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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2018

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

For the transition period from               to              

Commission File Number: 000-55522

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

DELAWARE
47-3339380
(State of Incorporation)
(I.R.S. Employer Identification Number)

10801 N. MOPAC EXPY BLDG 3, AUSTIN, TEXAS 78759-5415
(Address of Principal Executive Offices)

(512) 836-1010
(Telephone Number)

Securities registered pursuant to Section 12 (b) of the Act:

Title of each class to be so registered:
 
Name of each exchange on which
each class is to be registered:
Class A Common Stock, $0.01 par value
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes x   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definition of "accelerated filer." "large accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x   Accelerated filer  o   Non-accelerated filer (Do not check if a smaller reporting company)  o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
The aggregate market value of the common stock (based upon the closing price) held by non-affiliates of the Registrant on June 30, 2018 was $699,652,528.

As of February 28, 2019, the number of shares of Registrant's common stock outstanding was:   Class A - 3,436,020 and Class B -200,000.

DOCUMENTS INCORPORATED BY REFERENCE

Documents incorporated by reference:  Portions of the registrant’s definitive proxy statement for the annual meeting of shareholders to be held June 21, 2019, which will be filed within 120 days after December 31, 2018, are incorporated by reference into Part III of this report.



nwlgilogoaaa06.jpg
 
 
 
 
 
 
PART I
Page
 
 
 
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
 
 
 
 
PART II
 
 
 
 
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
 
 
 
 
PART III
 
 
 
 
 
The information required by Items 10 through 14 is incorporated by reference from our definitive proxy statement to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2018.
 
 
 
 
 
PART IV
 
 
 
 
Exhibits and Financial Statement Schedules
 
 
 
 
Signatures




2
Table of Contents



Cautionary Statement Regarding Forward Looking Information

This Form 10-K includes statements pertaining to anticipated financial performance, business endeavors, product development, and other similar matters. These statements, which may include words such as "may," "likely," "projected," "expect," "anticipate," "believe," "intend," and other like expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. A variety of factors could cause actual results and experiences to differ materially from the anticipated results or other expectations expressed in forward-looking statements. The risks and uncertainties that may affect the operations, performance, and results of business include, but are not limited to, the following:

Ÿ
 
Difficult conditions globally and in the U.S. economy may materially and adversely affect our business and results of operations.
 
 
 
Ÿ
 
Our investment portfolio is subject to several risks which may lessen the value of our invested assets and the amounts credited to policyholders.
 
 
 
Ÿ
 
The determination of valuation and impairments of fixed income securities include estimations and assumptions that are subjective and prone to differing interpretations and could materially impact our results of operations or financial condition.
 
 
 
Ÿ
 
Changing interest rates and credit spreads, market volatility and general economic conditions affect the risks and the returns on both our investment portfolio and our products.
 
 
 
Ÿ
 
We are subject to incurring difficulties in marketing and distributing our products through our current and future distribution channels.
 
 
 
Ÿ
 
We are subject to a downgrade in our financial strength ratings which may negatively affect our ability to attract and retain independent distributors, make our products less attractive to consumers, and may have an adverse effect on our operations.
 
 
 
Ÿ
 
We are subject to competition from new sources as well as companies having substantially greater financial resources, higher ratings, and more expansive product offerings which could have an adverse impact upon our business levels and profitability.
 
 
 
Ÿ
 
We are subject to regulation, changes to existing laws, and investigations which may affect our profitability or means of operation.
 
 
 
Ÿ
 
Changes in accounting standards issued by standard-setting bodies may adversely affect our financial statements and affect the management of business operations.
 
 
 
Ÿ
 
We may be subject to unfavorable judicial developments, including the time and expense of litigation, which potentially could affect our financial position and results of operations.
 
 
 
Ÿ
 
We could be liable with respect to liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.
 
 
 
Ÿ
 
We are subject to policy claims experience which can fluctuate from period to period and vary from past results or expectations.
 
 
 
Ÿ
 
We are subject to assumption inaccuracies regarding future mortality, persistency, and interest rates used in determining deferred policy acquisition costs which may require us to accelerate our amortization.
 
 
 
Ÿ
 
Occurrence of natural or man-made disasters and catastrophes could adversely affect our ability to conduct business operations and the financial condition and results of operations.
 
 
 
Ÿ
 
Our enterprise risk management practices and procedures may prove to be ineffective exposing us to unidentified or unanticipated risks.
 
 
 
Ÿ
 
We are dependent upon effective information technology systems and the development and implementation of new technologies.
 
 
 
Ÿ
 
The Company could be adversely affected by changes to tax law or interpretations of existing tax law which could reduce the demand for certain insurance products.
 
 
 
Ÿ
 
The Company may be required to establish a valuation allowance against its deferred tax assets which could materially affect the Company's results of operations and financial condition.
 
 
 
Ÿ
 
Competition for employees is intense and the Company may not be able to attract and retain highly skilled people needed to support its business.

See Part 1A, Risk Factors, for additional information.

3
Table of Contents



PART I

ITEM 1. BUSINESS

General

National Western Life Group, Inc. ("NWLGI"), a Delaware Corporation, is the parent holding company which was established effective October 1, 2015 under a holding company plan of reorganization. As a result of the reorganization, NWLGI replaced National Western Life Insurance Company as the publicly held company at that time with the latter becoming a wholly owned subsidiary of NWLGI.

National Western Life Insurance Company (hereinafter referred to as "National Western" or "company" where insurance operations are being discussed) is a stock life insurance company, chartered in the State of Colorado in 1956, currently licensed to do business in all states (except for New York), the District of Columbia, and four U.S. territories or possessions.  National Western is also licensed in Haiti. National Western has historically provided life insurance products on a global basis for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contract holders. As disclosed in the Form 10-Q filed by NWLGI for the quarter ended March 31, 2018, the company discontinued accepting applications for the company's international products from all remaining foreign residents in May 2018. Since 2015, the company had progressively disengaged from accepting applications for its international products from residents of certain countries culminating in the decision to discontinue accepting applications from residents of all other territories. At December 31, 2018, the company maintained approximately 105,500 policies for its life insurance products and 126,900 annuity contracts.
 
The Company's total assets decreased to $11.9 billion at December 31, 2018, from $12.2 billion at December 31, 2017. The Company generated revenues of $551.6 million, $874.4 million and $682.4 million in 2018, 2017 and 2016, respectively. In addition, NWLGI generated net income of $116.8 million, $110.4 million and $100.9 million in 2018, 2017 and 2016, respectively.

Products

National Western offers a broad portfolio of individual whole life, universal life and term insurance plans, and annuities, including supplementary riders. In the following discussion, the Company reports sales and other statistical information. These statistics are derived from various sales tracking and administrative systems and are not derived from the Company's financial reporting systems or financial statements. These statistics are used to measure the relative progress of our marketing and acquisition efforts. Sales data for traditional life insurance is based upon annualized premiums, while universal life sales are based on annualized "target" premiums which are those premiums upon which full first year commissions are paid. Sales of annuities are measured based on the amount of deposits received. These statistics attempt to measure only some of the many factors that may affect future profitability, and therefore, are not intended to be predictive of future profitability.

Life Products. The company's life products provide protection for the life of the insured and, in some cases, allow for cash value accumulation on a tax-deferred basis. These product offerings include universal life insurance ("UL"), interest-sensitive whole life, and traditional products such as term insurance coverage. Interest sensitive products such as UL accept premiums that are applied to an account value. Deducted from the account value are costs of insurance charges which vary by age, gender, plan, and class of insurance, as well as various expense charges. Interest is credited to account values at a fixed interest rate generally determined in advance and guaranteed for a policy year at a time, subject to minimum guaranteed rates specified in the policy contract. A slight variation to this general interest crediting practice involves equity-index universal life ("EIUL") policies whose credited interest may be linked in part to an outside index at the election of the policyholder. These products offer both flexible and fixed premium modes and provide policyholders with flexibility in the available coverage, the timing and amount of premium payments and the amount of the death benefit, provided there are sufficient policy funds to cover all policy charges for the coming year. Traditional products generally provide for a fixed death benefit payable in exchange for regular premium payments.


4
Table of Contents



Annuity Products. Annuity products sold include flexible premium and single premium deferred annuities, equity-index (fixed-index) annuities, and single premium immediate annuities. These products can be tax qualified or nonqualified annuities. A fixed single premium deferred annuity ("SPDA") provides for a single premium payment at the time of issue, an accumulation period, and an annuity payout period commencing at some future date. A flexible premium deferred annuity ("FPDA") provides the same features but allows, generally with some conditions, additional payments into the contract. Interest is credited to the account value of the annuity initially at a current rate of interest which is guaranteed for a period of time, typically the first year. After this period, the interest credited is subject to change based upon market rates and product profitability subject to a minimum guaranteed rate specified in the contract. Interest accrues during the accumulation period generally on a tax-deferred basis to the contract holder. After a number of years specified in the annuity contract, the owner may elect to have the proceeds paid as a single payment or as a series of payments over a period of time. The owner is permitted at any time during the accumulation period to withdraw all or part of the annuity account balance subject to contract provisions such as surrender charges and market value adjustments. A fixed-index deferred annuity performs essentially in the same manner as SPDAs and FPDAs with the exception that, in addition to a fixed interest crediting option, the contract holder has the ability to elect an interest crediting mechanism that is linked, in part, to an outside index. A single premium immediate annuity ("SPIA") foregoes the accumulation period and immediately commences an annuity payout period.

The following table sets forth information regarding the company's sales activity by product type. Life insurance sales are measured by annualized first year premiums.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Annuities:
 
 
 
 
 
Fixed-index deferred
$
377,102

 
556,975

 
678,652

Other deferred
21,564

 
16,893

 
32,968

Single premium immediate
3,288

 
3,709

 
3,597

 
 
 
 
 
 
Total annuities
$
401,954

 
577,577

 
715,217

 
 
 
 
 
 
Life:
 

 
 

 
 

Fixed-index universal life insurance
$
28,534

 
26,393

 
26,094

Other universal life insurance
656

 
1,784

 
2,238

Traditional life and other
1,499

 
2,161

 
2,183

 
 
 
 
 
 
Total life
$
30,689

 
30,338

 
30,515



5
Table of Contents



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

 
Insurance In Force as of
 
December 31,
 
2018
 
2017
 
($ in thousands)
 
 
 
 
Universal life:
 
 
 
Number of policies
36,970

 
40,200

Face amounts
$
5,234,160

 
$
5,710,930

 
 
 
 
Traditional life:
 
 
 
Number of policies
30,490

 
32,210

Face amounts
$
2,975,030

 
$
3,133,940

 
 
 
 
Fixed-index life:
 
 
 
Number of policies
38,090

 
38,460

Face amounts
$
10,386,020

 
$
10,830,710

 
 
 
 
Total life insurance:
 
 
 
Number of policies
105,550

 
110,870

Face amounts
$
18,595,210

 
$
19,675,580


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

 
Annuities In Force as of
 
December 31,
 
2018
 
2017
 
($ in thousands)
 
 
 
 
Fixed-index annuities
 
 
 
Number of policies
73,740

 
75,370

GAAP annuity reserves
$
5,771,216

 
$
5,998,427

 
 
 
 
Other deferred annuities
 
 
 
Number of policies
39,960

 
43,940

GAAP annuity reserves
$
1,584,660

 
$
1,774,436

 
 
 
 
Immediate annuities
 
 
 
Number of policies
13,210

 
13,800

GAAP annuity reserves
$
352,418

 
$
363,514

 
 
 
 
Total annuities
 
 
 

Number of policies
126,910

 
133,110

GAAP annuity reserves
$
7,708,294

 
$
8,136,377



6
Table of Contents



Operating Segments

The company manages its business between Domestic Insurance Operations and International Insurance Operations.  For segment reporting purposes, the company's annuity business is separately identified. The Company also has a corporate segment, which consists of the assets and activities of wholly owned subsidiaries that have not been allocated to any other operating segment.

Domestic Insurance Operations. The company is currently licensed to do business in all states and the District of Columbia, except for New York.  Products marketed are annuities, universal life insurance, and traditional life insurance, which include both term and whole life products.  The company's domestic sales have historically been more heavily weighted toward the company's annuities.  More recently, a greater proportion of sales activity has been derived from single premium life insurance products, predominantly those with equity-index crediting mechanisms. National Western markets and distributes its domestic products primarily through independent national marketing organizations ("NMOs").  These NMOs assist the company in recruiting, contracting, and managing independent agents.  The company's agents are independent contractors who are compensated on a commission basis.  At December 31, 2018, the company's NMO relationships had contracted approximately 31,300 independent agents with the company. At December 31, 2018, the company had 49,000 domestic life insurance policies in force representing $3.2 billion in face amount of coverage and 126,900 annuity contracts representing account balances of $7.7 billion.

The following table sets forth the company's domestic life insurance sales as measured in annualized first year premium for the last three years.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Fixed-index life
$
24,119

 
18,874

 
16,356

Universal life
51

 
24

 
43

Traditional life
414

 
96

 
112

 
 
 
 
 
 
Total
$
24,584

 
18,994

 
16,511


International Insurance Operations. National Western's international operations had generally focused on foreign nationals in upper socioeconomic classes.  Insurance products issued were primarily to residents of countries in South America with product offerings not available in the local markets. Issuing policies to residents of countries in these different regions had provided diversification that helped to minimize large fluctuations that could arise due to various economic, political, and competitive pressures that could occur from one country to another.  Products issued to international residents were almost entirely universal life and traditional life insurance products.

As disclosed in the Company's 2018 first quarter report on Form 10-Q, the company ceased accepting applications from residents of Venezuela during the first quarter of 2018 due to the unsettled political, economic, civil, and social climate existing in that country. The company had previously ceased accepting applications from residents of Brazil, Central America, and the Pacific Rim region in the fourth quarter of 2015 and from residents in the Eastern European region, primarily Russian-speaking, during 2017. As noted in Note (12) Subsequent Events in the Notes to Condensed Consolidated Financial Statements in the first quarter filing, the company ceased accepting applications for the company's international products from all remaining foreign residents effective May 11, 2018.
 
At December 31, 2018, the company had approximately 56,500 international life insurance policies in force representing nearly $15.4 billion in face amount of coverage.



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The following table sets forth the company's contracts issued to international residents as measured in annualized first year premium for the past three years.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Fixed-index life
$
4,415

 
7,519

 
9,738

Universal life
605

 
1,760

 
2,195

Traditional life
1,085

 
2,065

 
2,071

 
 
 
 
 
 
Total
$
6,105

 
11,344

 
14,004


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

Contracts issued to international residents historically had larger face amounts of life insurance coverage per policy compared to those issued to domestic policyholders. The insurance coverage per international life policy witnessed a steady growth until 2015 when the company ceased accepting applications from residents of several countries. During the same time period, the company's average face amount of insurance coverage per policy for domestic contracts exhibited an upward trend reflecting the shift in sales toward single premium life products. Empirical evidence suggests that policy persistency generally improves with larger face amounts of insurance.

