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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 March 31, 2020

  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)

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 May 8, 2020, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,020 and  Class B - 200,000.



NWLGI-LOGOA74.JPG
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
March 31, 2020 (Unaudited) and December 31, 2019
 
 
For the Three Months Ended March 31, 2020 and 2019 (Unaudited)
 
 
For the Three Months Ended March 31, 2020 and 2019 (Unaudited)
 
 
For the Three Months Ended March 31, 2020 and 2019 (Unaudited)
 
 
For the Three Months Ended March 31, 2020 and 2019 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
March 31,
2020
 
December 31,
2019
 
 
 
 
Investments:
 
 
 
Debt securities held to maturity, at amortized cost, net of allowance for credit losses ($6,039 and $0; fair value: $7,181,687 and $7,407,703)
$
6,990,041

 
7,106,245

Debt securities available for sale, at fair value (cost: $3,206,357 and $3,206,120)
3,174,260

 
3,356,945

Mortgage loans, net of allowance for credit losses ($1,885 and $675)
276,083

 
272,422

Policy loans
78,036

 
80,008

Derivatives, index options
24,335

 
157,588

Equity securities, at fair value (cost: $15,246 and $16,894)
15,984

 
23,594

Other long-term investments
66,152

 
62,090

 
 
 
 
Total investments
10,624,891

 
11,058,892

 
 
 
 
Cash and cash equivalents
352,215

 
253,525

Deferred policy acquisition costs
782,904

 
723,972

Deferred sales inducements
114,171

 
104,359

Value of business acquired
135,879

 
138,071

Accrued investment income
95,780

 
93,298

Federal income tax receivable
13,282

 

Other assets
165,300

 
181,330

 
 
 
 
Total assets
$
12,284,422

 
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
March 31,
2020
 
December 31,
2019
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts (Note 1)
$
9,125,612

 
9,303,233

Traditional life reserves
842,551

 
838,738

Other policyholder liabilities
134,579

 
127,607

Deferred Federal income tax liability (Note 1)
30,438

 
36,767

Federal income tax payable

 
3,748

Other liabilities
120,764

 
126,924

 
 
 
 
Total liabilities
10,253,944

 
10,437,017

 
 
 
 
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 2020 and 2019
34

 
34

Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2020 and 2019
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income (loss)
(20,750
)
 
60,108

Retained earnings (Note 1)
2,009,476

 
2,014,570

 
 
 
 
Total stockholders’ equity
2,030,478

 
2,116,430

 
 
 
 
Total liabilities and stockholders' equity
$
12,284,422

 
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 March 31, 2020 and 2019
(Unaudited)
(In thousands, except per share amounts)
 
2020
 
2019
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
35,306

 
37,953

Traditional life premiums
23,522

 
17,583

Net investment income (loss)
(13,478
)
 
151,331

Other revenues
3,653

 
6,413

Net realized investment gains (losses):
 

 
 

Total other-than-temporary impairment (“OTTI”) gains (losses)
2

 
3

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

 

Other net investment gains (losses)
3,485

 
4,629

Total net realized investment gains (losses)
3,485

 
4,629

Total revenues
52,488

 
217,909

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
33,634

 
28,189

Amortization of deferred policy acquisition costs and value of business acquired
30,037

 
32,164

Universal life and annuity contract interest
(28,026
)
 
80,916

Other operating expenses
19,822

 
26,049

 
 
 
 
Total benefits and expenses
55,467

 
167,318

 
 
 
 
Earnings (loss) before Federal income taxes
(2,979
)
 
50,591

 
 
 
 
Federal income taxes
(917
)
 
10,393

 
 
 
 
Net earnings (loss)
$
(2,062
)
 
40,198

 
 
 
 
Basic earnings (loss) per share:
 

 
 

Class A
$
(0.58
)
 
$
11.37

Class B
$
(0.29
)
 
$
5.68

 
 
 
 
Diluted earnings (loss) per share:
 

 
 

Class A
$
(0.58
)
 
$
11.37

Class B
$
(0.29
)
 
$
5.68


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


5


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
(In thousands)
 
2020
 
2019
 
 
 
 
Net earnings (loss)
$
(2,062
)
 
40,198

 
 
 
 
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
(78,153
)
 
42,743

Net unrealized liquidity gains (losses)
1

 
1

Reclassification adjustment for net amounts included in net earnings
(601
)
 
(868
)
 
 
 
 
Net unrealized gains (losses) on securities
(78,753
)
 
41,876

 
 
 
 
Foreign currency translation adjustments
(39
)
 
553

 
 
