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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, 2019

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OFTHE 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)

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 6, 2019, 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, 2019 (Unaudited) and December 31, 2018
 
 
For the Three Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Nine Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Three Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Nine Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Three Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Nine Months Ended September 30, 2019 and 2018 (Unaudited)
 
 
For the Nine Months Ended September 30, 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
September 30,
2019
 
December 31,
2018
 
 
 
 
Investments:
 
 
 
Debt securities held to maturity, at amortized cost (fair value: $7,537,665 and $7,228,268)
$
7,224,459

 
7,285,254

Debt securities available for sale, at fair value (cost: $3,265,807 and $3,008,624)
3,409,466

 
2,946,059

Mortgage loans, net of allowance for possible losses ($675 and $675)
224,048

 
203,180

Policy loans
80,272

 
54,724

Derivatives, index options
106,364

 
14,684

Equity securities, at fair value (cost: $14,120 and $14,329)
19,462

 
17,491

Other long-term investments
62,037

 
56,851

 
 
 
 
Total investments
11,126,108

 
10,578,243

 
 
 
 
Cash and cash equivalents
171,509

 
131,976

Deferred policy acquisition costs
736,826

 
841,704

Deferred sales inducements
108,425

 
133,714

Value of business acquired
139,900

 

Accrued investment income
98,618

 
96,338

Federal income tax receivable
11,346

 
17,934

Other assets
166,862

 
131,782

 
 
 
 
Total assets
$
12,559,594

 
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
September 30,
2019
 
December 31,
2018
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,329,867

 
9,608,850

Traditional life reserves
832,859

 
135,436

Other policyholder liabilities
129,715

 
135,694

Deferred Federal income tax liability
47,665

 
39,384

Other liabilities
127,836

 
111,550

 
 
 
 
Total liabilities
10,467,942

 
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)
59,977

 
(37,015
)
Retained earnings
1,989,923

 
1,896,040

 
 
 
 
Total stockholders’ equity
2,091,652

 
1,900,777

 
 
 
 
Total liabilities and stockholders' equity
$
12,559,594

 
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 September 30, 2019 and 2018
(Unaudited)
(In thousands, except per share amounts)
 
2019
 
2018
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
37,840

 
38,287

Traditional life premiums
24,099

 
4,209

Net investment income
108,456

 
175,553

Other revenues
3,273

 
5,111

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(1,943
)
 
3

Portion of OTTI (gains) losses recognized in other comprehensive income
(2
)
 
(3
)
Net OTTI losses recognized in earnings
(1,945
)
 

Other net investment gains (losses)
1,443

 
2,275

Total net realized investment gains (losses)
(502
)
 
2,275

Total revenues
173,166

 
225,435

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
39,918

 
5,744

Amortization of deferred policy acquisition costs and value of business acquired
22,998

 
26,775

Universal life and annuity contract interest
59,445

 
124,145

Other operating expenses
25,813

 
24,037

 
 
 
 
Total benefits and expenses
148,174

 
180,701

 
 
 
 
Earnings before Federal income taxes
24,992

 
44,734

 
 
 
 
Federal income taxes
5,003

 
9,093

 
 
 
 
Net earnings
$
19,989

 
35,641

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
5.65

 
$
10.08

Class B
$
2.83

 
$
5.04

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
5.65

 
$
10.08

Class B
$
2.83

 
$
5.04


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


5

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands, except per share amounts)

 
2019
 
2018
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
112,703

 
116,753

Traditional life premiums
65,492

 
13,282

Net investment income
388,211

 
358,100

Other revenues
13,652

 
15,396

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
(7,840
)
 
9

Portion of OTTI (gains) losses recognized in other comprehensive income
(7
)
 
(9
)
Net OTTI losses recognized in earnings
(7,847
)
 

Other net investment gains (losses)
11,549

 
5,582

Total net realized investment gains (losses)
3,702

 
5,582

 
 
 
 
Total revenues
583,760

 
509,113

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
101,764

 
44,607

Amortization of deferred policy acquisition costs and value of business acquired
86,573

 
90,073

Universal life and annuity contract interest
200,500

 
183,316

Other operating expenses
77,196

 
72,467

 
 
 
 
Total benefits and expenses
466,033

 
390,463

 
 
 
 
Earnings before Federal income taxes
117,727

 
118,650

 
 
 
 
Federal income taxes
23,844

 
23,668

 
 
 
 
Net earnings
$
93,883

 
94,982

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
26.55

 
$
26.86

Class B
$
13.28

 
$
13.43

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
26.55

 
$
26.86

Class B
$
13.28

 
$
13.43

 
 
 
 