 
Average New Policy Face Amount
 
Domestic
 
International
 
 
 
 
Year ended December 31, 2012
$
254,900

 
$
380,200

Year ended December 31, 2013
286,000

 
384,000

Year ended December 31, 2014
286,600

 
382,600

Year ended December 31, 2015
274,500

 
342,500

Year ended December 31, 2016
308,700

 
336,500

Year ended December 31, 2017
317,200

 
306,300

Year ended December 31, 2018
338,400

 
297,100



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Geographical Distribution of Business. The following table depicts the distribution of the company's premium revenues and deposits.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
United States domestic products:
 
 
 
 
 
Annuities
$
410,412

 
606,508

 
730,447

Life insurance
196,550

 
160,695

 
141,328

 
 
 
 
 
 
Total domestic products
606,962

 
767,203

 
871,775

 
 
 
 
 
 
International products:
 
 
 

 
 

Annuities
796

 
2,291

 
293

Life insurance
103,982

 
116,889

 
131,508

 
 
 
 
 
 
Total international products
104,778

 
119,180

 
131,801

 
 
 
 
 
 
Total direct premiums and deposits collected
$
711,740

 
886,383

 
1,003,576


Although many agents sell National Western's products, the company's annuity sales in any year typically reflect several NMOs whose contracted independent agents sold 10% or more of the company’s total annuity sales. In 2018, there were two NMOs that exceeded this threshold accounting for approximately 14% and 13%, respectively, of the company’s annuity sales. Similarly, domestic life insurance sales in any year may include several NMOs who accounted for 10% or more of total domestic life insurance sales. In 2018, there were three NMOs who generated 35%, 10%, and 10%, respectively, of total domestic life insurance sales. Given the independent distribution model National Western employs, the concentration of sales within a particular NMO is not an acute concern as compared to other distribution channels given that the underlying agents are free to contract with the company through any NMO with which the company has a relationship.

The company's international business consisted of applications submitted by independent contractors of Latin America during 2018 and 2017. The company's international life sales during 2018 came principally from residents of Columbia, Ecuador, Peru and Chile. As noted previously, the company ceased accepting applications from all remaining residents outside the U.S. effective May 11, 2018. The company had previously ceased accepting applications for its international products from residents in the Pacific Rim, Central America, and Brazil in 2015; from residents in Eastern Europe in 2017; and from residents of Venezuela in the first quarter of 2018. The progressive disengagements were the result of increasing costs associated with this business and reduced profitability due to higher than anticipated mortality experience, lower than expected persistency of policies, and the additional cost structure imposed. In addition, unsettled political, economic, civil and social climates in places such as Venezuela contributed to the decision to cease accepting applications for international products from residents outside the country.

As disclosed in prior SEC filings, the Brazilian Superintendence of Private Insurance (“SUSEP”) attempted to serve National Western in 2011 with a subpoena regarding an administrative proceeding initiated by SUSEP in which it alleged the company was operating as an insurance company in Brazil without due authorization. While the company believes that SUSEP has no jurisdiction over the company, SUSEP affirmed its imposition of a penal fine against National Western, but in a reduced amount of 3 million reais (approximately $960,000). Given the substantial reduction in the proposed penal fine by SUSEP, National Western paid the penal fine in the reduced amount in the fourth quarter of 2016 under protest and thereby retained its rights to seek judicial review in Brazil of the merits of the SUSEP charges. In light of these developments, the company ceased accepting new applications from residents in Brazil during the fourth quarter of 2015.  Additionally, as noted in the previous paragraph, after careful consideration of various factors, including segment performance and the volume of application submissions, the company ceased accepting applications from residents in certain other countries during that same time period, primarily Central America and the Pacific Rim. Finally, as also noted above, the company ceased accepting applications from all residents outside of the U.S. in May 2018.


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Segment Financial Information. A summary of financial information for the Company's segments is as follows:

 
Domestic Life Insurance
 
International Life Insurance
 
Annuities
 
All Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Revenues, excluding realized gains (losses):
 
 
 
 
 
 
 
 
 
2018
$
64,477

 
131,613

 
299,883

 
47,203

 
543,176

2017
111,299

 
189,334

 
511,506

 
47,546

 
859,685

2016
74,538

 
168,427

 
385,174

 
41,159

 
669,298

 
 
 
 
 
 
 
 
 
 
Segment earnings (losses):  (A)
 

 
 

 
 

 
 

 
 

2018
$
1,401

 
33,704

 
53,371

 
21,628

 
110,104

2017
2,835

 
59,025

 
17,409

 
21,556

 
100,825

2016
3,411

 
50,942

 
22,687

 
15,357

 
92,397

 
 
 
 
 
 
 
 
 
 
Segment assets:  (B)
 

 
 

 
 

 
 

 
 

2018
$
1,215,864

 
1,211,036

 
8,791,463

 
370,118

 
11,588,481

2017
1,106,410

 
1,236,733

 
9,269,956

 
398,597

 
12,011,696

2016
971,990

 
1,232,648

 
9,193,980

 
298,481

 
11,697,099


Notes to Table:

(A) Amounts exclude realized gains and losses on investments, net of taxes.
(B) Amounts exclude other unallocated assets.

Additional information concerning these industry segments is included in Note 13, Segment and Other Operating Information, of the accompanying Consolidated Financial Statements.

Competition and Ratings

National Western operates in a mature and highly competitive industry. We compete with hundreds of life and health insurance company groups in the United States as well as other financial intermediaries such as banks and securities firms who market insurance products. Many of these companies are larger, have more substantial capital and technological resources, possess greater brand recognition, and maintain higher ratings. Competitors in international territories had included Pan-American Life Insurance, American Fidelity Life Insurance, and Best Meridian Insurance while domestic market competitors have included, among others, Allianz Life, American Equity Investment Life, Sammons Financial Group (Midland, NACOLAH), Security Benefit Life, Fidelity and Guaranty Life, Athene USA, Jackson National Life, Equitrust Life Insurance Company, Pacific Life, National Life Group (Life of the Southwest) and Global Atlantic. Competitive factors are primarily the breadth and quality of products offered, established positions in niche markets, pricing, relationships with distribution channels, commission structures, the perceived stability of the insurer, quality of underwriting and customer service, scale and cost efficiency. Operating results of life insurers are subject to fluctuations not only from this competitive environment but also due to economic conditions, interest rate levels and changes, performance of investments, and the maintenance of strong insurance ratings from independent rating agencies.

In order to compete successfully, life insurers focus initiatives toward distribution, technology, defined end market targets, speed to the market in terms of product development, and customer relationship management as ways of gaining a competitive edge. The Company's management believes that it competes primarily on the basis of its longstanding reputation for commitment in serving its markets, its financial strength and stability, and its ability to attract and retain distribution based upon product and compensation.


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Ratings with respect to financial strength are an important factor in establishing the competitive position of insurance companies. Financial strength ratings are generally defined as a rating agency’s opinion as to a company’s financial strength and ability to meet ongoing obligations to policyholders and contract holders. Accordingly, ratings are important to maintaining public confidence and impact the ability to market products. The following summarizes National Western's current financial strength ratings.

Rating Agency
 
Rating
 
Outlook
 
 
 
 
 
A.M. Best
 
A (Excellent)
 
Stable
 
 
 
 
 
Standard & Poor's
 
A- (Strong)
 
Stable

A.M. Best has 16 financial strength ratings assigned to insurance companies which currently range from A++ (Superior) to F (In Liquidation). Standard & Poor’s has twenty-one financial strength ratings assigned to insurance companies ranging from “AAA” (Extremely Strong) to “R” (Regulatory Action). Both rating agencies further qualify their current ratings with outlook designations of “Positive”, “Stable”, and “Negative”. During 2018, Standard & Poor's, primarily in response to the company's strategic shift away from accepting applications from residents outside the U.S., reduced the company's rating while maintaining an outlook of "Stable".

A.M. Best and Standard & Poor’s ratings are an independent consideration of National Western’s claims paying ability and are not a rating of the company’s investment worthiness. Accordingly, such ratings are not recommendations to buy, sell or hold securities. The rating agencies formally review National Western and its rating on an annual basis with interim analysis performed as necessary. Generally speaking, as ratings are subject to revision or withdrawal at any time by the rating agency, there is no assurance that National Western's ratings will continue for a certain period of time. In the event the company's ratings are subsequently downgraded, the company's business may be negatively impacted.


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Risk Management

Similar to other entities, the Company is exposed to a wide spectrum of financial, operational, and other risks as described in Item 1A “Risk Factors”. Effective enterprise risk management ("ERM") is a key concern for identifying, monitoring, measuring, communicating, and managing risks within limits and risk tolerances. The Company’s Board of Directors and senior management are knowledgeable of and accountable for key risks.  The full Board of Directors of the Company (as well as the Board of Directors of National Western) meets at least every other month and regularly hears reports from the President and Chief Executive Officer, the Chief Financial Officer, the President and Chief Operating officer (National Western), the Chief Actuary (National Western), the Chief Investment Officer (National Western), and the Chief Legal Officer. In addition, the Board of Directors of the Company (including the Board of Directors of National Western) has several committees which include the Executive Committee, the Audit Committee, the Investment Committee, and the Compensation and Stock Option Committee that regularly convene to address various aspects of risk. Day-to-day responsibility for the overall ERM governance framework resides with the Company's designated Chief Risk Officer.

Enterprise Risk Management (ERM) Governance Framework
 
 
 
 
 
 
 
 
 
Board of Directors and Sub-Committees of the Board
 
 
 
 
o
 
 
 
 
Company Senior Management
 
 
 
 
o
 
 
 
 
ERM Committees
o
 
o
 
o
 
o
 
o
Disclosure Committee
 
Asset/Liability Matching
 
Product Pricing/ Development
 
Compliance/Fraud Unit
 
Underwriting/ Claims
o
 
o
 
o
 
o
 
o
Corporate Risk Function
Insurance Risk
 
Market Risk
 
Credit Risk
 
Operational Risk
 
Strategy Risk
o
 
o
 
o
 
o
 
o
Lines of Business / Functional Areas

National Western maintains management groups and committees that meet regularly to monitor, discuss and manage a variety of issues and risks associated with the business. These groups and committees include numerous areas such as regulatory compliance, financial reporting process and controls, fraud unit investigations, product spread management, security (including cyber), and business strategy. Key members of senior management are involved with these groups and committees providing direction and oversight and serve as a reporting liaison with the Company’s Board of Directors and sub-committees. In addition, the Internal Audit department reviews financial and operational risk exposures and reports directly to the Audit Committee of the Company concerning its independent reviews and assessments of management's efforts in these areas.

The Company maintains a system of disclosure controls and procedures, including internal controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized, executed and recorded. The Company recognizes the importance of full and open presentation of its financial position and operating results and to this end maintains a Disclosure Controls and Procedures Committee ("Disclosure Committee") comprised of senior executives who possess comprehensive knowledge of the Company's business and operations.  The Disclosure Committee is responsible for evaluating disclosure controls and procedures and for the gathering, analyzing, and disclosing of information as required to be disclosed under the securities laws.  It assists the Chief Executive Officer and Chief Financial Officer in their responsibilities for making the certifications required under the securities laws regarding the Company's disclosure controls and procedures.  It ensures that material financial information is properly communicated up the Company's hierarchy to the appropriate person or persons and that all disclosures are made in a timely fashion.  This Committee reports directly to the Audit Committee of the Company.


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National Western's product designs, underwriting standards and risk management techniques are utilized to protect against disintermediation risk and greater than expected mortality and morbidity risk. Disintermediation risk is limited through the use of surrender charges, certain provisions not allowing discretionary withdrawals, and market value adjustment features. Investment guidelines including duration targets, asset allocation tolerances and return objectives help to ensure that disintermediation risk is managed within the constraints of profitability criteria. Prudent underwriting is applied to select and price insurance risks and management regularly monitors mortality experience relative to its product pricing assumptions. Enforcement of disciplined claims management serves to further protect against greater than expected mortality.

A significant aspect of the company’s business is managing the linkage of its asset characteristics with the anticipated behavior of its policy obligations and liabilities, a process commonly referred to as asset-liability matching. National Western maintains an Asset-Liability Committee (“ALCO”) consisting of senior level members of National Western who assist and advise the Board of Directors in monitoring the level of risk National Western is exposed to in managing its assets and liabilities in order to attain the risk-return profile desired.  Certain members of the ALCO meet as frequently as necessary, to review and recommend for Board of Director ratification, current period interest crediting rates to policyholders based upon existing and anticipated investment opportunities. These rates apply to new sales and to products after an initial guaranteed period, if applicable. Rates are established after the initial guaranteed period based upon asset portfolio yields and each product’s required interest spread, taking into consideration current competitive market conditions.

Underwriters generally follow detailed policies and procedures to assess and quantify the risk of National Western's individual life products based on the age, gender, health, occupation and financial resources of the applicant and the amount of insurance applied for. As National Western maintains reinsurance treaties with several third party reinsurers, the majority of National Western's risk assessment policies have been established in conjunction with reinsurer policies and practices. National Western bases premiums and policy charges for individual life insurance on expected death benefits, surrender benefits, expenses and required reserves. Assumptions regarding mortality, interest rates, policy persistency, expenses, premium payment patterns and investment performance are embedded in the pricing of policies. Deviations of actual experience from pricing assumptions may positively or negatively impact the profitability of National Western's products.

Substantially all products sold to residents of other countries contained a currency clause stating that premium and claim "dollars" refer to lawful currency of the United States.  Policy applications that had been submitted through international insurance consultants generally were associated with individuals in upper socioeconomic classes who desired the stability and inflationary hedge of dollar denominated insurance products previously issued by National Western.  The favorable demographics of this group typically resulted in an average policy size, persistency, and claims experience (from natural causes) similar to that in the United States.  By having accepted applications submitted on residents outside the United States, National Western was able to further diversify its revenue, earnings and insurance risk.

Insurance Product Liabilities

At December 31, 2018, the Company's total balance for liabilities pertaining to insurance products was $9.9 billion. These product liabilities are payable over an extended period of time for which National Western's product pricing includes in making certain assumptions. The profitability of insurance products depends on this pricing and differences between the company's expectations when the products are sold and the subsequent actual experience impacts future profitability.

Liabilities for insurance products are determined using standard actuarial tables and past experience. Accordingly, establishing reserves can be an uncertain process in some cases. The Company's financial results depend significantly upon the extent to which actual experience is consistent with the assumptions used in determining reserves and pricing National Western's products. If assumptions are incorrect with respect to future claims, future policyholder premiums and policy charges or the investment income derived from the assets supporting product liabilities, the Company would be required to increase its liabilities which would negatively affect operating results.


