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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 value NWLI   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.


NWLI-20200930_G1.JPG
TABLE OF CONTENTS
  Page
3
3
September 30, 2020 (Unaudited) and December 31, 2019
3
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
5
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
6
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
7
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
8
For the Three Months Ended September 30, 2020 and 2019 (Unaudited)
9
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
For the Nine Months Ended September 30, 2020 and 2019 (Unaudited)
2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

  (Unaudited)  
ASSETS September 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 loans 75,714  80,008 
Derivatives, index options 93,367  157,588 
Equity securities, at fair value (cost: $15,157 and $16,894)
18,610  23,594 
Other long-term investments 78,579  62,090 
Total investments 10,801,694  11,058,892 
Cash and cash equivalents 507,025  253,525 
Deferred policy acquisition costs 633,349  723,972 
Deferred sales inducements 86,104  104,359 
Value of business acquired 132,426  138,071 
Accrued investment income 93,330  93,298 
Federal income tax receivable 802  — 
Other assets 166,256  181,330 
Total assets $ 12,420,986  12,553,447 

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
3

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

  (Unaudited)  
LIABILITIES AND STOCKHOLDERS’ EQUITY September 30,
2020
December 31,
2019
LIABILITIES:    
Future policy benefits:    
Universal life and annuity contracts (Note 1) $ 9,013,661  9,303,233 
Traditional life reserves 848,515  838,738 
Other policyholder liabilities 136,392  127,607 
Deferred Federal income tax liability (Note 1) 53,055  36,767 
Federal income tax payable —  3,748 
Other liabilities 154,133  126,924 
Total liabilities 10,205,756  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
Additional paid-in capital 41,716  41,716 
Accumulated other comprehensive income (loss) 104,764  60,108 
Retained earnings (Note 1) 2,068,714  2,014,570 
Total stockholders’ equity 2,215,230  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).

4

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)

  2020 2019
Premiums and other revenues:    
Universal life and annuity contract charges $ 40,303  37,840 
Traditional life premiums 22,693  24,099 
Net investment income (loss) 129,679  108,456 
Other revenues 3,977  3,273 
Net realized investment gains (losses):    
Total other-than-temporary impairment (“OTTI”) gains (losses) (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 revenues 202,702  173,166 
Benefits and expenses:    
Life and other policy benefits 26,940  39,918 
Amortization of deferred policy acquisition costs and value of business acquired 50,800  22,998 
Universal life and annuity contract interest 85,879  59,445 
Other operating expenses 25,754  25,813 
Total benefits and expenses 189,373  148,174 
Earnings before Federal income taxes 13,329  24,992 
Federal income taxes 2,504  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).

5

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)

  2020 2019
Premiums and other revenues:    
Universal life and annuity contract charges $ 112,478  112,703 
Traditional life premiums 68,956  65,492 
Net investment income 261,894  388,211 
Other revenues 15,217  13,652 
Net realized investment gains (losses):    
Total other-than-temporary impairment (“OTTI”) gains (losses) (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 revenues 471,205  583,760 
Benefits and expenses:    
Life and other policy benefits 94,005  101,764 
Amortization of deferred policy acquisition costs and value of business acquired 111,937  86,573 
Universal life and annuity contract interest 119,625  200,500 
Other operating expenses 74,730  77,196 
Total benefits and expenses 400,297  466,033 
Earnings before Federal income taxes 70,908  117,727 
Federal income taxes 13,732  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).

6

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)

  2020 2019
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 period 24,357  15,586 
Net unrealized liquidity gains (losses)
Reclassification adjustment for net amounts included in net earnings (702) 1,380 
Net unrealized gains (losses) on securities 23,656  16,967 
Foreign currency translation adjustments 85  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).

7

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)

  2020 2019
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 period 53,569  93,730 
Net unrealized liquidity gains (losses)
Reclassification adjustment for net amounts included in net earnings (2,670) 4,252 
Net unrealized gains (losses) on securities 50,901  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).






