

 
3.80

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
11.37

 
5.68

 
7.60

 
3.80


 
 
 
 
 
 
 
 



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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 Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
 
 
 
 
Service cost
$
24

 
28

Interest cost
210

 
225

Expected return on plan assets
(272
)
 
(325
)
Amortization of prior service cost

 

Amortization of net loss
165

 
131

 
 
 
 
Net periodic benefit cost
$
127

 
59



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 2019 plan year is $0.4 million. There was $0.5 million in planned contributions remaining for the 2018 plan year as of March 31, 2019. As of March 31, 2019, the Company had made $0.0 million in contributions to the plan for the 2019 plan year.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the income statement.

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 Insurance Company ("ANICO"), a related party. ANICO has guaranteed the payment of pension obligations under the plan. However, the company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with National Western beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the Company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the then Chairman of the Company. As previously mentioned, these additional obligations are a liability to the company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the then Chairman and the then President of the Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").


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Table of Contents

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

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 Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
 
 
 
 
Service cost
$
125

 
90

Interest cost
256

 
213

Amortization of prior service cost
15

 
15

Amortization of net loss
348

 
176

 
 
 
 
Net periodic benefit cost
$
744

 
494



The Company expects to contribute $2.0 million to these plans in 2019.  As of March 31, 2019, the Company has contributed $0.4 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 income statement.

Ozark National and NIS have no defined benefit plans.

(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 plan is unfunded. The following table summarizes the components of net periodic benefit costs.

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
 
 
 
 
Interest cost
$
49

 
40

Amortization of prior service cost
13

 
26

Amortization of net loss
61

 
37

 
 
 
 
Net periodic benefit cost
$
123

 
103



The Company expects to contribute minimal amounts to the plan in 2019. Ozark National and NIS do not offer postemployment benefits.

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Table of Contents

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


The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the income statement.


(6)
SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, annuities, and acquired companies. 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). As disclosed in the Company's filings for 2018, National Western discontinued accepting applications for the Company's international products from foreign residents in May 2018. 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 March 31, 2019 and December 31, 2018 for the Condensed Consolidated Balance Sheet items and for the three months ended March 31, 2019 and March 31, 2018 for the Condensed Consolidated Statement of Earnings is provided below.

Condensed Consolidated Balance Sheet Items:

 
March 31, 2019
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
Acquired Businesses
 
All
Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs, sales inducements, and value of business acquired
$
118,471

 
231,166

 
567,505

 
146,374

 

 
1,063,516

Total segment assets
1,243,412

 
1,185,862

 
8,569,375

 
940,933

 
366,626

 
12,306,208

Future policy benefits
1,075,603

 
890,562

 
7,691,496

 
694,793

 

 
10,352,454

Other policyholder liabilities
18,156

 
14,700

 
101,485

 
14,468

 

 
148,809


 
December 31, 2018
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
Acquired Businesses
 
All
Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
122,661

 
243,518

 
609,239

 

 

 
975,418

Total segment assets
1,215,864

 
1,211,036

 
8,791,463

 

 
370,118

 
11,588,481

Future policy benefits
1,039,150

 
894,891

 
7,810,245

 

 

 
9,744,286

Other policyholder liabilities
17,439

 
20,381

 
97,874

 

 

 
135,694



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

Condensed Consolidated Statement of Earnings:


Three Months Ended March 31, 2019
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
Acquired Businesses
 
All
 Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
10,804

 
26,063

 
4,868

 
13,801

 

 
55,536

Net investment income
23,499

 
14,017

 
103,154

 
3,976

 
6,685

 
151,331

Other revenues
44

 
21

 
8

 
1,441

 
4,899

 
6,413

 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
34,347

 
40,101

 
108,030

 
19,218

 
11,584

 
213,280

 
 
 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,922

 
2,162

 
11,430

 
10,675

 

 
28,189

Amortization of deferred policy acquisition costs and value of business acquired
3,410

 
7,294

 
19,712

 
1,748

 

 
32,164

Universal life and annuity contract interest
21,441

 
11,993

 
47,482

 

 

 
80,916

Other operating expenses
4,123

 
4,264

 
7,508

 
3,085

 
7,069

 
26,049

Federal income taxes (benefit)
324

 
3,208

 
4,883

 
747

 
259

 
9,421

 
 
 
 
 
 
 
 
 
 
 
 
Total expenses
33,220

 
28,921

 
91,015

 
16,255

 
7,328

 
176,739

 
 
 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,127

 
11,180

 
17,015

 
2,963

 
4,256

 
36,541

 
 
 
 
 
 
 
 
 
 

Three Months Ended March 31, 2018
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
Acquired Businesses
 
All
 Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
9,601

 
27,917