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Reinsurance

National Western follows the industry practice of reinsuring (ceding) portions of its insurance risks with a variety of reinsurance companies. All reinsurance is yearly renewable term. The company does not use financial or surplus relief reinsurance. The use of reinsurance allows the company to underwrite policies larger than the risk it is willing to retain on any single life and to continue writing a larger volume of new business. New sales of life insurance products are reinsured above prescribed limits and do not require the reinsurer’s prior approval within certain guidelines. The maximum amount of life insurance the company normally retains is $500,000 on any one life. However, the use of reinsurance does not relieve National Western of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation. Consequently, the company avoids concentrating reinsurance risk with any one reinsurer and only participates in reinsurance treaties with reputable carriers. No reinsurer of business ceded by National Western has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business. The company continuously monitors the financial strength of its reinsurers and has been able to obtain replacement coverages from financially responsible reinsurers when making changes. The company’s primary reinsurers as of December 31, 2018 were as follows.

Reinsurer
 
A.M. Best Rating
 
Amount of In Force Ceded (In thousands)
 
 
 
 
 
Hannover Life Reassurance Company (Florida)
 
A+
 
$
1,871,128

SCOR Global Life Americas Reinsurance (Delaware)
 
A+
 
1,300,031

RGA Reinsurance Company (Missouri)
 
A+
 
783,102

Swiss Life & Health America Inc. (Connecticut)
 
A+
 
41,831

SCOR Global Life USA Reinsurance (Delaware)
 
A+  
 
8,170

All others
 
      A to A+
 
17,717

 
 
 
 
 
 
 
 
 
$
4,021,979


Regulatory and Other Issues

Regulation. The Company's insurance business is subject to comprehensive state regulation in each of the states it is licensed to conduct business. The laws enforced by the various state insurance departments provide broad administrative powers with respect to licensing to transact business, licensing and appointing agents, approving policy forms, regulating unfair trade and claims practices, establishing solvency standards, fixing minimum interest rates for the accumulation of surrender values, and regulating the type, amounts, and valuations of permitted investments, among other things. National Western is required to file detailed annual statements with each of the state insurance supervisory departments in which it does business. Annually, the company’s board-appointed qualified actuary must submit an opinion to state insurance regulators where the company is licensed to do business on whether the statutory assets held backing the statutory reserves are sufficient to meet contractual obligations and related expenses of the insurer. If an opinion cannot be rendered noting the sufficiency of assets, the company is required to establish additional statutory reserves which draw from available statutory surplus until the time such an opinion can be furnished.

National Western's operations and financial records are subject to examination by these departments typically at regular intervals but may be examined at any time. Statutory financial statements are prepared in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance, the company's principal insurance regulator. Prescribed statutory accounting practices are largely dictated by the Statutory Accounting Principles adopted by the National Association of Insurance Commissioners ("NAIC"). The company's most recent Colorado statutory financial examination covered the five year period ended December 31, 2012, and resulted in no financial statement adjustments and no material deficiencies were found. An examination for the five year period ended December 31, 2017 by the Colorado department commenced during the latter half of 2018 and is still in progress as of the date of this filing. The NAIC, as well as state regulators, continually evaluates existing laws and regulations pertaining to the operations of life insurers. To the extent that initiatives result as a part of this process, they may be adopted in the various states in which the company is licensed to do business. It is not possible to predict the ultimate content and timing of new statutes and regulations adopted by state insurance departments and the related impact upon the company's operations although it is conceivable that they may be more restrictive.


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The NAIC has developed a principles-based approach for establishing reserves for life insurance products. This approach is designed to improve reserving for products for which the current formula requirement for reserves may not accurately reflect the risks or costs of the obligations to insurers. The NAIC's Standard Valuation Law has been enacted by the minimum number of states representing a minimum level of premium volume needed in order for the principles-based approach to become effective. This approach is effective as of January 1, 2017 with a three year phase-in period and is prospective (applying only to new business). National Western fully intends to be compliant with the new Standard Valuation Law by the end of the phase-in period.

The NAIC has also enacted the Own Risk and Solvency Assessment ("ORSA") model act which requires insurers to make a formal assessment of the adequacy of their risk management and current and future solvency positions. National Western's state of domicile, Colorado, passed legislation calling for the adoption of the ORSA Model Act which subjected the company to filing annual ORSA reports with the Colorado Division of Insurance starting in 2017. The company filed its annual ORSA report in the fourth quarter of 2018.

Each state has insurance guaranty association laws under which insurers doing business in a state can be assessed contributions, up to prescribed limits, in order to cover contractual benefit obligations of insolvent insurance companies. The state guaranty associations levy assessments on each insurer on the basis of their proportionate share of the premiums written in the lines of business in which the insolvent insurer had been engaged. Some states permit the member insurers to recover the assessments paid through full or partial premium tax offsets.

National Western is also subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting, and escheatment of unclaimed or abandoned funds. Compliance with these requirements is subject to audit and examination by state regulators.

State insurance laws and regulations contain numerous provisions pertaining to the marketplace activities of insurers, including various provisions governing the form and content of disclosures made to consumers, policy illustrations, advertising material, sales practices and handling of policyholder complaints. State regulatory authorities enforce these prerequisites through periodic market conduct examinations.

Given the ongoing legislative developments concerning insurance industry regulation, the NAIC and state regulators continue to revisit existing laws and statutes focusing on matters involving insurance company investments and solvency, market conduct, risk-adjusted capital measurements, enterprise risk management guidelines, interpretations of current laws, and creation of new laws. The Company does not believe the adoption of any of the current NAIC initiatives will have a material adverse impact on its operations; however, the Company cannot predict the form of any future proposals or regulation.

The Company’s business is also affected by U.S. federal, state and local tax laws. Although the federal government does not directly regulate the life insurance industry, federal measures previously considered or enacted by Congress, if revisited, could affect the insurance industry and the Company's business. These measures include the tax treatment of life insurance companies and life insurance products, as well as changes in individual income tax structures and rates. Even though the ultimate impact of any of these changes, if implemented, is uncertain, the persistency of National Western's existing products and the ability to sell products could be materially affected. 

The Company is subject to federal and state laws and regulations that require financial institutions and other businesses to protect the security and confidentiality of personal information, including health-related and customer information, and to notify their customers and other individuals of their policies and practices relating to the collection and disclosure of health-related and customer information. Federal or state laws or regulations also provide additional protections regarding the use and disclosure of certain information such as social security numbers; require notice to affected individuals, regulators, and others if there is a breach of the security of certain personal information; require financial institutions to implement effective programs to detect, prevent, and mitigate identity theft; and prescribe the permissible uses of certain financial information, including customer information and consumer report information.

Despite having been in place for several years, many of the key rules of the Dodd-Frank legislation have yet to be formalized, some of which may have an impact on insurers. The Federal Insurance Office ("FIO") was established to accumulate information about the insurance industry and its mandate is very broad although it is not empowered with any general regulatory authority over insurers. The current Presidential Administration continues to review this legislation and may roll back more of the rules and regulatory authority embedded in Dodd-Frank.


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The USA Patriot Act of 2001 ("Patriot Act") amended the Money Laundering Control Act of 1986 and the Bank Secrecy Act of 1970 to expand anti-money laundering ("AML") and financial transparency laws applicable to financial services companies, including insurance companies. Among other things, the Patriot Act seeks to identify parties involved in terrorism, money laundering or other illegal activities. It is the policy of National Western to comply fully with all applicable U.S. anti-money laundering laws and regulations. The company is committed to maintaining company-wide awareness of the importance of these laws and regulations and has adopted an AML Compliance Program, setting forth National Western’s policies, procedures, and internal controls designed to detect and prevent money laundering.  The goal of this Program is to establish a framework for the company to ensure compliance with all applicable U.S. anti-money laundering laws and regulations, including not only the Patriot Act but also the sanctions programs promulgated by the Office of Foreign Assets Control.

Risk-Based Capital Requirements. In order to enhance the regulation of insurer solvency, the NAIC established risk-based capital ("RBC") requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold.  The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments.  The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset-liability matching issues; and (iv) other business risks.  For each category, the RBC requirements are determined by applying specified factors to various assets, premiums, reserves, and other items, with the factor being higher for items with greater underlying risk and lower for items with less risk. The standards require life insurers to submit a report to state regulators on an annual basis regarding their risk-based capital.

The RBC requirements provide for four levels of regulatory attention, varying with the ratio of the insurer's ratio of total adjusted capital to its RBC as measured on December 31 of each year. In addition, the RBC requirements provide for a trend test if an insurer's total adjusted capital falls to a certain range of its ratio relative to its RBC as of the end of the year. National Western's statutory capital and surplus at December 31, 2018, was significantly in excess of the threshold RBC requirements for regulatory attention and trend test analysis.

Effects of Inflation. The rate of inflation as measured by the change in the average consumer price index has not had a material effect on the revenues or operating results of the Company during the three most recent fiscal years.

Employees.  National Western had 276 employees as of December 31, 2018, substantially all of which worked in the company’s home office in Austin, Texas. None of the employees are subject to collective bargaining agreements governing their employment with the company.

Available Information

The Company files periodic and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). These reports, including information in this report filed on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to the above reports, are accessible free of charge through the SEC's website (www.sec.gov) or may be viewed by visiting the SEC's Public Reference Room in Washington, D.C.

The Company's press releases, financial information, and reports filed with the SEC are available online free of charge at the Company's website: www.nwlgi.com. Reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information located on the Company's website is not part of this or any other report filed with or furnished to the SEC.


ITEM 1A. RISK FACTORS

Company performance is subject to varying risk factors including general business and financial risk. Any or all of these risks could have a material adverse effect on the business, financial condition or results of the Company or cause the trading price of the Company's Class A common shares (ticker symbol "NWLI") to decline materially. This section provides an overview of possible risk exposures at this point in time that could impact Company performance in the future. Many of these risks are interrelated, ongoing, and endemic to the industry. Consequently, they could occur under similar business and economic conditions, and in turn prompt the emergence or amplify the effect of others. While these scenarios do not represent expectations of future experience, they are intended to illustrate the potential impacts if any of the following risks were to manifest into actual occurrences.

Difficult conditions globally and in the U.S. economy may materially adversely affect our business and results of operations.

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The Company’s results from operations can be materially affected by economic conditions both in the U.S. and elsewhere around the world. Even under relatively beneficial market conditions, demand for our insurance and products, as well as our investment returns, are sensitive to fixed income, equity, real estate and other fluctuations and overall economic and political conditions. General factors such as credit availability, willingness of business to invest, consumer spending, financial market conditions and inflation affect the Company's business. Demand for our products and ultimately the profitability of our business may be adversely affected by anemic activity in any or all of these areas. Our current policyholders may opt to defer or stop paying insurance premiums. High interest rates or inflation could induce those holding interest-sensitive life insurance and annuity products of the Company to begin an elevated level of discretionary withdrawals of policy funds. Conversely, low interest rates and inflation could cause persistency of our products to vary from that anticipated and adversely affect profitability. In addition, changing economic conditions may serve to create unfavorable public perception of financial institutions and influence policyholder behavior. Changes as detailed above could negatively affect our net income and have a material effect on our business, results of operations and financial condition. The Company cannot foretell the occurrence of economic trends or the timing of changes in such trends.

Our investment portfolio is subject to several risks which may lessen the value of invested assets and the amounts credited to policyholders.

The Company primarily invests monies received in investment grade, fixed income investment securities in order to meet its obligations to policyholders and provide a return on its deployed capital. Accordingly, our business is exposed to customary risks of debt markets including credit defaults and changes in fair value. Adverse market conditions can affect the liquidity and value of our investments and we are subject to the credit risk that issuers of these securities may default on principal and interest payments, particularly in the event of an ongoing downturn in the economic and/or business climate. A ratings downgrade affecting issuers of particular securities could worsen the credit quality of our investments and could increase the amount of capital we must hold to maintain our risk-based capital levels which are monitored by regulators and rating agencies. At December 31, 2018, approximately 0.9% of the Company’s $10.2 billion fixed income securities portfolio was comprised of issuers who were investment grade at the time the Company acquired them but were subsequently downgraded for various reasons. Although this is an extremely low percentage compared to industry averages, a substantial increase in defaults from these or other issuers could negatively impact the Company’s financial position and results of operations.

For the Company’s fixed-index products, over the counter derivative instruments (index options) are purchased from a number of highly-rated counterparties to fund the index credit provided to policyholders. These index options consist primarily of one-year call options. Market conditions could cause these instruments to not perform as intended or expected and result in higher realized losses and unforeseen stresses on liquidity. The counterparties may also limit the availability of these hedging instruments or further increase the cost of executing product related hedges which may be difficult to recover in the pricing of our underlying products. Amounts that the Company expects to collect under derivative contracts are subject to counterparty risk. In the event that any of these counterparties fails to meet their contractual obligations under these derivative instruments, the Company would be financially at risk for providing the credits due that the counterparty reneged on. The Company attempts to offset this risk through careful credit evaluation of counterparties, diversification of holdings among numerous institutions, and use of credit support agreements requiring counterparties to provide collateral at specified threshold levels. Although the Company has never had a counterparty default on its obligations, the failure of counterparties to perform could negatively impact the Company’s financial strength and reduce the Company’s profitability.

The concentration of the Company's portfolio in any particular issuer, asset classes, industries, or geographic areas could have an adverse effect on our investment portfolios and, therefore, the Company's results of operations and financial position. In order to minimize this risk, the Company's investment guidelines contain maximum exposure thresholds to concentrations of risk in order to promote a broadly diversified portfolio. Disruptions in individual market sectors within our investment portfolio could result in significant realized and unrealized losses.

Significant financial and credit market volatility, changes in interest rates and credit spread margins, credit defaults, market illiquidity, declines in equity prices, ratings downgrades of the issuers of debt securities, and declines in general economic conditions, either singularly or in combination, could have a material adverse impact on the Company's results of operations and financial condition through realized losses, impairments, and changes in unrealized loss positions.

The determination of valuation and impairments of fixed income securities include estimations and assumptions that are subjective and prone to differing interpretations and could materially impact our results of operations or financial condition.


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The Company makes assumptions regarding the fair value and expected performance of its investments. During periods of market disruption and volatility, it becomes more difficult to evaluate securities, particularly if trading becomes less frequent or market data becomes less observable. Fair value of certain securities may be based upon one or more significant unobservable inputs even in typical market conditions. As a result, valuations may include inputs and assumptions that are less observable or require greater estimation and judgment as well as valuation methods which are more complex. These values may not be ultimately realizable in a market transaction and may change rapidly as market conditions change and assumptions are modified. We also consider a wide range of factors about security issuers in evaluating the cause of a decline in the estimated fair value of a security and in assessing the prospects for recovery. Inherent in this evaluation are assumptions about the operations of the issuer and its future earnings potential. Such evaluations are revised as conditions change and new information becomes available.

The decision on whether to record an other-than-temporary impairment is determined by our assessment of the financial condition and prospects of a particular issuer, projections of future cash flows and recoverability as well as our ability and intent to hold the securities to recovery or maturity. Expectations that the Company's investments in corporate debt securities will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. However, historical trends may not be indicative of future impairments and our conclusions concerning the recoverability of any particular security’s market price could ultimately prove to be invalid as facts and circumstances change. Rapidly changing and unprecedented credit market conditions make it possible that issuers of the Company's investments in corporate securities and/or debt obligations will perform worse than current expectations. Consequently, there can be no assurance that we have accurately assessed the level of impairments in our financial statements or that additional impairments may not need to be taken in the future. It is also possible that unanticipated events may lead the Company to dispose of such investments and recognize the effects of any market movements in its financial statements.