8


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)

  2020 2019
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 (loss):    
Unrealized gains (losses) on non-impaired securities:    
Balance at beginning of period 97,909  50,730 
Change in unrealized gains (losses) during period, net of tax 23,655  16,966 
Balance at end of period 121,564  67,696 
Unrealized losses on impaired held to maturity securities:    
Balance at beginning of period (3) (5)
Cumulative effect of change in accounting principle —  — 
Amortization
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
9

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)
2020 2019
Foreign currency translation adjustments:    
Balance at beginning of period 4,970  5,044 
Change in translation adjustments during period 85  52 
Balance at end of period 5,055  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 period 104,764  59,977 
Retained earnings:    
Balance at beginning of period 2,057,889  1,969,934 
Cumulative effect of change in accounting principle, net of tax —  — 
Net earnings 10,825  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).





10


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)

  2020 2019
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 70,665  (30,286)
Change in unrealized gains (losses) during period, net of tax 50,899  97,982 
Cumulative effect of change in accounting principle, net of tax —  — 
Balance at end of period 121,564  67,696 
Unrealized losses on impaired held to maturity securities:    
Balance at beginning of period (4) (7)
Amortization
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
11


CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
2020 2019
Foreign currency translation adjustments:    
Balance at beginning of period 5,101  4,577 
Change in translation adjustments during period (46) 519 
Balance at end of period 5,055  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 period 104,764  59,977 
Retained earnings:    
Balance at beginning of period 2,014,570  1,896,040 
Cumulative effect of change in accounting principle, net of tax (Note 2) (3,032) — 
Net earnings 57,176  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).


12


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
  2020 2019
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 interest 119,625  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, investments 1,580  1,798 
Depreciation and amortization 8,892  8,501 
Increase (decrease) in estimated credit losses on investments 2,930  — 
(Increase) decrease in value of equity securities 3,107  (2,639)
(Increase) decrease in value of derivatives 34,866  (63,127)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired 75,604  53,837 
(Increase) decrease in accrued investment income (32) 3,837 
(Increase) decrease in other assets 8,746  1,831 
Increase (decrease) in liabilities for future policy benefits (5,288) 6,960 
Increase (decrease) in other policyholder liabilities 8,785  (19,847)
Increase (decrease) in Federal income tax liability (4,550) 6,486 
Increase (decrease) in deferred Federal income tax 5,224  (17,502)
Increase (decrease) in other liabilities (3,391) (1,045)
Net cash provided by operating activities 279,395  244,163 
Cash flows from investing activities:    
Proceeds from sales of:    
Debt securities available for sale —  80,528 
Other investments 5,786  29,960 
Proceeds from maturities, redemptions, and prepayments of:    
Debt securities held to maturity 619,984  486,344 
Debt securities available for sale 240,398  189,944 
  Other investments 9,753  5,911 
Derivatives, index options 84,778  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)
13

Continued on Next Page

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended September 30, 2020 and 2019
(Unaudited)
(In thousands)
2020 2019
Principal payments on mortgage loans 6,022  22,384 
Cost of mortgage loans acquired (41,530) (47,744)
Decrease (increase) in policy loans 4,294  2,580 
Net cash provided by (used in) investing activities 347,357  249,717 
Cash flows from financing activities:    
Deposits to account balances for universal life and annuity contracts 348,583  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 cash 253,500  39,533 
Cash, cash equivalents, and restricted cash at beginning of period 253,525  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).


14


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.

15


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,
2020 2019 2020 2019
(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 taxes 889  (1,747) 3,380  (5,382)
Federal income taxes 187  (367) 710  (1,130)
Net earnings $ 702  (1,380) 2,670  (4,252)


16


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.

17


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.


18


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.