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


6

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Net earnings
$
19,989

 
35,641

 
 
 
 
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
15,586

 
(1,416
)
Net unrealized liquidity gains (losses)
1

 

Reclassification adjustment for net amounts included in net earnings
1,380

 
(936
)
 
 
 
 
Net unrealized gains (losses) on securities
16,967

 
(2,352
)
 
 
 
 
Foreign currency translation adjustments
52

 
20

 
 
 
 
Benefit plans:
 

 
 

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

 
 
 
 
Other comprehensive income (loss)
16,515

 
469

 
 
 
 
Comprehensive income (loss)
$
36,504

 
36,110


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


7

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Net earnings
$
93,883

 
94,982

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

 
 

Unrealized gains (losses) on securities:
 

 
 

Net unrealized holding gains (losses) arising during period
93,730

 
(51,238
)
Net unrealized liquidity gains (losses)
3

 
2

Reclassification adjustment for net amounts included in net earnings
4,252

 
(2,533
)
 
 
 
 
Net unrealized gains (losses) on securities
97,985

 
(53,769
)
 
 
 
 
Foreign currency translation adjustments
519

 
1,227

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(1,512
)
 
8,403

 
 
 
 
Other comprehensive income (loss)
96,992

 
(44,139
)
 
 
 
 
Comprehensive income (loss)
$
190,875

 
50,843

 
 
 
 

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







8

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended September 30, 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
50,730

 
(22,169
)
Change in unrealized gains (losses) during period, net of tax
16,966

 
(2,352
)
Cumulative effect of change in accounting principle, net of tax

 

 
 
 
 
   Balance at end of period
67,696

 
(24,521
)
 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(5
)
 
(8
)
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
)
 
(1
)
 
 
 
 
   Balance at end of period
(4
)
 
(7
)
 
 
 
 
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

 
(1
)
Recoveries, net of tax

 

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

9

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Three Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands)
 
 
 
 
 
2019
 
2018
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
5,044

 
4,430

Change in translation adjustments during period
52

 
20

 
 
 
 
  Balance at end of period
5,096

 
4,450

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(12,305
)
 
(16,993
)
Amortization of net prior service cost and net loss, net of tax
(504
)
 
2,801

 
 
 
 
  Balance at end of period
(12,809
)
 
(14,192
)
 
 
 
 
Accumulated other comprehensive income (loss) at end of period
59,977

 
(34,272
)
 
 
 
 
Retained earnings:
 
 
 
   Balance at beginning of period
1,969,934

 
1,839,896

   Net earnings
19,989

 
35,641

 
 
 
 
   Balance at end of period
1,989,923

 
1,875,537

 
 
 
 
Total stockholders' equity
$
2,091,652

 
1,883,017


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



10

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 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
97,982

 
(53,771
)
Cumulative effect of change in accounting principle, net of tax

 
(4,414
)
 
 
 
 
   Balance at end of period
67,696

 
(24,521
)
 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(7
)
 
(10
)
Amortization
6

 
7

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

 

Additional credit loss on previously impaired securities

 

Change in shadow deferred policy acquisition costs
(3
)
 
(4
)
 
 
 
 
   Balance at end of period
(4
)
 
(7
)
 
 
 
 
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

 
(1
)
Recoveries, net of tax

 

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

11

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Nine Months Ended September 30, 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
519

 
1,227

 
 
 
 
  Balance at end of period
5,096

 
4,450

 
 
 
 
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
(1,512
)
 
8,403

 
 
 
 
  Balance at end of period
(12,809
)
 
(14,192
)
 
 
 
 
Accumulated other comprehensive income (loss) at end of period
59,977

 
(34,272
)
 
 
 
 
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
93,883

 
94,982

 
 
 
 
   Balance at end of period
1,989,923

 
1,875,537

 
 
 
 
Total stockholders' equity
$
2,091,652

 
1,883,017


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



12

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
93,883

 
94,982

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

 
 

Universal life and annuity contract interest
200,500

 
183,316

Surrender charges and other policy revenues
(25,608
)
 
(28,429
)
Realized (gains) losses on investments
(3,702
)
 
(5,582
)
Accretion/amortization of discounts and premiums, investments
1,798

 
(86
)
Depreciation and amortization
8,185

 
8,769

(Increase) decrease in value of equity securities
(2,639
)
 
(254
)
(Increase) decrease in value of derivatives
(63,127
)
 
(35,581
)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired
53,837

 
31,645

(Increase) decrease in accrued investment income
3,837

 
(4,245
)
(Increase) decrease in other assets
280

 
(12,489
)
Increase (decrease) in liabilities for future policy benefits
6,960

 
(11,566
)
Increase (decrease) in other policyholder liabilities
(19,847
)
 