We are subject to changing interest rates and credit spreads, market volatility, and general economic conditions which may affect the risk and returns on both our investment portfolio and our products.

We are exposed to significant capital market risk related to changes in interest rates. Our investment performance, including yields and realization of gains and losses, may vary depending on economic and market conditions. Substantial and sustained changes, up or down, in market interest rate levels can materially affect the profitability of our products, the market value of our investments, and ultimately the reported amount of stockholders’ equity.

A rise in interest rates will increase the net unrealized loss position of our investment portfolio and may subject the Company to disintermediation risk. Disintermediation risk is the risk that in a change from a period of low interest rates to a period of significantly higher and increasing interest rates more policyholders than assumed in the product pricing assumptions may surrender their contracts or make early withdrawals in order to increase their returns, potentially requiring the Company to liquidate investments in an unrealized loss position (i.e. the market value less than the carrying value of the investments). The Company manages its liabilities and configures its investment portfolio so as to provide and maintain sufficient liquidity to support expected withdrawal demands. If the Company experiences an unexpected increased level of withdrawal or surrender activity, it could exhaust liquid assets and be forced to liquidate other assets at a loss or on other unfavorable terms. With respect to fixed income security investments maintained in the Company's “Available for Sale” category that are reported at fair values, rising interest rates will cause declines in the market value of these securities. These declines are reported in our financial statements as an unrealized investment loss and a reduction of stockholders’ equity.

There may be occasions where the Company could encounter difficulty selling some of its investments due to a lack of liquidity in the marketplace. If the Company required significant amounts of cash during such a period, it may have difficulty selling investments at attractive prices, in a timely manner or both.

Significant changes in interest rates expose insurance companies to the risk of not realizing the anticipated spread between the interest rates earned on investments and the credited rates paid on in force policies and contracts. A decline in interest rates could expose the Company to reduced profitability due to minimum interest rate guarantees that are required in our products by regulation. When interest rates decline or remain low, as has been the case in recent years, the Company will have to reinvest investment portfolio cash proceeds in lower-yielding instruments, further reducing investment income. As a key component of profitability, a narrowing of investment spreads (“spread compression”) could negatively affect operating results. Although the Company has the ability to adjust the rates credited on products in order to maintain our required investment spread, a significant decline in interest rate levels could affect investment yields to the point where the investment spread is compromised due to minimum interest rate guarantees. In addition, the potential for increased policy surrenders and cash withdrawals, competitor activities, and other factors could further limit the Company’s ability to maintain crediting rates on its products at levels necessary to avoid sacrificing investment spread.


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When interest rates rise, the Company may not be able to replenish assets in its investment portfolio as rapidly with higher-yielding investments needed to fund/support the higher interest rates necessary to have its product offerings for sale remain competitive. Conversely, a prolonged period during which interest rates remain at lower levels may cause policies to remain in force for longer periods than anticipated in our pricing exposing the Company to additional spread compression and potentially greater claim costs than expected.

Due to regulatory and information system support considerations, delays may occur between the time the Company analyzes the need to make changes in the rates it credits on its products and other assumptions used for product pricing and the time the Company is able to reflect these changes in it products available for sale. These delays could negatively impact the long-term profitability of product sales during the interim period.

Changes in interest rates may also impact the Company's business in other ways. The Company's expectation for future interest earnings and spreads is an important component in determining the amortization of deferred policy acquisition costs ("DPAC") and deferred sales inducements ("DSI"). Significantly lower than expected interest earnings or spreads may cause the Company to accelerate its amortization of DPAC and DSI thereby reducing net income in a reporting period. Additionally, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive savings alternatives to consumers resulting in increased premium payments on products with flexible premium features, repayment of policy loans, or otherwise a higher persistency of policies remaining in force from year-to-year during a period when the Company's investments carry lower returns.

The profitability of the Company’s fixed-indexed products, whose crediting rate mechanism is linked in part to market indices, is significantly affected by the cost of underlying call options purchased to fund the credits owed to contract holders selecting this form of interest crediting. If there are little or no gains on the call options purchased over the expected life of these fixed-indexed products, the Company would incur expenses for credited interest over and above the option costs. In addition, if the Company does not successfully match the terms of the underlying call options purchased with the terms of the fixed-indexed products, the index credits could exceed call option proceeds. This would serve to reduce the Company’s spread on the products and decrease profits.

We are subject to incurring difficulties in marketing and distributing our products through our current and future distribution channels.

The Company distributes its life and annuity products through independent broker-agents. These product distributors are not captive and may sell products of competitors of the Company. There is substantial competition in the Company’s domestic market for independent broker-agents with the demonstrated ability to market and sell insurance products. Competition for these individuals or organizations typically centers on company reputation, products and their features, compensation, home office support services and the insurer’s financial position and independent strength ratings. Competitiveness for such individuals and organizations also depends upon the relationships the Company develops with them. An interruption in key relationships could materially affect our ability to market products. Distributors may also elect to reduce or terminate their distribution relationships with the Company at any time. We are further at risk that key distribution partners may change their mode of conducting business that affects how our products are sold. The Company’s future sales and financial condition are dependent upon avoiding significant interruptions in attracting and retaining independent broker-agents and consultants.

As technology continues to evolve, such as the use of so called "robo-advisors", comparison of a particular product of any company for a particular customer with competing products for that customer will become more readily available, which could also lead to increased competition as well as affecting agent, consultant and customer behavior.
 
We are subject to a downgrade in our financial strength ratings which may negatively affect our ability to attract and retain independent distributors, make our products less attractive to consumers, and may have an adverse effect on our operations.

Financial strength ratings are important criteria in establishing the competitive position of insurers. While financial strength ratings are not a recommendation to buy the Company's products, these ratings are important to maintaining public confidence in the Company, its products, and its competitive position. Ratings generally reflect the rating agencies’ quantitative and qualitative view of a particular company’s financial strength, operating performance, and ability to meet its obligations to policyholders. However, since some of the rating factors often relate to the particular and subjective views of the rating agency, their independent economic modeling, the general economic climate, and other circumstances, these are largely outside of the insurer’s control. During 2018, Standard & Poor's downgraded National Western's financial strength rating primarily due to the Company's strategic decision to cease accepting applications for its international products from residents outside the U.S. We cannot predict with any certainty what future actions rating agencies may take.


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A downgrade in our financial strength rating, or an announced potential downgrade, could potentially affect our competitive position making it more difficult to market our products vis-à-vis competitors with higher financial strength ratings, and/or hurt our relationships with distributors, reinsurers and other business partners. In extreme situations, a significant downgrade action by one or more rating agencies could cause a decrease in the sale of our products, prompt defections within our independent sales force, and induce existing policyholders to cancel their policies and withdraw funds from the Company. Currently, the major rating agencies, including A.M. Best and Standard & Poor’s, maintain stable outlooks on the U.S. life insurance industry. Regardless of their current view, these rating agencies could revise their benchmarks regarding levels of capital, earnings, and other metrics that align with particular rating levels and impact their rating assessments of U.S. life insurance companies. These events could have a material adverse effect on our financial position and liquidity.

We are subject to competition from new sources as well as companies having substantially greater financial resources, higher ratings, and more expansive product offerings which could have an adverse impact upon our business levels and profitability.

Life insurance is a mature and highly competitive industry. Our ability to compete is based upon a variety of factors including financial strength ratings, competitive products, quality of service, scale, and distribution capacity. There has been considerable consolidation among companies in the insurance and financial sectors resulting in large, well-capitalized entities that offer products comparable to the Company who have greater market share or breadth of distribution, higher financial strength ratings, and offer a broader range of products and services. Frequently, these larger organizations are not domiciled in the United States or are financial services entities attempting to establish a position in the insurance industry. These larger competitors often enjoy better name recognition and economies of scale which produce lower operating costs and the wherewithal to absorb greater risk allowing them to price products more competitively and, in turn, attract independent distributors. Such competition could result in lower sales or higher lapses of existing products. In addition, since the actual cost of products is not precisely known when they are sold, the Company is exposed to competitors who may sell products at prices that do not cover actual costs. Consequently, the Company may encounter additional pricing pressures to lower prices for similar products and be challenged to maintain market share, profit margin targets and profitability criteria. Due to these competitive forces, the Company may not be able to effectively compete without negative effects on our financial position and results of operations.

We are subject to regulation, changes to existing laws, and investigations that may affect our profitability or means of operations.

The Company is subject to extensive laws and regulations which are complex and subject to change. In addition, these laws and regulations are enforced by a number of different authorities including, but not limited to, the National Association of Insurance Commissioners ("NAIC"), individual state insurance regulators, the Securities and Exchange Commission ("SEC"), state attorney generals, and the U.S. Department of Justice. Compliance with these laws and regulations is time consuming and any changes may materially increase our compliance costs and other expenses of doing business. The regulatory framework at the state and federal level pertaining to insurance products and practices is unsettled and could affect not only the design of our products but our ability to continue to sell certain products.

The Company is subject to government regulation in each of the states in which it conducts business with such regulation vested in state agencies having broad administrative power dealing with many aspects of the Company's business. Regulators oversee matters relating to sales practices, policy forms, claims practices, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, and payments of dividends. At any given time, the Company may be subject to a number of financial, market conduct, or other examinations or audits. These examinations or audits may result in payment of fines and penalties as well as changes in systems or procedures, any of these could have a material adverse effect on the Company's financial condition or results of operations. Other NAIC or state insurance regulator actions, such as the adoption of principles-based reserving or changes to RBC calculations, may adversely impact our business from time to time.

Life insurance products generally offer tax advantages to policyholders via the deferral of income tax on policy earnings during the accumulation phase of the product, be it an annuity or a life insurance product, as compared to other savings instruments such as certificates of deposit and taxable bonds. Taxes are payable on income attributable to a distribution under a policy/contract for the year in which the distribution is made as opposed to the current taxation of other savings instruments. In addition, death benefit proceeds maintain a tax-free status. Periodically, Congress has considered legislation that would reduce or eliminate this tax advantage inherent to the life insurance industry and subject the industry’s products to treatment more equivalent with other investments. In the event that the tax status of life insurance products is revised or reduced by Congress all life insurers would be adversely impacted.


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Insurance companies that do business in a particular state are subject to assessment up to certain prescribed limits by that state’s insurance guaranty association to provide funds to help pay for policyholder losses or liabilities of insolvent insurance companies. As the amount and timing of assessments by state insurance guaranty associations is outside of the Company’s control, the liabilities provided for these potential assessments in our financial statements may differ from the amounts ultimately assessed.

In 2010, the Dodd-Frank Act (“Dodd-Frank”) was enacted into law. Dodd-Frank called for expansive changes in the regulation and oversight of the financial industry intended to provide for greater supervision of financial industry entities, reduction of risk in banking practices and in securities and derivatives trading, enhancement of public company corporate governance practices and executive compensation disclosures, and greater protections to individual consumers and investors. Numerous provisions of Dodd-Frank required adoption of implementing rules and/or regulations. The process of adopting these have been substantially delayed beyond the timeframes imposed by Dodd-Frank. Legislative or regulatory requirements ultimately imposed may impact the Company in a variety of ways including placing the Company at a competitive disadvantage relative to its competition or other financial service entities, changing the competitive framework of the financial services sector and/or life insurance industry, making it more expensive for the Company to conduct its business, or requiring the reallocation of Company resources to legal and compliance-related activities. There remains some speculation that many aspects of Dodd-Frank will be rescinded given their anti-competitive and compliance costly nature. Consequently, the impact of Dodd-Frank on the Company, as well as that on the financial industry and economy cannot be determined until all the rules and regulations called for under the Act have been finalized and implemented, if at all.

The Company's operations are centralized at its Austin, Texas location and it is licensed to do business in forty-nine states (except New York) and various other U.S. territories and possessions and is regulated by the insurance departments in each of these locations. Although not otherwise licensed, the Company accepted applications from and issued dollar-denominated policies to residents outside of the United States until May 2018. From time to time insurance regulators in these non-U.S. locations have sought to exercise regulatory authority over the Company including the imposition of substantial penal fines. Although these non-U.S. regulators have no jurisdiction over the Company and any actions, including fines, would be unenforceable against the Company, the threat of regulatory action could otherwise absorb Company time and resources away from its business operations. The Company's future financial condition is dependent upon avoiding significant interruptions from authorities outside of the United States.

Several years ago, Brazilian authorities commenced an investigation into possible violations of Brazilian criminal law in connection with the issuance of the Company's insurance policies to Brazilian residents at that time, and in assistance of such investigation a Commissioner appointed by the U.S. District Court for the Western District of Texas issued a subpoena upon the Company 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.  The Company has been cooperating with the relevant governmental authorities in regard to this matter.  See “Legal Proceedings” in Item 3 of Part I of this report.
Changes in accounting standards issued by standard-setting bodies may adversely affect our financial statements and affect the management of business operations.

The Company’s financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) as delineated in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“FASB ASC”). GAAP is subject to constant review by various policy-setting organizations to address emerging accounting rules and issue interpretative accounting guidance. From time to time, the Company is required to adopt new or revise accounting standards or guidance that has been integrated into the FASB ASC. For example, the FASB has had an ongoing project to revise the accounting standards for insurance contracts. The changes to GAAP from this particular project, which are subject to adoption in the coming years, present significant accounting changes which will require companies to develop new systems and infrastructure in order to comply. Future accounting standards required to be adopted could possibly further change the current accounting treatment that the Company uses in its Consolidated Financial Statements and such changes could possibly have a material adverse effect on our financial position and results of operations.


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In addition, the FASB has been working on several projects with the International Accounting Standards Board (“IASB”) over the years which could produce significant changes if GAAP converges with International Financial Reporting Standards (“IFRS”). These projects include how the Company accounts for its insurance contracts and financial instruments and how its financial statements are prepared and presented. Although most of these efforts have stalled at this point in time, filers in the U.S. could be required to report financial results in accordance with IFRS as issued by the IASB rather than GAAP were this initiative to be resumed. Despite the uncertainty of any deliberations involving convergence of GAAP and IFRS, adoption of IFRS would be a complete change to the Company's accounting and reporting. The changes to GAAP and the ultimate conversion to IFRS would invoke new demands on public companies in the areas of governance, internal controls, employee training, and disclosure and will likely affect how business operations are managed. The Company is unable to predict whether, and if so, when this effort will be resumed, adopted and/or implemented.

The Company is also required to comply with statutory accounting principles ("SAP") which are subject to constant review by the NAIC and related task forces and committees. Various proposals either are currently or have been previously pending before the NAIC. The Company cannot predict whether or in what form reforms will be enacted by state legislatures and whether the enacted reforms will positively or negatively affect the Company.

We may be subject to unfavorable judicial developments, including the time and expense of litigation, which potentially could affect our financial position and results of operations.