19


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,
  2020 2019
  Class A Class B Class A Class 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 earnings 10,519  306  19,424  565 
Net earnings $ 10,519  306  19,424  565 
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 $ 3.06  1.53  5.65  2.83 
Diluted earnings per share $ 3.06  1.53  5.65  2.83 

20


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Nine Months Ended September 30,
  2020 2019
  Class A Class B Class A Class 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 earnings 55,560  1,616  91,228  2,655 
Net earnings $ 55,560  1,616  91,228  2,655 
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 $ 16.17  8.08  26.55  13.28 
Diluted Earnings Per Share $ 16.17  8.08  26.55  13.28 


21


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 Nine Months Ended
  September 30, September 30,
  2020 2019 2020 2019
  (In thousands)
Service cost $ 27  24  81  72 
Interest cost 168  210  505  630 
Expected return on plan assets (315) (271) (946) (815)
Amortization of prior service cost —  —  —  — 
Amortization of net loss 145  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).

22


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 Ended Nine Months Ended
September 30, September 30,
  2020 2019 2020 2019
  (In thousands)
Service cost $ 302  126  907  377 
Interest cost 337  256  1,012  768 
Amortization of prior service cost 14  14  44  44 
Amortization of net loss 1,446  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.

23


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 Ended Nine Months Ended
September 30, September 30,
  2020 2019 2020 2019
  (In thousands)
Interest cost $ 41  49  124  148 
Amortization of prior service cost —  13  —  39 
Amortization of net loss 40  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).


24


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
Annuities Acquired Businesses All
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 assets 1,467,577  1,049,371  7,797,137  1,030,162  367,605  11,711,852 
Future policy benefits 1,275,476  798,665  7,068,118  719,917  —  9,862,176 
Other policyholder liabilities 17,190  12,214  91,818  15,170  —  136,392 

December 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 $ 127,557  209,858  486,553  142,434  —  966,402 
Total segment assets 1,399,818  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 liabilities 18,016  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.

25


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
Annuities Acquired Businesses All
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 revenues 10  84  2,628  1,249  3,977 
Total revenues 38,945  31,911  92,160  28,586  5,050  196,652 
Life and other policy benefits 3,785  2,278  3,383  17,494  —  26,940 
Amortization of deferred policy acquisition costs and value of business acquired 10,540  6,496  31,794  1,970  —  50,800 
Universal life and annuity contract interest 20,352  (14,023) 79,550  —  —  85,879 
Other operating expenses 5,185  5,434  9,205  4,498  1,432  25,754 
Federal income taxes (benefit) (161) 5,169  (5,294) 963  556  1,233 
Total expenses 39,701  5,354  118,638  24,925  1,988  190,606 
Segment earnings (loss) $ (756) 26,557  (26,478) 3,661  3,062  6,046 

26


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 2020
Domestic
Life
Insurance
International
Life
Insurance
Annuities Acquired Businesses All
Others
Totals
  (In thousands)
Premiums and contract revenues $ 40,971  67,479  13,536  59,448  —  181,434 
Net investment income 23,293  12,507  196,187  19,284  10,623  261,894 
Other revenues 40  54  80  7,369  7,674  15,217 
Total revenues 64,304  80,040  209,803  86,101  18,297  458,545 
Life and other policy benefits 13,831  9,293  20,452  50,429  —  94,005 
Amortization of deferred policy acquisition costs and value of business acquired 16,322  19,392  70,159  6,064  —  111,937 
Universal life and annuity contract interest 17,831  (15,368) 117,162  —  —  119,625 
Other operating expenses 15,123  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 expenses 63,306  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
Annuities Acquired Businesses All
Others
Totals
  (In thousands)
Premiums and contract revenues $ 11,387  25,065  5,336  20,151  —  61,939 
Net investment income 12,885  6,872  78,000  6,300  4,399  108,456 
Other revenues 49  25  2,318  873  3,273 
Total revenues 24,321  31,962  83,344  28,769  5,272  173,668 
Life and other policy benefits 6,099  5,074  12,550  16,195  —  39,918 
Amortization of deferred acquisition costs and value of business acquired 2,181  (3,047) 21,688  2,176  —  22,998 
Universal life and annuity contract interest 11,267  14,637  33,541  —  —  59,445 
Other operating expenses 5,297  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 expenses 24,737  24,127  77,763  24,276  2,380  153,283 
Segment earnings (loss) $ (416) 7,835  5,581  4,493  2,892  20,385 
27