 
 
Benefit plans:
 

 
 

Amortization of net prior service cost and net gain (loss)
(2,066
)
 
(504
)
 
 
 
 
Other comprehensive income (loss)
(80,858
)
 
41,925

 
 
 
 
Comprehensive income (loss)
$
(82,920
)
 
82,123


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


6


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 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
70,665

 
(30,286
)
Change in unrealized gains (losses) during period, net of tax
(78,754
)
 
41,875

 
 
 
 
   Balance at end of period
(8,089
)
 
11,589

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(4
)
 
(7
)
Cumulative effect of change in accounting principle

 

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
(3
)
 
(6
)
 
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 

7


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Three Months Ended March 31, 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
(39
)
 
553

 
 
 
 
  Balance at end of period
5,062

 
5,130

 
 
 
 
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
(2,066
)
 
(504
)
 
 
 
 
  Balance at end of period
(17,718
)
 
(11,801
)
 
 
 
 
Accumulated other comprehensive income (loss) at end of period
(20,750
)
 
4,910

 
 
 
 
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 (loss)
(2,062
)
 
40,198

 
 
 
 
Balance at end of period (Note 1)
2,009,476

 
1,936,238

 
 
 
 
Total stockholders' equity
$
2,030,478

 
1,982,900


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






8


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
(In thousands)
 
2020
 
2019
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings (loss)
$
(2,062
)
 
40,198

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

 
 

Universal life and annuity contract interest
(28,026
)
 
80,916

Surrender charges and other policy revenues
(7,450
)
 
(8,049
)
Realized (gains) losses on investments
(3,485
)
 
(4,629
)
Accretion/amortization of discounts and premiums, investments
850

 
490

Depreciation and amortization
2,885

 
4,455

Increase (decrease) in estimated credit losses on investments
3,411

 

(Increase) decrease in value of equity securities
5,816

 
(1,951
)
(Increase) decrease in value of derivatives
106,629

 
(42,003
)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired
16,681

 
20,342

(Increase) decrease in accrued investment income
(2,482
)
 
(3,195
)
(Increase) decrease in other assets
9,399

 
(1,790
)
Increase (decrease) in liabilities for future policy benefits
6,357

 
(776
)
Increase (decrease) in other policyholder liabilities
6,972

 
(753
)
Increase (decrease) in Federal income tax liability
(17,030
)
 
19,114

Increase (decrease) in deferred Federal income tax
15,971

 
(8,823
)
Increase (decrease) in other liabilities
(8,775
)
 
(4,142
)
 
 
 
 
Net cash provided by operating activities
105,661

 
89,404

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Debt securities available for sale

 
73,257

Other investments
9,565

 
13,193

Proceeds from maturities and redemptions of:
 

 
 

Debt securities held to maturity
187,973

 
137,732

Debt securities available for sale
93,326

 
55,569

Derivatives, index options
52,973

 
3,047

Purchases of:
 

 
 

Debt securities held to maturity
(75,836
)
 
(20,690
)
Debt securities available for sale
(92,963
)
 
(20,474
)
Equity securities
(488
)
 
(262
)
Derivatives, index options
(22,403
)
 
(18,264
)
Other investments
(11,446
)
 
(6,908
)
Property and equipment
(58
)
 
(77
)
Payment to acquire businesses, net of cash acquired

 
(189,120
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

9


NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended March 31, 2020 and 2019
(Unaudited)
(In thousands)
 
2020
 
2019
 
 
 
 
 
 
 
 
Principal payments on mortgage loans
2,149

 
15,171

Cost of mortgage loans acquired
(6,996
)
 
(17,271
)
Decrease (increase) in policy loans
1,972

 
1,690

 
 
 
 
Net cash provided by (used in) investing activities
137,768

 
26,593

 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
117,682

 
92,153

Return of account balances on universal life and annuity contracts
(262,371
)
 
(248,890
)
Borrowings under line of credit agreement

 
75,000

Principal payments on line of credit borrowings

 
(75,000
)
 
 
 
 
Net cash provided by (used in) financing activities
(144,689
)
 
(156,737
)
 
 
 
 
Effect of foreign exchange
(50
)
 
700

 
 
 
 
Net increase (decrease) in cash, cash equivalents, and restricted cash
98,690

 
(40,040
)
Cash, cash equivalents, and restricted cash at beginning of period
253,525

 
131,976

 
 
 
 
Cash, cash equivalents and restricted cash at end of period
$
352,215

 
91,936

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
19

 
19

Income taxes
$
1

 
1

 
 
 
 
Noncash operating activities:
 
 
 
   Net deferral and amortization of sales inducements
$
(3,360
)
 
(4,105
)
 
 
 
 
Noncash investing and financing activities:
 
 
 
Contingent consideration to acquire businesses
$

 
3,700


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



10


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


(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (“Company”) as of March 31, 2020, and the results of its operations and its cash flows for the three months ended March 31, 2020 and March 31, 2019. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 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. 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.