Financial services companies are frequently targets of legal proceedings, including class action litigation. In the ordinary course of business, we are involved in various legal actions common to the life insurance industry, some of which may occasionally assert claims for large amounts. Companies in the life insurance and annuity lines of business have encountered litigation pertaining to allegations of improper sales practices in connection with the sale of life insurance, improper product design and disclosures, marketing unsuitable products to customers especially in the senior market, bad faith in the handling of insurance claims, and other similar pleas. Some of these proceedings have been brought on behalf of various alleged classes of complainants. In addition, life insurance companies are subject to risk of errors and misconduct of the agents selling their products for fraud, non-compliance with policies and recommending products or transactions that are not suitable in a particular situation. Often these legal proceedings have involved plaintiffs seeking large and/or indeterminate amounts and resulted in the award of substantial amounts disproportionate to the actual damages including material amounts of punitive compensatory or exemplary damages. In some states, judges and juries have substantial discretion in awarding punitive and compensatory damages which creates the potential for material adverse judgments or awards. In the event of an unfavorable outcome in one or more matters, the ultimate liability may be in excess of the liabilities established in the Company's accounts.

Legal liability or adverse publicity emanating from current or future legal actions, whether or not they actually involve the Company, could have an adverse effect on us or cause us reputational harm, which could, in turn, impair our prospective business. Given the inherent unpredictability of litigation, and the potential complexity and scope of such actions, there can be no assurance that such litigation, current or in the future, will not have a material adverse effect on the Company’s results of operations or cash flows in any particular reporting period. In addition, such matters may become more frequent and/or severe in the event that general economic conditions deteriorate.

We could be liable with respect to liabilities ceded to reinsurers if the reinsurers fail to meet the obligations assumed by them.

The Company cedes material amounts of insurance to other unaffiliated insurance companies through reinsurance. New sales of life products are reinsured within prescribed limits and do not require the reinsurer's prior approval within certain guidelines. The Company's maximum retention limit on an insured life is $500,000. However, these reinsurance arrangements do not fully discharge the Company’s obligation to pay benefits on the reinsured business. If a reinsurer fails to meet its obligations, the Company would be forced to cover these claims. In addition, if a reinsurer becomes insolvent, it may cause the Company to lose its reserve credits on the ceded business which require the establishment of additional reserves. To mitigate the risks associated with the use of reinsurance, the Company carefully monitors the ratings and financial condition of its reinsurers on a regular basis and attempts to avoid concentration of credit risks by spreading its business among several reinsurers in order to diversify its risk exposure.

The Company's ability to be competitive is affected by the availability of reinsurance. The availability and cost of reinsurance protection are impacted by our operating and financial performance as well as conditions beyond our control. In recent years, the number of life reinsurers has decreased as the reinsurance industry has consolidated. The lower number of life reinsurers has resulted in increased concentration of risk for insurers. If the cost of reinsurance were to increase or become unavailable, the Company could be adversely impacted.

We are subject to policy claims experience which can fluctuate from period to period and vary from past results or expectations.


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The Company’s earnings are significantly influenced by policy claims received and will vary from period to period depending upon the amount of claims incurred. In any given quarter or year, there is very limited predictability of claims experience. The liability established for future policy benefits is based upon a number of different factors. Our mortality experience could be adversely impacted by a catastrophic event such as a natural disaster, terrorist attack or pandemic event. Significant deviations in actual experience from pricing assumptions could have an adverse effect on the profitability of our products. Some of the Company's products permit premium increases or adjustment of other charges or credits during the life of a policy, but the adjustments permitted under the terms of the policies may not be sufficient to maintain profitability or may induce policies to lapse. Many of our products do not permit us to increase premiums or adjust other charges and credits or otherwise limit the adjustments we can make during the life of a policy. There may be instances in which we may not be able or willing to raise premiums or adjust other charges sufficiently for competitive reasons. Consequently, in the event our future claim experience does not match our past results or pricing assumptions, our operating results could be materially and adversely affected.

We are subject to assumption inaccuracies regarding future mortality, persistency, and interest rates used in determining deferred policy acquisition costs which may require us to accelerate our amortization.

In the course of business, the Company makes certain assumptions regarding mortality, policy persistency, expenses, interest rates, business mix, investment performance and other factors concerning the type of business experience expected in future periods. Deferred policy acquisition costs ("DPAC") and deferred sales inducement ("DSI") amounts are calculated using a number of these assumptions. DPAC represent costs that vary with and are primarily related to the acquisition of new insurance and annuity contracts while DSI represents first year bonus interest amounts that are credited to policyholder account balances as an inducement to purchase the policy. Both are amortized over the expected lives of the policies. Amortization is dependent upon actual and estimated future gross profits ("EGP") generated by the lines of business that incurred the related expenses and are amortized over the expected lives of the corresponding contracts. The principal assumptions for determining EGP are mortality, persistency, expenses, investment returns (including capital gains and losses on assets supporting contract liabilities), and interest crediting rates to contract holders. DPAC and DSI recorded on the Consolidated Balance Sheets are tested to determine if they are recoverable under current assumptions. The estimates and assumptions used to amortize these deferred costs proportional to expected gross profits are also regularly reviewed. Due to the uncertainty associated with establishing these assumptions, the Company cannot, with precision, determine the exact pattern of profit emergence. Updates to these assumptions (commonly referred to as "unlocking") could result in an acceleration of amortization of DPAC and DSI. Accordingly, actual results could differ from the related assumptions which could have a material and adverse impact on the Company’s operating results.

Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time. The Company's results may be affected, positively or negatively, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.

Occurrence of natural or man-made disasters and catastrophes could adversely affect our ability to conduct business operations and the financial condition and results of operations.

The occurrence of natural disasters and catastrophes, including earthquakes, hurricanes, floods, tornadoes, fires, explosions, pandemic disease and man-made disasters, including acts of terrorism and military actions, could adversely affect the financial condition or results of operations of the Company. Such disasters and catastrophes could impact the Company directly by damaging our facilities, preventing employees from performing their duties or otherwise disturbing the Company’s ordinary business operations, as well as indirectly by changing the condition and behaviors of consumers, business counterparties and regulators and potentially causing declines or volatility in economic and financial markets. Disasters or a pandemic outbreak could disrupt public and private infrastructure, including communications and financial services, which could disrupt the Company's normal business operations. A terrorist attack affecting financial institutions could negatively impact the financial services industry as a whole and our business operations, investment portfolio and our profitability. In addition, such events and conditions could result in a decrease or halt in economic activity in large geographic regions, adversely impacting the marketing of the Company's business within such geographic areas which in turn could have an adverse effect on the Company. There can be no assurance that our business continuity plans and insurance coverages would be effective in mitigating any negative effects on our operations or profitability in the event of a terrorist attack or other disaster.

The effects of natural and man-made disasters and catastrophes on the Company’s business include, but are not limited to: an acceleration of the timing in which benefits are paid under the Company’s insurance policies due to catastrophic loss of life, unexpected changes in persistency rates as policyholders affected by disaster may be unable to meet their contractual obligations, harm to the financial condition of the Company’s reinsurers due to an increase in claims thereby impacting the cost and availability of reinsurance and possibly increasing the probability of default on reinsurance recoveries, and heightened volatility, loss of liquidity and credit impairment in the financial markets resulting in harm to the Company’s financial condition.

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Our enterprise risk management practices and procedures may prove to be ineffective exposing us to unidentified or unanticipated risks.

The Company maintains an enterprise-wide risk management framework to mitigate risk and loss to the Company. Under this framework we maintain policies, procedures and controls intended to identify, measure, monitor, report and analyze the risks to which the Company is exposed. There are, however, inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework bears out as to being ineffective, the Company may suffer unexpected losses and could be materially adversely affected.

As our business changes and the markets in which we operate evolve, our risk management framework may not advance at the same pace as those changes. As a result, there is a risk that new products or new business strategies may present risks that are not appropriately identified, monitored or managed. Many of our risk management strategies or techniques are based upon historical customer and market behavior and all such strategies and techniques are based to some degree on management’s subjective judgment. We cannot provide assurance that our risk management framework, including the underlying assumptions or strategies, will be accurate and effective. Management of operational, legal and regulatory risks requires, among other things, policies, procedures and controls to record properly and verify a large number of transactions and events, and these policies, procedures and controls may not be fully effective. In addition, there can be no assurance that controls and procedures that we employ, which are designed to monitor associates’ business decisions and prevent us from taking excessive or inappropriate risks, will be effective.
 
We are dependent upon effective information technology systems and the development and implementation of new technologies.

The Company’s business operations are technology dependent for maintaining accurate records, administering complex contract provisions, and complying with increasingly demanding regulation. While systems developments can streamline many processes and in the long term reduce the cost of doing business, these initiatives can present short-term cost and implementation risks. Projections of expenses, implementation time frames and the ultimate enhancement values may be different from expectations and escalate over time. The Company also faces rising costs and time constraints in meeting data security compliance requirements of new and proposed regulations. These increased risks and expanding requirements expose the Company to potential data loss and damages and significant increases in compliance and litigation costs.

The Company relies heavily on its telecommunication and computer systems to conduct business, service customers, and produce financial statements. These systems may fail to operate properly or become disabled as a result of events wholly or in part beyond our control. Further, we are at risk of third party vendors and parties which the Company utilizes for services, or to which we outsource the provision of services, incurring operational or technology failures. While policies, procedures and back-up plans designed to prevent or minimize the effect of incapacity or failure are maintained, the Company’s computer systems may be vulnerable to disruptions or breaches which cause operational difficulties, increased costs, or other adverse effects on our business. The Company's computer systems may be inaccessible to its employees, business partners, and customers for an extended period of time. Even if employees of the Company are able to report to work, they may be unable to perform their duties if the Company's data or systems are disabled or destroyed. The failure or incapacity of any of the Company’s computer systems could potentially disrupt operations, damage our reputation and adversely impact our profitability. Unanticipated problems with our disaster recovery or business continuity plans and systems could have a material adverse impact on our ability to resume and conduct business.

Despite implementation of a program of security measures, our information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other security breaches. The Company retains confidential information on its systems, including customer information and proprietary business information, and relies on sophisticated commercial technologies and third parties to maintain the security of those systems and information. The increasing volume and sophistication of computer viruses, hackers and other external threats may increase the vulnerability of the Company’s systems to data breaches. Even given our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate all types of security breaches, especially in light of the ever-evolving techniques used by hackers, the inability to recognize invasive attacks until launched, and the capability of cyber attacks originating from a wide variety of sources. Anyone who is able to circumvent the Company's security measures could access, view, misappropriate, alter, or delete any information in the systems, including personally identifiable customer information, customer financial information, and proprietary business information. Security breaches or other technological failures may also produce regulatory inquiries, proceedings, litigation costs, and reputational damage. An increasing number of states require customers to be notified of any unauthorized access, use, or disclosure of their information. We may incur reimbursement and other expenses, including litigation settlements and other additional compliance costs.


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The Company's business is dependent on the ability to keep up to date with effective, secure and advanced technology systems to reach a large number of people, provide sizable amounts of information, and secure and store vast quantities of data through our technology systems. Some of the Company’s information technology systems are older legacy-type systems and require an ongoing commitment of resources to maintain current standards. These legacy systems are written in older programming languages with which fewer and fewer individuals are knowledgeable of and trained in. The Company’s success is in large part dependent on maintaining and enhancing the effectiveness of existing legacy systems until converting to newer technologies and failure of these systems for any reason could disrupt our operations, result in the loss of business and adversely impact our profitability.

Interruption in telecommunication, information technology and other operational systems, or a failure to maintain the security, confidentiality or privacy of sensitive data residing on such systems, whether due to actions by us or others, could delay or disrupt our ability to do business and service our customers, harm our reputation, result in a violation of applicable privacy and other laws, subject us to substantial regulatory sanctions and other claims, lead to a loss of customers and revenues or financial loss to our customers and otherwise adversely affect our business.

The Company could be adversely affected by changes to tax law or interpretations of existing tax law which could reduce the demand for certain insurance products.

The Internal Revenue Code (the "IRC") provides that income tax payable on investment earnings of certain life insurance and annuity products is deferred during the accumulation period of the policies/contracts until payments are made to the policyholder or other beneficiary giving certain of the Company's products a competitive advantage over other non-insurance products. In addition, life insurance death benefits paid under terms of the policy are generally exempt from income tax. If the IRC were amended to reduce or eliminate the tax-deferred status of life insurance and annuity products, all life insurance companies, including the Company, would be adversely affected with respect to the ability to sell these products. Such changes in tax law could make the tax advantages of investing in certain life insurance and annuity products less attractive and adversely affect our financial position and results of operations.

In addition, the Company is subject to federal corporate income taxes but receives the benefit of certain tax provisions, including but not limited to, dividends-received deductions and insurance reserve deductions. Due to a variety of factors including the current Federal budget deficit and ongoing proposals from the U.S. Department of Treasury, from time to time Congress and various state legislatures entertain revenue-raising proposals contrary to the life insurance industry, either by raising rates or otherwise changing tax rules, and there is a risk that federal tax legislation could be enacted lessening or eliminating some or all of the tax advantages currently benefiting the Company and result in higher taxes. The Tax Cuts and Job Act ("Tax Act") which was passed in December 2017, besides reducing the federal corporate income tax rate from 35% to 21%, amended certain tax items unique to the life insurance industry which serve to increase the Company's federal taxable income. Chief among these in the Tax Act were the capping of the amount of tax reserves that the Company could currently deduct below previous thresholds and increasing the amount of acquisition expenses the Company is required to defer for deduction to future periods.

The level of profitability of the Company's products is significantly dependent upon current tax law and the Company's ability to generate taxable income, which is incorporated into our product design and pricing. Consequently, changes in tax law could impact product pricing and returns or require the Company to reduce sales of certain products or otherwise implement other courses of action that could be disruptive to our business. The Company cannot predict what other changes to tax laws or interpretations of existing tax law may ultimately be enacted or adopted, or whether such changes will adversely affect the Company.

The Company may be required to establish a valuation allowance against its deferred tax assets which could materially affect the Company's results of operations and financial condition.

Differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases give rise to deferred tax assets. These deferred tax assets represent future tax savings that would otherwise be paid in cash. GAAP requires that such deferred tax assets be analyzed for their future realizability which is dependent upon the generation of sufficient future taxable income with which to utilize the deferred tax assets. If it is determined that it is more likely than not all or a portion of the deferred tax assets cannot be realized, then an offsetting valuation allowance must be established with a corresponding charge to net income.


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The Company's current assessment of future taxable income in combination with the consideration of available tax planning opportunities has determined that it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets. This assessment of the realizability of our deferred tax assets requires significant judgment. If future events deviate from the Company's current assessment and cause a failure to achieve our projections, a valuation allowance may need to be established which could have a material adverse effect on the Company's results of operations and financial condition. The Company's year-end net deferred tax assets reflect the top marginal corporate income tax rate of 21% prescribed by the Tax Act. Any future reduction in this rate would cause a further write-down of our deferred tax assets.

Competition for employees is intense and the Company may not be able to attract and retain highly skilled people needed to support its business.