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 2019
Domestic
Life
Insurance
International
Life
Insurance
Annuities Acquired Businesses All
Others
Totals
  (In thousands)
Premiums and contract revenues $ 32,897  74,905  16,061  54,332  —  178,195 
Net investment income 51,379  30,165  270,727  16,283  19,657  388,211 
Other revenues 113  79  80  6,049  7,331  13,652 
Total revenues 84,389  105,149  286,868  76,664  26,988  580,058 
Life and other policy benefits 13,850  10,195  33,856  43,863  —  101,764 
Amortization of deferred acquisition costs and value of business acquired 8,898  11,195  60,150  6,330  —  86,573 
Universal life and annuity contract interest 45,693  33,967  120,840  —  —  200,500 
Other operating expenses 14,437  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 expenses 83,184  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,
  2020 2019 2020 2019
  (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 revenues 3,977  3,273  15,217  13,652 
Realized gains (losses) on investments 6,050  (502) 12,660  3,702 
Total condensed consolidated premiums and other revenues $ 202,702  173,166  471,205  583,760 

28


NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
  Three Months Ended September 30, Nine Months Ended September 30,
  2020 2019 2020 2019
  (In thousands)
Federal Income Taxes:
       
Total segment Federal income taxes $ 1,233  5,109  11,073  23,067 
Taxes on realized gains (losses) on investments 1,271  (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,
  2020 2019 2020 2019
  (In thousands)
Net Earnings:
       
Total segment earnings $ 6,046  20,385  47,175  90,958 
Realized gains (losses) on investments, net of taxes 4,779  (396) 10,001  2,925 
Total condensed consolidated net earnings $ 10,825  19,989  57,176  93,883 

  September 30, December 31,
  2020 2019
  (In thousands)
Assets:
   
Total segment assets $ 11,711,852  12,092,796 
Other unallocated assets 709,134  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).

29


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.
30


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
Shares Weighted-
Average
Exercise
Price
Stock Options:      
Balance at January 1, 2020 291,000  —  $ — 
Exercised —  —  $ — 
Forfeited —  —  $ — 
Expired —  —  $ — 
Stock options granted —  —  $ — 
Balance at September 30, 2020 291,000  —  $ — 

  Liability Awards
SAR RSU PSU
Other Share/Unit Awards:
Balance at January 1, 2020 107,517  14,352  19,108 
Exercised (1,372) (2,357) (4,150)
Forfeited (1,797) (259) — 
Granted —  —  — 
Balance at September 30, 2020 104,348  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.

31


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:      
$132.56 19,118  1.2 years 19,118 
$210.22 23,550  3.2 years 19,600 
$216.48 11,149  5.4 years 11,149 
$311.16 9,797  6.2 years 9,797 
$310.55 203  6.6 years 203 
$334.34 9,264  7.0 years 6,254 
$303.77 11,462  8.0 years 3,967 
$252.91 19,805  9.1 years 249 
Totals 104,348    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-average 32.85 % 22.19  %
Expected dividend yield 0.20 % 0.12  %
Risk-free rate weighted-average 0.17 % 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.

32


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.
33


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.


34


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,
  2020 2019 2020 2019
  (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 disposal 2,501  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.

35


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. Treasury 3,798  156  —  3,954  — 
States and political subdivisions 437,620  24,976  (124) 462,472  (176)
Foreign governments 1,128  150  —  1,278  — 
Public utilities 812,251  71,098  —  883,349  (718)
Corporate 4,549,262  401,764  (7,620) 4,943,406  (4,111)
Commercial mortgage-backed 3,019  34  —  3,053  — 
Residential mortgage-backed 944,838  57,854  (1)