11


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 months ended March 31, 2020 and March 31, 2019.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
 
(In thousands)
 
 
 
 
 
Other net investment gains (losses)
 
$
761

 
1,099

Net OTTI losses recognized in earnings
 

 

Earnings before Federal income taxes
 
761

 
1,099

Federal income taxes
 
160

 
231

 
 
 
 
 
Net earnings
 
$
601

 
868



12


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 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.

13


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 to retained earnings in the first quarter of 2020 to set up an initial allowance for estimated credit losses 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 will be 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.


(3)
 STOCKHOLDERS' EQUITY

The Robert L. Moody Revocable Trust beneficially owns 99.0% of the total outstanding shares of the Company's Class B common stock as of March 31, 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.


14


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

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 first quarter of 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. Ozark National did not declare or pay cash dividends on its shares during the first quarter of 2020 or in the two-month period ended March 31, 2019.

NIS declared and paid a $0.9 million dividend to NWLGI in the first quarter of 2020.  As the sole owner of NIS, all dividends declared by NIS are payable entirely to NWLGI and are eliminated in consolidation. NIS did not declare or pay cash dividends on its shares during the two-month period ended March 31, 2019.

NWLGI did not declare or pay cash dividends on its common shares during the three months ended March 31, 2020 and 2019.


(4)
 EARNINGS PER SHARE

Basic earnings (loss) per share of common stock are computed by dividing net earnings (loss) 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 (loss) 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 (loss) 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.


15


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

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

 
Three Months Ended March 31,
 
2020
 
2019
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings (Loss) Per Share:
 
 
 
 
 
 
 
Net earnings (loss)
$
(2,062
)
 
 
 
40,198

 
 
Dividends - Class A shares

 
 
 

 
 
Dividends - Class B shares

 
 
 

 
 
 
 
 
 
 
 
 
 
Undistributed earnings (loss)
$
(2,062
)
 
 
 
40,198

 
 
 
 
 
 
 
 
 
 
Allocation of net earnings (loss):
 

 
 
 
 

 
 
Dividends
$

 

 

 

Allocation of undistributed earnings (loss)
(2,004
)
 
(58
)
 
39,061

 
1,137

 
 
 
 
 
 
 
 
Net earnings (loss)
$
(2,004
)
 
(58
)
 
39,061

 
1,137

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Basic earnings (loss) per share - weighted-average shares
3,436

 
200

 
3,436

 
200

Effect of dilutive stock options

 

 

 

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

 
200

 
3,436

 
200

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
(0.58
)
 
(0.29
)
 
11.37

 
5.68

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
(0.58
)
 
(0.29
)
 
11.37

 
5.68


 
 
 
 
 
 
 
 



16


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

(5)
 PENSION AND OTHER POSTRETIREMENT PLANS

(A)
Defined Benefit Pension Plans

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

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Service cost
$
27

 
24

Interest cost
168

 
210

Expected return on plan assets
(315
)
 
(272
)
Amortization of net loss
145

 
165

 
 
 
 
Net periodic benefit cost
$
25

 
127



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 was $0.8 million in planned contributions remaining for the 2019 plan year as of March 31, 2020. As of March 31, 2020, the Company had made $0.1 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).

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


17


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

Effective July 1, 2005, National Western established a second non-qualified defined benefit plan for the benefit of the then Chairman of the Company.  This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified plan, while complying with the requirements of the Act.

Effective November 1, 2005, National Western established a third non-qualified defined benefit plan for the benefit of the then President of the Company.  This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified plan as previously discussed, while complying with the requirements of the Act.

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

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Service cost
$
302

 
125

Interest cost
338

 
256

Amortization of prior service cost
15

 
15

Amortization of net loss
1,445

 
348

 
 
 
 
Net periodic benefit cost
$
2,100

 
744



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 March 31, 2020, the Company has contributed $0.4 million to the plans.

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

Ozark National and NIS have no defined benefit plans.

(B)
Postretirement Employment Plans Other Than Pension

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

 
Three Months Ended
 
March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Interest cost
$
41

 
49

Amortization of prior service cost

 
13

Amortization of net loss
40

 
61

 
 
 
 
Net periodic benefit cost
$
81

 
123




18


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

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).