The Company’s success and ability to reach goals is dependent upon its ability to attract and retain qualified personnel. The market for qualified personnel is extremely competitive and the Company may not be able to hire or retain key people. The unexpected loss of services of one or more of the company’s key personnel could have a material adverse effect on the Company’s operations due to their skills, unique knowledge of our business, years of industry experience and the potential difficulty of quickly finding qualified replacements. The Company has largely managed to sustain lower than average employee turnover and retained valued employees with decades of experience in the Company's products, business and systems. However, as these individuals attain retirement age, the Company is exposed to the loss of cumulative knowledge in its operations. The Company's employees, including named executive officers, are not subject to employee contracts. Sales in our lines of business and our results of operations and financial condition could be materially adversely affected if the Company is unsuccessful in attracting and retaining qualified individuals or its recruiting and retention costs increase significantly.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

During 2016, National Western created a new operating entity, Braker P III, LLC ("BP III"), to own and manage the operations of an approximately 196,400 square foot commercial office building in Austin, Texas, which BP III acquired. The purchase price of the property was $49.3 million, exclusive of closing costs and fees. The Company relocated its principal office to this facility during the fourth quarter of 2017, and currently occupy approximately 78,000 square feet. At December 31, 2018, all of the remaining space is leased by BP III to other third party tenants.

The Westcap Corporation, a wholly owned subsidiary of National Western, owns the Company’s former office location in Austin, Texas and two buildings adjacent to it. During 2018, the two adjacent buildings were sold for in excess of $2.9 million. The remaining building of approximately 72,000 square feet is currently available for sale.  The Company’s affiliate, Regent Care Building, LP, owns an approximately 63,000 square foot building in Reno, Nevada, which is leased and utilized by another of the Company’s affiliates, Regent Care Operations, LP, for use in its nursing home operations.  The Company’s subsidiary, Regent Care San Marcos A-3 LP, owns an approximately 79,000 square foot building in San Marcos, Texas, which is also used in nursing home operations.  Lease costs and related operating expenses for facilities of the Company’s subsidiaries are currently not significant in relation to the Company’s Consolidated Financial Statements.  The intercompany lease costs related to The Westcap Corporation and the nursing homes have been eliminated for consolidated reporting purposes.


ITEM 3. 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. 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.


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National Western was the named defendant in the case of Damaris Maldonado Vinas, et al. vs. National Western Life Insurance, in which the plaintiffs, after National Western had paid the death benefits to the beneficiary (Francisco Iglesias-Alvarez) upon the annuitant’s (Carlos Iglesias-Alvarez) death, sought to annul two annuity policies issued by National Western at the behest of Carlos Iglesias-Alvarez and which named Francisco Iglesias-Alvarez as their beneficiary.  On March 31, 2016, the United States District Court for the District of Puerto Rico (the “Court”) issued its Opinion and Order on the pending Motions for Summary Judgment submitted by the parties, and therein denied National Western’s motion and granted plaintiffs’ motion voiding the two annuities and requesting a refund of the premiums paid ($2.9 million).  National Western vigorously defended the case and believes that the Court’s Opinion and Order is contrary to applicable law.  As such, National Western filed a Motion for Reconsideration of Opinion and Order and Corresponding Judgment with the Court on April 27, 2016, which the Court denied on May 5, 2016. National Western filed a Notice of Appeal on June 10, 2016, filed its Appeal Brief on September 12, 2016, and oral arguments with the U.S. Court of Appeals for the First Circuit were held on March 9, 2017. On June 29, 2017, the Court of Appeals vacated the district court's judgment and remanded to the district court to determine whether it is nevertheless equitable for the case to proceed without Francisco Iglesias-Alvarez. Plaintiffs filed a Motion in Support of Determination in Equity and Good Conscience That Action Should Proceed Among Existing Parties Under Fed.R.Civ.P. 19(B) on September 14, 2017, and National Western filed its Opposition to Plaintiffs' Motion on October 27, 2017. On April 2, 2018 the Court asked the parties for additional briefing regarding the Court's jurisdiction over Francisco Iglesias-Alvarez, which the parties filed on April 30, 2018. On May 14, 2018, National Western filed its Opposition to Plaintiffs' Brief.  Plaintiffs filed a Motion to Strike on May 22, 2018, which National Western opposed on June 4, 2018. On August 6, 2018, the Court issued an Opinion and Order dismissing plaintiffs’ case without prejudice and plaintiffs filed a Notice of Appeal to the First Circuit Court of Appeals on September 4, 2018. The case settled in December of 2018 without an admission of liability by either party.

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 challenges the directors’ oversight of insurance sales to non-U.S. residents and alleges 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 seeks 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 are baseless and without merit, will vigorously defend this lawsuit, and will seek reimbursement of all legal costs and expenses from plaintiff.  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 will grant the defendants' Pleas and asking 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 their 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 their 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 $1,314,053.73 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.
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.

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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 upon the company in March of 2015 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 is cooperating with the relevant governmental authorities in regard to this matter.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.



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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Market Information

The Class A common stock of National Western Life Group, Inc. ("NWLGI" or the "Company") is listed for trading on The NASDAQ - Stock Market® ("Nasdaq") under the symbol “NWLI”.  The quarterly high and low sales prices for the Company's common stock for each quarter during the past two calendar years as reported on Nasdaq, and the cash dividends declared per common share, are shown in the following table.

Class A Common Stock Data (per share)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
 
 
 
 
 
 
 
 
2018:
 
 
 
 
 
 
 
High
$
343.22

 
328.53

 
335.00

 
329.00

Low
276.00

 
287.00

 
304.65

 
260.65

Dividends Declared
—

 
—

 
—

 
0.36

2017:
 

 
 

 
 

 
 

High
$
331.70

 
332.00

 
352.03

 
368.00

Low
287.10

 
294.39

 
318.84

 
329.53

Dividends Declared
—

 
—

 
—

 
0.36


There is no established public trading market for the NWLGI’s Class B common stock.

Equity Security Holders

The number of stockholders of record on February 28, 2019 was as follows:

Class A Common Stock
2,497

Class B Common Stock
2


Dividends

Class B common stockholders receive dividends at one-half the per share amount declared on Class A common stock. During 2018, NWLGI paid cash dividends on its Class A and Class B common stock in the amounts of $1.2 million and $36,000, respectively.  During 2017, the Company also paid cash dividends on its Class A and Class B common stock in the amounts of $1.2 million and $36,000, respectively.  Payment of dividends is within the discretion of the Company’s Board of Directors.

Payment of dividends by National Western Life Insurance Company ("National Western") to NWLGI, as sole owner, are also within the discretion of National Western's Board of Directors, but are subject to prescribed limitations set by the Colorado Division of Insurance without prior approval.  The Company’s general policy is to reinvest earnings internally to finance the development of new business, provide for potential acquisitions, and to lend support to its financial strength ratings assigned by independent rating agencies. In the years ended December 31, 2018 and 2017, National Western declared and paid dividends to NWLGI in the amounts of $6.0 million and $7.0 million, respectively, to fund the operations of the holding company.


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Securities Authorized For Issuance Under Equity Compensation Plans

The Company has two equity compensation plans that were approved by security holders. These plans were assumed by NWLGI from National Western in 2015 pursuant to the terms of the reorganization. The plan approved in 1995 terminated in 2010 while the plan approved in 2008 was amended, restated and approved by stockholders of NWLGI in June 2016 extending its term for ten years from the date of stockholder approval. Under these plans, there are no outstanding options at December 31, 2018 which would otherwise entitle option holders to shares.  At December 31, 2018, 291,000 shares of Class A common stock remain available for future issuance under the remaining plan.

Performance Graph

The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the NASDAQ - U.S. Companies Index and the NASDAQ - Insurance Stock Index. The graph assumes that the value of the Company's Class A common stock and each index was $100 at December 31, 2013, and that all dividends were reinvested.

chart-cd20dd3e469e52468c0.jpg
 
Issuer Purchases of Equity Securities

Effective August 22, 2008, National Western adopted and implemented a limited stock buy-back program associated with the company's 2008 Incentive Plan which provides Option Holders the additional alternative of selling shares acquired through the exercise of options directly back to the company. This program succeeded a similar buy-back program implemented March 10, 2006 associated with the company's 1995 Stock Option and Incentive Plan. The programs provide Option Holders with the ability to elect to sell 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. These plans and program were assumed by NWLGI from National Western in 2015 pursuant to the terms of the holding company reorganization. As of December 31, 2018, there are no options outstanding under these plans.


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The following table sets forth the Company’s issuance and repurchase activity of its Class A common shares from Option Holders for the quarter ended December 31, 2018.

Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May yet Be Purchased Under the Plans or Programs
 
 
 
 
 
 
 
 
 
October 1, 2018 through October 31, 2018
 
—

 
$
—

 
N/A
 
N/A
November 1, 2018 through November 30, 2018
 
—

 
$
—

 
N/A
 
N/A
December 1, 2018 through December 31, 2018
 
—

 
$
—

 
N/A
 
N/A
 
 
 
 
 
 
 
 
 
Total
 
—

 
$
—

 
N/A
 
N/A

Purchased shares are reported in the Company's Consolidated Financial Statements as authorized and unissued.



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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following five-year financial summary includes comparative amounts derived from the audited Consolidated Financial Statements. (1)
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In thousands except per share amounts)
Earnings Information:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Universal life and annuity contract charges
$
155,205

 
159,968

 
163,447

 
155,608

 
150,596

Traditional life premiums
18,291

 
18,962

 
19,276

 
19,699

 
19,519

Net investment income
349,077

 
659,685

 
467,674

 
379,114

 
505,430

Other revenues
20,603

 
21,070

 
18,901

 
28,166

 
21,630

Net realized investment gains (losses)
8,423

 
14,763

 
13,070

 
7,209

 
11,605

 
 
 
 
 
 
 
 
 
 
Total revenues
551,599

 
874,448

 
682,368

 
589,796

 
708,780

 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 

 
 

 
 

 
 

 
 

Life and other policy benefits
65,297

 
71,485

 
65,529

 
67,452

 
54,295

Amortization of deferred policy acquisition costs
114,771

 
114,387

 
121,139

 
120,333

 
115,154

Universal life and annuity contract interest
136,055

 
437,019

 
248,390

 
176,901

 
298,259

Other operating expenses
93,969

 
107,002

 
94,448

 
78,442

 
83,551

 
 
 
 
 
 
 
 
 
 
Total benefits and expenses
410,092

 
729,893

 
529,506

 
443,128

 
551,259

 
 
 
 
 
 
 
 
 
 
Earnings before Federal income taxes
141,507

 
144,555

 
152,862

 
146,668

 
157,521

Federal income taxes
24,749

 
34,134

 
51,970

 
48,272

 
51,933

 
 
 
 
 
 
 
 
 
 
Net earnings
$
116,758

 
110,421

 
100,892

 
98,396

 
105,588

 
 
 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 

 
 

 
 

 
 

 
 

Class A
$
33.02

 
31.23

 
28.53

 
27.83

 
29.87

Class B
$
16.51

 
15.61

 
14.27

 
13.91

 
14.93

 
 
 
 
 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
Class A
$
33.02

 
31.23

 
28.53

 
27.82

 
29.85

Class B
$
16.51

 
15.61

 
14.27

 
13.91

 
14.93

 
 
 
 
 
 
 
 
 
 
Balance Sheet Information:
 
 
 
 
 
 
 
 
 
Total assets
$
11,931,691

 
12,225,094

 
11,894,981

 
11,612,576

 
11,351,892

 
 
 
 
 
 
 
 
 
 
Total liabilities
$
10,030,914

 
10,392,920

 
10,173,153

 
10,000,590

 
9,795,572

 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
$
1,900,777

 
1,832,174

 
1,721,828

 
1,611,986

 
1,556,320

 
 
 
 
 
 
 
 
 
 
Book value per common share
$
522.76

 
503.88

 
473.53

 
443.32

 
428.01


(1) See Note 1 Summary of Significant Accounting Policies to the Consolidated Financial Statement for reorganization effective October 1, 2015.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.  Certain information contained herein or in other written or oral statements made by or on behalf of the Company or its subsidiaries are or may be viewed as forward-looking.  Although the Company has taken appropriate care in developing any such information, forward-looking information involves risks and uncertainties that could significantly impact actual results.  These risks and uncertainties include, but are not limited to, matters described in the Company’s SEC filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues.  However, as a matter of policy, the Company does not make any specific projections as to future earnings, nor does it endorse any projections regarding future performance that may be made by others.  Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments. Also, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

Management’s discussion and analysis of the financial condition and results of operations (“MD&A”) of National Western Life Group, Inc. for the three years ended December 31, 2018 follows.  Where appropriate, discussion specific to the insurance operations of National Western Life Insurance Company is denoted by "National Western" or "company". This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes beginning on page 85 of this report.

Overview

National Western has historically provided life insurance products on a global basis for the savings and protection needs of policyholders and issued annuity contracts for the asset accumulation and retirement needs of contract holders, both domestic and international residents. As disclosed in the Form 10-Q filed for the quarter ended March 31, 2018, the company discontinued accepting applications for the company's international products from foreign residents in May 2018.

The company accepts funds from policyholders or contract holders and establishes a liability representing future obligations to pay the policy or contract holders and their beneficiaries.  To ensure the company will be able to pay these future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities.

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

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The Company monitors these factors continually as key business indicators.  The discussion that follows in this Item 7 includes these indicators and presents information useful to an overall understanding of the Company’s business performance in 2018, incorporating required disclosures in accordance with the rules and regulations of the SEC.

Impact of Recent Business Environment

The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by metrics which indicate improving employment data and increases in personal income growth. The consensus view at this time is for GDP growth to moderate during 2019 as the Federal Reserve delays raising rates at least for the first half of the year in its attempt to engineer an economic soft-landing. Risk of recession over the next couple of years is elevated compared to previous outlooks. While there is minimal slack in the labor market, inflation expectations continue to be muted. Accordingly, the probability of entering a high-inflation period remains remote.
 
With regard to the credit market, industry analysts and observers generally agree that a sudden jump in interest rate levels, while presently a highly unlikely scenario, would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal levels of product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. The Federal Reserve has more recently tilted toward a slightly dovish policy. Their challenge continues to be calibrating the last stretch of their normalization efforts to facilitate a soft-landing while market volatility edges up and growing concerns about financial stability emerge. The baseline view call for two rate increases in 2019 with an end rate of 3.0% for short-term rates. However, the direction and at what pace interest rate movements may occur in the future is ultimately uncertain and subject to change. What impact, if any, such movements would have on the Company’s business, results of operations, cash flows or financial condition is indeterminate.

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

Critical Accounting Policies

Accounting policies discussed below are those considered critical to an understanding of the Company’s financial statements.