1,520

Increase (decrease) in Federal income tax liability
6,486

 
(696
)
Increase (decrease) in deferred Federal income tax
(17,502
)
 
4,680

Increase (decrease) in other liabilities
(1,340
)
 
(3,882
)
 
 
 
 
Net cash provided by operating activities
242,001

 
222,102

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Debt securities available for sale
80,528

 
13,098

Other investments
35,871

 
2,749

Proceeds from maturities and redemptions of:
 

 
 

Debt securities held to maturity
486,344

 
360,036

Debt securities available for sale
189,944

 
168,638

Derivatives, index options
28,457

 
160,094

Property and equipment

 
8

Purchases of:
 

 
 

Debt securities held to maturity
(161,617
)
 
(391,548
)
Debt securities available for sale
(127,811
)
 
(228,172
)
Equity securities
(977
)
 
(1,678
)
Derivatives, index options
(57,443
)
 
(63,524
)
Other investments
(7,314
)
 
(5,581
)
Property and equipment
(2,497
)
 
(3,070
)
Payment to acquire businesses, net of cash acquired
(189,121
)
 

 
 
 
 
 
Continued on Next Page
 
 
 
 
 

13

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended September 30, 2019 and 2018
(Unaudited)
(In thousands)
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
22,384

 
32,374

Cost of mortgage loans acquired
(47,744
)
 
(24,803
)
Decrease (increase) in policy loans
2,580

 
1,931

 
 
 
 
Net cash provided by/(used in) investing activities
251,584

 
20,552

 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
292,551

 
442,795

Return of account balances on universal life and annuity contracts
(747,260
)
 
(749,245
)
 
 
 
 
Net cash provided by (used in) financing activities
(454,709
)
 
(306,450
)
 
 
 
 
Effect of foreign exchange
657

 
1,553

 
 
 
 
Net increase (decrease) in cash and cash equivalents
39,533

 
(62,243
)
Cash and cash equivalents at beginning of period
131,976

 
217,624

 
 
 
 
Cash and cash equivalents at end of period
$
171,509

 
155,381

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
252

 
30

Income taxes
$
34,758

 
19,683

 
 
 
 
Noncash operating activities:
 
 
 
   Net deferral and amortization of sales inducements
$
(13,501
)
 
(8,152
)
 
 
 
 
Noncash investing activities:
 
 
 
Contingent consideration to acquire businesses
$
3,965

 


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



14

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 September 30, 2019, and the results of its operations and its cash flows for the three and nine months ended September 30, 2019 and September 30, 2018. Such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 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 eight months ended September 30, 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 ("DPAC") and value of business acquired ("VOBA"), (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 nine months 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 and nine months ended September 30, 2019 and September 30, 2018.

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,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Other net investment gains (losses)
 
$
198

 
1,185

 
2,465

 
3,206

Net OTTI losses recognized in earnings
 
(1,945
)
 

 
(7,847
)
 

Earnings before Federal income taxes
 
(1,747
)
 
1,185

 
(5,382
)
 
3,206

Federal income taxes
 
(367
)
 
249

 
(1,130
)
 
673

 
 
 
 
 
 
 
 
 
Net earnings
 
$
(1,380
)
 
936

 
(4,252
)
 
2,533



15

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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 periods beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
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.

16

Table of Contents

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

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 April 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The new guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The amendments will be effective for annual goodwill impairment tests occurring after December 15, 2019. Adoption of this 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. 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 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. The guidance for these pronouncements 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. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
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 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.
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.

17

Table of Contents

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

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. All dividends declared by Ozark National going forward are payable entirely to NWLIC as the sole owner 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 third quarter of 2019, National Western declared a $4.0 million dividend to NWLGI which was subsequently paid on October 17, 2019. In the first quarter of 2018, National Western declared and paid a $3.0 million dividend to NWLGI. In the third quarter of 2018, National Western declared a $3.0 million dividend to NWLGI which was subsequently paid on October 17, 2018. Ozark National did not declare or pay cash dividends on its shares during the eight-month period ended September 30, 2019.

NWLGI did not declare or pay cash dividends on its common shares during the nine months ended September 30, 2019 and 2018.



18

Table of Contents

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

(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income 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 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 September 30,
 
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
$
19,989

 
 
 
35,641

 
 
Dividends - Class A shares

 
 
 

 
 
Dividends - Class B shares

 
 
 

 
 
 
 
 
 
 
 
 
 
Undistributed earnings
$
19,989

 
 
 
35,641

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$