(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 March 31, 2020 and December 31, 2019 for the Condensed Consolidated Balance Sheet items and for the three months ended March 31, 2020 and March 31, 2019 for the Condensed Consolidated Statements of Earnings (Loss) is provided below.

Condensed Consolidated Balance Sheet Items:

 
March 31, 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
$
140,151

 
217,805

 
533,788

 
141,210

 

 
1,032,954

Total segment assets
1,369,973

 
1,105,816

 
7,912,799

 
972,601

 
355,373

 
11,716,562

Future policy benefits
1,196,180

 
840,215

 
7,220,704

 
711,064

 

 
9,968,163

Other policyholder liabilities
15,873

 
14,229

 
89,572

 
14,905

 

 
134,579


 
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.


19


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

Condensed Consolidated Statements of Earnings (Loss):


Three Months Ended March 31, 2020
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
Acquired Businesses
 
All
 Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
11,228

 
22,867

 
4,650

 
20,083

 

 
58,828

Net investment income (loss)
(19,383
)
 
(9,000
)
 
10,632

 
6,301

 
(2,028
)
 
(13,478
)
Other revenues
29

 
54

 
4

 
2,422

 
1,144

 
3,653

 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
(8,126
)
 
13,921

 
15,286

 
28,806

 
(884
)
 
49,003

 
 
 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
5,877

 
3,331

 
8,189

 
16,237

 

 
33,634

Amortization of deferred policy acquisition costs and value of business acquired
2,573

 
6,052

 
19,021

 
2,391

 

 
30,037

Universal life and annuity contract interest
(21,693
)
 
(10,837
)
 
4,504

 

 

 
(28,026
)
Other operating expenses
4,295

 
3,096

 
6,867

 
4,069

 
1,495

 
19,822

Federal income taxes (benefit)
188

 
2,804

 
(5,319
)
 
1,222

 
(544
)
 
(1,649
)
 
 
 
 
 
 
 
 
 
 
 
 
Total expenses
(8,760
)
 
4,446

 
33,262

 
23,919

 
951

 
53,818

 
 
 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
634

 
9,475

 
(17,976
)
 
4,887

 
(1,835
)
 
(4,815
)
 
 
 
 
 
 
 
 
 
 
 
 

20


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


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

 
26,063

 
4,868

 
13,801

 

 
55,536

Net investment income
23,499

 
14,017

 
103,154

 
3,976

 
6,685

 
151,331

Other revenues
44

 
21

 
8

 
1,441

 
4,899

 
6,413

 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
34,347

 
40,101

 
108,030

 
19,218

 
11,584

 
213,280

 
 
 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
3,922

 
2,162

 
11,430

 
10,675

 

 
28,189

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

 
7,294

 
19,712

 
1,748

 

 
32,164

Universal life and annuity contract interest
21,441

 
11,993

 
47,482

 

 

 
80,916

Other operating expenses
4,123

 
4,264

 
7,508

 
3,085

 
7,069

 
26,049

Federal income taxes (benefit)
324

 
3,208

 
4,883

 
747

 
259

 
9,421

 
 
 
 
 
 
 
 
 
 
 
 
Total expenses
33,220

 
28,921

 
91,015

 
16,255

 
7,328

 
176,739

 
 
 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,127

 
11,180

 
17,015

 
2,963

 
4,256

 
36,541

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

 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Premiums and Other Revenues:
 
 
 
Premiums and contract revenues
$
58,828

 
55,536

Net investment income (loss)
(13,478
)
 
151,331

Other revenues
3,653

 
6,413

Realized gains (losses) on investments
3,485

 
4,629

 
 
 
 
Total condensed consolidated premiums and other revenues
$
52,488

 
217,909




21


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

 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Federal Income Taxes:
 
 
 
Total segment Federal income taxes
$
(1,649
)
 
9,421

Taxes on realized gains (losses) on investments
732

 
972

 
 
 
 
Total condensed consolidated Federal income taxes
$
(917
)
 
10,393



 
Three Months Ended March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Net Earnings (Loss):
 
 
 
Total segment earnings (loss)
$
(4,815
)
 
36,541

Realized gains (losses) on investments, net of taxes
2,753

 
3,657

 
 
 
 
Total condensed consolidated net earnings (loss)
$
(2,062
)
 
40,198




 
March 31,
 
December 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
11,716,562

 
12,092,796

Other unallocated assets
567,860

 
460,651

 
 
 
 
Total condensed consolidated assets
$
12,284,422

 
$
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 1995 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).