Impairment of Investment Securities.  The Company’s accounting policy requires that a decline in the value of a security below its amortized cost basis be evaluated to determine if the decline is other-than-temporary.  The primary factors considered in evaluating whether a decline in value for fixed income and equity securities is other-than-temporary include: (a) the length of time and the extent to which the fair value has been less than cost, (b) the reasons for the decline in value (credit event, interest rate related, credit spread widening), (c) the overall financial condition as well as the near-term prospects of the issuer, (d) whether the debtor is current on contractually obligated principal and interest payments, and (e) that the Company does not intend or be required to sell the investment prior to recovery.  In addition, certain securitized financial assets with contractual cash flows are evaluated periodically by the Company to update the estimated cash flows over the life of the security.  If the Company determines that the fair value of the securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the previous purchase or prior impairment, then an other-than-temporary impairment charge is recognized.  The Company would recognize impairment of securities due to changing interest rates or market dislocations only if the Company intended to sell the securities prior to recovery.  When a security is deemed to be impaired, a charge is recorded equal to the difference between the fair value and amortized cost basis of the security.  In compliance with GAAP guidance the estimated credit versus the non-credit components are bifurcated, and the non-credit component is reclassified as unrealized losses in other comprehensive income.  Once an impairment charge has been recorded, the fair value of the impaired investment becomes its new cost basis and the Company continues to review the other-than-temporarily impaired security for appropriate valuation on an ongoing basis.  However, the new cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value.


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Deferred Policy Acquisition Costs (“DPAC”).  The Company is required to defer certain policy acquisition costs and amortize them over future periods.  These costs include commissions and certain other expenses that vary with and are directly associated with acquiring new business.  The deferred costs are recorded as an asset commonly referred to as deferred policy acquisition costs. The DPAC asset balance is subsequently charged to income over the lives of the underlying contracts in relation to the anticipated emergence of revenue or profits.  Actual revenue or profits can vary from Company estimates resulting in increases or decreases in the rate of amortization.  The Company performs regular evaluations of its universal life and annuity contracts to determine if actual experience or other evidence suggests that earlier estimates should be revised. Assumptions considered significant include surrender and lapse rates, mortality, expense levels, investment performance, and estimated interest spread.  Should actual experience dictate that the Company change its assumptions regarding the emergence of future revenues or profits (commonly referred to as “unlocking”), the Company would record a charge or addition to bring its DPAC balance to the level it would have been if using the new assumptions from the inception date of each policy.

DPAC is also subject to periodic recoverability and loss recognition testing.  These tests ensure that the present value of future contract-related cash flows will support the capitalized DPAC balance to be amortized in the future.  The present value of these cash flows, less the benefit reserve, is compared with the unamortized DPAC balance and if the DPAC balance is greater, the deficiency is charged to expense as a component of amortization and the asset balance is reduced to the recoverable amount. For more information about accounting for DPAC see Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Deferred Sales Inducements.  Costs related to sales inducements offered on sales to new customers, principally on investment type contracts and primarily in the form of additional credits to the customer’s account value or enhancements to interest credited for a specified period, which are beyond amounts currently being credited to existing contracts, are deferred and recorded as other assets.  All other sales inducements are expensed as incurred and included in interest credited to contract holders’ funds.  Deferred sales inducements are amortized to income using the same methodology and assumptions as DPAC, and are included in interest credited to contract holders’ funds.  Deferred sales inducements are also periodically reviewed for recoverability.  For more information about accounting for deferred sales inducements see Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Future Policy Benefits.  Because of the long-term nature of insurance contracts, the Company is liable for policy benefit payments many years into the future.  The liability for future policy benefits represents estimates of the present value of the Company’s expected benefit payments, net of the related present value of future net premium collections.  For traditional life insurance contracts, this is determined by standard actuarial procedures, using assumptions as to mortality (life expectancy), morbidity (health expectancy), persistency, and interest rates, which are based on the Company’s experience with similar products.  The assumptions used are those considered to be appropriate at the time the policies are issued.  An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed.  For universal life and annuity products, the Company’s liability is the amount of the contract’s account balance.  Account balances are also subject to minimum liability calculations as a result of minimum guaranteed interest rates in the policies. While management and National Western actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents the Company’s ultimate obligation. In addition, significantly different assumptions could result in materially different reported amounts.  A discussion of the assumptions used to calculate the liability for future policy benefits is reported in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

Revenue Recognition.  Premium income for the Company’s traditional life insurance contracts is generally recognized as the premium becomes due from policyholders.  For annuity and universal life contracts, the amounts collected from policyholders are considered deposits and are not included in revenue. For these contracts, fee income consists of policy charges for policy administration, cost of insurance charges and surrender charges assessed against policyholders’ account balances which are recognized in the period the services are provided.


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Investment activities of the Company are integral to its insurance operations. Since life insurance benefits may not be paid until many years into the future, the accumulation of cash flows from premium receipts are invested with income reported as revenue when earned. Anticipated yields on investments are reflected in premium rates, contract liabilities, and other product contract features.  These anticipated yields are implied in the interest required on the Company’s net insurance liabilities (future policy benefits less deferred acquisition costs) and contractual interest obligations in its insurance and annuity products.  The Company benefits to the extent actual net investment income exceeds the required interest on net insurance liabilities and manages the rates it credits on its products to maintain the targeted excess or “spread” of investment earnings over interest credited. The Company will continue to be required to provide for future contractual obligations in the event of a decline in investment yield. For more information concerning revenue recognition, investment accounting, and interest sensitivity, please refer to Note 1, Summary of Significant Accounting Policies; Note 3, Investments, in the Notes to Consolidated Financial Statements; and the discussions under Investments in Item 7 of this report.

Pension Plans and Other Postretirement Benefits.  The Company sponsors a qualified defined benefit pension plan, which was frozen effective December 31, 2007, covering substantially all employees at that time, and three non-qualified defined benefit plans covering certain senior officers.  In addition, the Company has postretirement health care benefits for certain senior officers.  The freeze of the qualified benefit pension plan 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.  In accordance with prescribed accounting standards, the Company annually reviews plan assumptions.

The Company annually reviews its pension benefit plans' assumptions which include the discount rate, the expected long-term rate of return on plan assets, and the compensation increase rate.  The assumed discount rate is set based on the rates of return on high quality long-term fixed income investments currently available and expected to be available during the period to maturity of the pension benefits.  The assumed long-term rate of return on plan assets is generally set at the rate expected to be earned based on the long-term investment policy of the plans, the various classes of the invested funds, input of the plan’s investment advisors and consulting actuary, and the plan’s historic rate of return.  The compensation rate increase assumption is generally set at a rate consistent with current and expected long-term compensation and salary policy, including inflation.  These assumptions involve uncertainties and judgment, and therefore actual performance may not be reflective of the assumptions.

Other postretirement benefit assumptions include future events affecting retirement age, mortality, dependency status, per capita claims costs by age, health care trend rates, and discount rates.  Per capita claims cost by age is the current cost of providing postretirement health care benefits for one year at each age from the youngest age to the oldest age at which plan participants are expected to receive benefits under the plan.  Health care trend rates involve assumptions about the annual rate(s) of change in the cost of health care benefits currently provided by the plan, due to factors other than changes in the composition of the plan population by age and dependency status.  These rates implicitly consider estimates of health care inflation, changes in utilization, technological advances, and changes in health status of the participants.

Share-Based Payments.  Liability awards under a share-based payment arrangement have been measured based on the awards’ fair value at the reporting date.  The Black-Scholes valuation method is used to estimate the fair value of the options.  This fair value calculation of the options includes assumptions relative to the following:

 ●
exercise price
 ●
expected term based on contractual term and perceived future behavior relative to exercise
 ●
current price
 ●
expected volatility
 ●
risk-free interest rates
 ●
expected dividends

These assumptions are continually reviewed by the Company and adjustments may be made based upon current facts and circumstances.

Other significant accounting policies, although not involving the same level of measurement uncertainties as those discussed above, but nonetheless important to an understanding of the financial statements, are described in Note 1, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.



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RESULTS OF OPERATIONS

The Company’s Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate derivative and realized investment gains and losses from operating revenues. Similar measures are commonly used in the insurance industry in order to assess profitability and results from ongoing operations. The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company’s results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company’s business. The Company excludes or segregates derivative and realized investment gains and losses because such items are often the result of events which may or may not be at the Company’s discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company’s business. Therefore, in the following sections discussing consolidated operations and segment operations, appropriate reconciliations have been included to report information management considers useful in enhancing an understanding of the Company’s operations to reportable GAAP balances reflected in the Consolidated Financial Statements.

Consolidated Operations

Revenues.  The following details Company revenues:

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Universal life and annuity contract charges
$
155,205

 
159,968

 
163,447

Traditional life premiums
18,291

 
18,962

 
19,276

Net investment income (excluding derivatives)
429,081

 
436,810

 
439,310

Other revenues
20,603

 
21,070

 
18,900

 
 
 
 
 
 
Operating revenues
623,180

 
636,810

 
640,933

Derivative gain (loss)
(80,004
)
 
222,875

 
28,364

Net realized investment gains (losses)
8,423

 
14,763

 
13,070

 
 
 
 
 
 
Total revenues
$
551,599

 
874,448

 
682,367


Universal life and annuity contract revenues - Revenues for universal life and annuity contract charges decreased in 2018 compared to 2017 due to lower surrender charge revenue from terminated policies and lower cost of insurance and administrative charges as shown below. Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, and surrender charges assessed against policyholder account balances, less reinsurance premiums as depicted in the following table.

 
Years Ended December 31,
Contract Charges:
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Cost of insurance and administrative charges
$
129,591

 
134,884

 
133,997

Surrender charges
37,138

 
42,061

 
44,828

Other charges
6,040

 
(173
)
 
856

Gross contract revenues
172,769

 
176,772

 
179,681

 
 
 
 
 
 
Reinsurance premiums
(17,564
)
 
(16,804
)
 
(16,234
)
 
 
 
 
 
 
Net contract charges
$
155,205

 
159,968

 
163,447



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Cost of insurance charges were $105.9 million in 2018 compared to $107.5 million in 2017 and $106.2 million in 2016. Cost of insurance charges typically trend with the size of the universal life insurance block in force and the amount of new business issued during the period. The volume of universal life insurance in force during 2018 decreased to $15.6 billion from $16.5 billion during 2017. Cost of insurance charges in 2017 showed an increase over the previous year due to the company increasing its cost of insurance charges during 2016 in accordance with its policy provisions on certain blocks of international life insurance policies. These increases were in effect for the entirety of 2017 and helped to mitigate the decline in insurance in force from 2016. Administrative charges were $23.7 million, $27.4 million, and $27.8 million for the years ended December 31, 2018, 2017 and 2016, respectively, and correlate with new universal life insurance business sales by the number of policies placed, the amount of premiums received and the volume of insurance issued. National Western's decision in May 2018 to cease accepting international policy applications from residents of other countries significantly decreased the level of universal life insurance sales.

Surrender charges assessed against policyholder account balances upon withdrawal were $37.1 million in 2018 compared to $42.1 million in 2017 and $44.8 million in 2016. While the Company earns surrender charge income that is assessed upon policy terminations, the Company’s overall profitability is enhanced when policies remain in force and additional contract revenues are realized and the Company continues to make an interest rate spread equivalent to the difference it earns on its investment and the amounts that it credits to policyholders. Policy lapse rates in 2018 for domestic life insurance and annuities segments were somewhat higher than those experienced in 2017 while the international life segment exhibited lower lapse rates. A spike in surrender charge income recognized occurred in 2016 reflecting a higher international life insurance lapse rate, most noticeably in the countries from which the Company ceased accepting applications from residents in the fourth quarter of 2015. Surrender charge income recognized is also dependent upon the duration of policies at the time of surrender (i.e. later duration policy surrenders have lower surrender charges assessed and earlier policy surrenders have a higher surrender charge assessed).

The growth in domestic life insurance sales the past several years has been driven principally by the sale of single premium life insurance products. In 2013, the Company began deferring the premium load associated with these products and spreading it over future income periods. The 2018 amount shown above as "Other charges" represents the net of previously capitalized amounts being amortized into revenue over current year deferrals of premium loads. Sales of single premium life insurance products have been a substantial portion of the company's new business over the past several years and has generated a higher balance of premium loads being amortized as revenue.

Traditional life premiums - Traditional life premiums have been relatively level over the past three years.  Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. A sizable portion of traditional life business resides in the International Life insurance segment which ceased accepting new applications in the second quarter of 2018. The Company’s overall life insurance sales focus has been primarily centered around universal life products.  Universal life products, especially the Company’s equity-index universal life products, which offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index such as the S&P 500 Index®, have been more popular product offerings in the Company’s markets representing 95% of new life insurance sales in 2018.


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Net investment income (with and without derivatives) - A detail of net investment income is provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Gross investment income:
 
 
 
 
 
Debt and equities
$
399,645

 
409,401

 
416,638

Mortgage loans
12,066

 
11,045

 
7,964

Policy loans
3,185

 
3,485

 
3,700

Short-term investments
2,249

 
1,012

 
668

Other invested assets
13,289

 
13,137

 
11,432

 
 
 
 
 
 
Total investment income
430,434

 
438,080

 
440,402

Less: investment expenses
1,353

 
1,270

 
1,092

 
 
 
 
 
 
Net investment income (excluding derivatives)
429,081

 
436,810

 
439,310

 
 
 
 
 
 
Derivative gain (loss)
(80,004
)
 
222,875

 
28,364

 
 
 
 
 
 
Net investment income
$
349,077

 
659,685

 
467,674


Effective January 1, 2018, new accounting guidance requires that changes in fair values of equity securities be include in the Consolidated Statements of Earnings. For the year ended December 31, 2018, an unrealized (loss) of ($1.8) million is included in net investment income (in the Debt and equities line item in the above table) reflecting the change in fair value during the period. The carrying value of the Company’s portfolio of equity securities was $17.5 million at December 31, 2018.

Debt and equity securities generated approximately 93% of total investment income, excluding derivative gains and losses, in 2018 consistent with prior years. The Company’s strategy is to invest substantially all of its cash flows in fixed debt securities within its guidelines for credit quality, duration, and diversification. The Company's investable funds are derived from incremental cash flow from new business and investment income from its portfolio above its operational requirements to pay policy benefits, commissions, and expenses. The debt securities portfolio grew from $10.2 billion at December 31, 2016 to $10.3 billion at December 31, 2017, but declined to $10.2 billion at December 31, 2018 as cash balances were being built in anticipation of closing an acquisition in early 2019. Investment yields on new bond purchases in 2018 exceeded the portfolio's weighted average yield for the first time in the current decade. The portfolio weighted average yield was approximately 3.90% at December 31, 2018, while the yield on debt security purchases to fund insurance operations increased to 4.20% in 2018 from 3.57% in 2017. Although the yield on new purchases increased in 2018, bond portfolio returns continued to be impacted by higher yielding debt securities maturing or being called by borrowers with the proceeds being reinvested into lower yielding securities.