22


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 forward 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 plans 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 three 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 three 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 three months ended March 31, 2020 and 2019.
 
 
 
 
 
 
 
 
The Company uses the current fair value method to measure compensation costs for awards granted under the share-based plans.

23


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

As of March 31, 2020 and December 31, 2019, the liability balance was $3.1 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 March 31, 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
)
 
(2,306
)
 
(4,049
)
Forfeited
(872
)
 

 

Granted

 

 

 
 
 
 
 
 
Balance at March 31, 2020
105,273

 
12,046

 
15,059



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 three months ended March 31, 2020 and 2019, respectively. The total share-based compensation paid was $1.9 million and $2.5 million for the three months ended March 31, 2020 and 2019, respectively. The total fair value of SARs, RSUs, and PSUs vested during the three months ended March 31, 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 on.


24


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

The following table summarizes information about SARs outstanding at March 31, 2020. There were no options outstanding as of March 31, 2020.

 
 
SARs Outstanding
 
 
Number
Outstanding
 
Weighted-
Average
Remaining
Contractual Life
 
Number
Exercisable
 
 
 
 
 
 
 
Exercise prices:
 
 
 
 
 
$132.56
 
19,118

 
1.7 years
 
19,118

$210.22
 
23,650

 
3.7 years
 
19,550

$216.48
 
11,149

 
5.9 years
 
11,149

$311.16
 
9,897

 
6.9 years
 
9,897

$310.55
 
203

 
7.1 years
 
135

$334.34
 
9,310

 
7.7 years
 
6,202

$303.77
 
11,566

 
8.7 years
 
3,848

$252.91
 
20,380

 
9.7 years
 

 
 
 
 
 
 
 
Totals
 
105,273

 
 
 
69,899

 
 

 
 
 
 

Aggregate intrinsic value (in thousands)
$
754

 
 
 
$
754



The aggregate intrinsic value in the table above is based on the closing Class A stock price of $172.00 per share on March 31, 2020.

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

 
March 31,
2020
 
December 31,
2019
 
 
 
 
Expected term
1.7 to 9.7 years

 
1.9 to 10.0 years

Expected volatility weighted-average
28.30
%
 
22.19
%
Expected dividend yield
0.21
%
 
0.12
%
Risk-free rate weighted-average
0.23
%
 
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 $(6.3) million and $(1.5) million for the three months ended March 31, 2020 and 2019, respectively. The related tax expense/(benefit) recognized was $1.3 million and $0.3 million for the three months ended March 31, 2020 and 2019.

As of March 31, 2020, the total pre-tax compensation expense related to non-vested share-based awards not yet recognized was $3.5 million.  This amount is expected to be recognized over a weighted-average period of 1.5 years.  The Company recognizes compensation cost over the graded vesting periods.



25


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

(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, TX.
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 $1.26 million. Both the Plaintiff and NWLIC have appealed this ruling.

26


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


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 no commitments to extend credit relating to existing loans at March 31, 2020. The Company evaluates each customer's creditworthiness on a case-by-case basis.


(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 March 31,
 
2020
 
2019
 
(In thousands)
 
 
 
 
Available for sale debt securities:
 
 
 
Realized gains on disposal
$
761

 
1,183

Realized losses on disposal

 
(84
)
Held to maturity debt securities:
 
 
 
Realized gains on disposal
2,724

 
27

Realized losses on disposal

 

Real estate gains (losses)

 
3,503

 
 
 
 
Totals
$
3,485

 
4,629




27


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

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.

Net real estate gains for the three months ended March 31, 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 February 1, 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 effective May 1, 2019 and the Company recorded a loss of $(2.0) million associated with the sale of the land and building of this operation (an impairment loss on this property of $(2.2) million was recorded in the quarter ended March 31, 2019). The sale of the Company's prior home office completed effective June 7, 2019 realized a gain on the sale of $3.2 million.

For the three months ended March 31, 2020 and 2019 the percentage of gains on bonds due to the call of securities was 99.6% and 41.4%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities.

(B)
Debt Securities

The table below presents amortized costs and fair values of debt securities held to maturity at March 31, 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
$
89,906

 
3,270

 

 
93,176

 
(4
)
U.S. Treasury
3,787

 
217

 

 
4,004

 

States and political subdivisions
418,332

 
21,576

 
(174
)
 
439,734

 
(74
)
Foreign governments
1,139

 
123

 

 
1,262

 

Public utilities
891,636

 
22,159

 
(7,360
)
 
906,435

 
(1,173
)
Corporate
4,547,631

 
140,323

 
(65,070