The Company’s new mortgage loan activity has been relatively low for a number of years given the low level of rates and the higher level of risk associated with commercial properties in this economic environment. Due to a concerted effort, the volume of new mortgage loan originations during 2017 and 2016 increased from prior year levels, however, aggressive interest rates offered by competitors served to hold down new loan originations in 2018. Mortgage loan investment income in 2018 and 2017 benefited from incremental contributions from loan prepayment fees and profit participation receipts during the year. Policy loan and other invested asset balances outstanding have remained relatively stable over the past few years. As noted above, the company maintained elevated short-term investment balances during the latter part of 2018 in anticipation of closing the acquisition of target companies in early 2019.


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In order to evaluate underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding derivative gain (loss), which is a common practice in the insurance industry.  Net investment income and average invested assets shown below includes cash and cash equivalents. Net investment income performance is summarized as follows:

 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(In thousands except percentages)
 
 
 
 
 
 
 
Excluding derivatives:
 
 
 
 
 
 
Net investment income
 
$
429,081

 
436,810

 
439,310

Average invested assets, at amortized cost
 
$
10,758,315

 
10,623,632

 
10,406,589

Annual yield on average invested assets
 
3.99
%
 
4.11
%
 
4.22
%
 
 
 
 
 
 
 
Including derivatives:
 
 

 
 

 
 

Net investment income
 
$
349,077

 
659,685

 
467,674

Average invested assets, at amortized cost
 
$
10,863,022

 
10,781,320

 
10,486,115

Annual yield on average invested assets
 
3.21
%
 
6.12
%
 
4.46
%

The decline in average invested asset yield, excluding derivatives, from 2016 to 2017 and to 2018 is due to the Company continuing to obtain low yields on newly invested cash inflows as higher yielding assets mature or are called. The pattern in average invested asset yield, including derivatives, incorporates increases and decreases in the fair value of index options purchased by the company to support its fixed-index products. Fair values of the purchased call options recorded net gains in 2017 and 2016 while recording a loss in 2018 corresponding to the movement in the S&P 500 Index® during these periods (the primary index the Company's fixed-index products employ). Refer to the derivatives discussion following this section for a more detailed explanation.

Other revenues - Other revenues primarily pertain to the Company’s two nursing home operations in Reno, Nevada and San Marcos, Texas. Revenues associated with these operations were $17.2 million, $18.2 million and $18.2 million in 2018, 2017 and 2016, respectively. Beginning in 2017, other revenues also includes the operations of Braker P III ("BP III"), a new subsidiary created at the end of 2016 to own and manage a commercial office building it acquired (Refer to Item 2. Properties in Part I of this filing for further discussion). Revenues associated with BP III were $3.2 million and $1.5 million in December 31, 2018 and 2017, respectively, reflecting additional tenant leases executed. Other revenues also includes the annual revaluation of the fair value of the life interest in the Libbie Shearn Moody Trust.

Derivative gain (loss) - Index options are derivative financial instruments used to hedge the equity return component of the Company’s fixed-index products.  Derivative gain or loss includes the amounts realized from the sale or expiration of the options. Since the index options do not meet the requirements for hedge accounting under GAAP, they are marked to fair value on each reporting date and the resulting unrealized gain or loss is reflected as a component of net investment income.

Gains and losses from index options are substantially due to changes in equity market conditions.  Index options are intended to act as hedges to match the returns on the product’s underlying reference index and the rise or decline in the index relative to the index level at the time of the option purchase which causes option values to likewise rise or decline. As income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the Company’s fixed-index products also fluctuates in a similar manner and direction. During 2017 and 2016, the reference indices increased and the Company recorded each year an overall gain from index options with a corresponding increase in contract interest expense in an amount relative to the gains recorded. In 2018, the reference indices decreased and an overall loss from index options was incurred and contract interest expense similarly declined.


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The table below summarizes the derivative gain (loss) amounts and total contract interest by year.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Unrealized gain (loss)
$
(191,654
)
 
74,607

 
92,559

Realized gain (loss)
111,650

 
148,268

 
(64,195
)
 
 
 
 
 
 
Total gain (loss) included in net investment income
$
(80,004
)
 
222,875

 
28,364

 
 
 
 
 
 
Total contract interest
$
136,055

 
437,019

 
248,390


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

The financial statement investment spread, the difference between investment income and interest credited to contractholders, is subject to variations from option performance during any given period. For example, many of the company's equity-index annuity products provide for the collection of asset management fees. These asset management fees are assessed when returns on expiring options are positive, and they are collected prior to passing any additional returns above the assessed management fees to the policy contractholders. During periods of positive returns, the collected asset management fees serve to increase the financial statement spread by increasing option realized gains reported as investment income in an amount greater than interest credited to policy contractholders which is reported as contract interest expense. Asset management fees collected in 2018, 2017, and 2016 were $24.3 million, $31.8 million, and $6.4 million, respectively.

Net realized investment gains (losses) - Realized gains (losses) on investments include proceeds on bond calls and sales as well as impairment write-downs on investments in debt securities, mortgage loans, and real estate. The net investment gains reported in 2018 consisted of gross gains of $8.5 million, primarily from calls of debt securities, offset by gross losses of $0.0 million, which included no other-than-temporary impairment losses. Included in the gross gains in 2018 is the sale of previously occupied home office property located in Austin, Texas of approximately of $1.8 million. Included in the gross gains in 2017 is approximately $2.3 million realized from a partial sale of the Company's previous home office land property to the Texas Department of Transportation to be used in the construction of roadway expansion.

The Company records impairment write-downs when a decline in value is considered to be other-than-temporary and full recovery of the investment is not expected. Impairments due to credit factors are recorded in the Company’s Consolidated Statements of Earnings while non-credit (liquidity) impairment losses are included in the Consolidated Statements of Comprehensive Income (Loss).  
 
 
 
 
 
 
Equity impairments (common stocks) represent a mark-to-market write-down on securities in which the market discount to book value was considered significant and had been maintained for several reporting periods. Prior to 2018, market value changes in equity security holdings were recorded through Other Comprehensive Income as a component of Stockholders' Equity. Effective January 1, 2018, the accounting guidance for equity securities was amended requiring that market value changes be recorded as a component of investment income in the Consolidated Statements of Earnings in the period of change. This guidance caused the impairment analysis of equity securities to be not applicable going forward. Equity securities represent 0.2% of invested assets and individual holdings have an average cost basis of approximately $84,000.


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Benefits and Expenses. The following details benefits and expenses.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Life and other policy benefits
$
65,297

 
71,485

 
65,529

Amortization of deferred policy acquisition costs
114,771

 
114,387

 
121,139

Universal life and annuity contract interest
136,055

 
437,019

 
248,390

Other operating expenses
93,969

 
107,002

 
94,448

 
 
 
 
 
 
Totals
$
410,092

 
729,893

 
529,506


Life and other policy benefits - Life and other policy benefits include death claims of $44.9 million, $38.6 million and $31.3 million for 2018, 2017 and 2016, respectively. While death claim amounts are subject to variation from period to period, the Company’s mortality experience has generally been consistent with or better than its product pricing assumptions. Mortality exposure is managed through reinsurance treaties under which the Company's retained maximum net amount at risk on any one life is capped at $500,000.

Life and other policy benefits also includes policy liabilities held associated with the company's traditional life products, including riders such as the company guaranteed minimum withdrawal benefit rider ("WBR"), a popular rider to its equity-indexed annuity products. The increases in these liabilities were $7.3 million, $17.9 million, and $17.5 million in 2018, 2017, and 2016, respectively. In 2018, the company unlocked its policy benefit reserves associated with the WBR which resulted in a decrease to the policy benefit liability (and policy benefit expenses) during the period of $15.7 million. The primary unlocking adjustment included within this amount was an adjustment of the assumed rate of election by policyholders taking withdrawal payments to a rate consistent with actual experience (which was lower than that previously assumed). In 2016, the company also recorded a prospective unlocking adjustment of WBR, the effect of which was to decrease WBR reserves by $3.1 million which decreased life and other policy benefits by a like amount.

Amortization of deferred policy acquisition costs - Life insurance companies are required to defer certain expenses that vary with, and are primarily related to, the cost of acquiring new business.  The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses.  Recognition of these deferred policy acquisition costs (“DPAC”) as an expense in the Consolidated Financial Statements occurs over future periods in relation to the expected emergence of profits priced into the products sold.  This emergence of profits is based upon assumptions regarding premium payment patterns, mortality, persistency, investment performance, and expense patterns. Companies are required to review universal life and annuity contract assumptions periodically to ascertain whether actual experience has deviated significantly from that assumed. If it is determined that a significant deviation has occurred, the emergence of profits pattern is to be "unlocked" and reset based upon the actual experience. DPAC balances are also adjusted each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience (“true-up”) with the adjustment reflected in current period amortization expense. In accordance with GAAP guidance, the Company must also write off deferred acquisition costs and unearned revenue liabilities upon internal replacement of certain contracts as well as annuitizations of deferred annuities.

The following table identifies the effects of unlocking adjustments on DPAC balances recorded through amortization expense separate from recurring amortization expense components for 2018, 2017 and 2016.

 
Years Ended December 31,
Amortization of DPAC
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Unlocking adjustments
$
(950
)
 
(11,857
)
 
(13,840
)
Other amortization components
115,721

 
126,244

 
134,979

 
 
 
 
 
 
Totals
$
114,771

 
114,387

 
121,139



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In 2018, the company unlocked its DPAC balances associated with its Life and Annuity segments for: (1) mortality, extended death benefit reserves, and the investment yield supporting universal life policy liabilities on its Life segment which collectively increased amortization expense by $1.2 million; and (2) mortality, the election rate of the company's withdrawal benefit rider, and the investment yield supporting annuity contract accounts which collectively decreased amortization expense by $2.2 million for the Annuity segment.

In 2017, the Company unlocked its DPAC balance for: (1) International life favorable mortality, better than expected persistency from disengaged countries, and enforcement of an interest rate clawback on certain universal life policies which collectively reduced amortization expense by $28.0 million; (2) Annuity surrender/annuitization assumptions and tighter crediting rate spreads which increased amortization by $15.1 million; and (3) Domestic and International life crediting rate spreads on certain equity-indexed universal life products which increased amortization expense by $1.1 million.

During 2016, the Company unlocked its DPAC balance for: (1) favorable mortality in the Domestic life insurance segment resulting in reduced amortization expense by $8.2 million; (2) International life insurance favorable mortality, increased cost of insurance charges that had been implemented during the year, and higher lapse assumptions for policies associated with residents in "disengaged countries" (countries which the Company ceased accepting applications from residents in 2015) collectively decreasing DPAC amortization expense by $7.3 million; (3) updating surrender and annuitization rates on indexed, single tier, and two tier annuities which increased DPAC amortization expense by $3.7 million; and (4) updating DPAC future profit projections for universal life insurance riders which had not been previously included in software models which resulted in decreasing DPAC amortization expense by $2.1 million.

As the DPAC balance is an asset on the Company's Consolidated Balance Sheets, GAAP provides for an earned interest return on the unamortized balance each period. The earned interest serves to increase the DPAC balance and reduce other amortization component expense. The rate at which the DPAC balance earns interest is the average credited interest rate on the company's universal life and annuity policies in force, including credited interest on equity-indexed policies. The amount of earned interest on DPAC balances recorded was $29.1 million, $33.5 million, and $10.5 million in 2018, 2017, and 2016, respectively, decreasing other amortization component expense.

Universal life and annuity contract interest - The Company closely monitors credited interest rates on interest sensitive policies, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions.  As long-term interest rates change, the Company's credited interest rates are often adjusted accordingly, taking into consideration the factors described above. The difference between yields earned on investments over policy credited rates is often referred to as the "interest spread".

The Company's approximated average credited rates, excluding and including equity-indexed products, were as follows:
 
 
December 31,
 
December 31,
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
 
(Excluding fixed-index products)
 
(Including fixed-index products)
 
 
 
 
 
 
 
 
 
 
 
 
Annuity
2.07
%
 
2.19
%
 
2.27
%
 
1.13
%
 
3.81
%
 
1.97
%
Interest sensitive life
3.37
%
 
3.41
%
 
3.62
%
 
2.61
%
 
7.77
%
 
4.28
%

Contract interest reported in financial statements also encompasses the performance of the index options associated with the Company's fixed-index products. As previously noted, the market value changes of these derivative features resulted in net realized and unrealized gains (losses) in 2018, 2017 and 2016 of $(80.0) million, $222.9 million and $28.4 million, respectively. In 2018, this figure was comprised of unrealized losses totaling $(191.7) million offset by realized gains of $111.7 million. These returns similarly increased/(decreased) the computed average credited rates for the periods shown. Policyholders of equity-indexed products cannot receive an interest credit below 0% according to the policy contract terms.


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Generally, the impact of the market value change of index options on asset values aligns closely with the movement of the embedded
derivative liability held for the Company's fixed-index products such that the net effect upon pretax earnings is negligible (i.e. net
realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). However, other aspects of the embedded derivatives can cause deviations to occur between the change in index option asset values included in net investment income and the change in the embedded derivative liability included in contract interest. As noted in the discussion of net investment income, the collection of asset management fees in a period can cause investment income to increase marginally higher than contract interest expense since these collected fees are deducted from indexed interest credited to policyholders. During the years ended December 31, 2018, 2017, and 2016, asset management fees collected were $24.3 million, $31.8 million, and $6.4 million, respectively.

Accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year as an offset to projected policyholder interest credits. The projections are based upon the performance of options as of the year-end balance sheet dates. The change in this projection, plus or minus, is included in contract interest expense for the period being reported on. During the years ended December 31, 2018, 2017, and 2016, contract interest was increased/(decreased) by $17.6 million, $6.9 million, and $(15.9) million, respectively, for this occurrence. The increases to contract interest expense reflect lower estimated asset management fees to be collected while the decrease to contract interest expense represents an increase to the amount of asset management fees estimated to be collected. Refer to Note 15 Derivative Investments in the accompanying Notes to Consolidated Financial Statements for further information.

Contract interest expense also includes reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitizations, and amortization of deferred sales inducement balances. These items are offset by policy charges assessed for policies having the withdrawal benefit rider. As changes in these items collectively impact contract interest expense, financial statement interest spread is also affected. For the years ended December 31, 2018, 2017, and 2016 the changes in these items increased contract interest expense by $22.8 million, $38.1 million, and $46.9 million, respectively.

Similar to deferred policy acquisition costs, the company defers sales inducements in the form of first year credited interest bonuses on annuity products that are directly related to the production of new business. These bonus interest charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest. In addition, deferred sales inducement balances are also reviewed periodically to ascertain whether actual experience has deviated significantly from that assumed (unlock) and are adjusted to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (true-up). These adjustments, plus or minus, are included in contract interest expense. As part of the DPAC balance unlockings for the Annuity segment previously discussed for 2018, 2017, and 2016, the Company also unlocked its deferred sales inducement balance. The effect of the prospective unlocking was to increase the deferred sales inducement balance by $1.3 million in 2018 (and decrease contract interest expense), and to decrease the deferred sales inducement balance by $4.3 million, and $1.7 million, in 2017, and 2016, respectively, and thereby increasing contract interest expense by a related amount for each period.

As previously discussed in the amortization of deferred policy acquisition costs section, in 2018 the company unlocked its life insurance DPAC balance for mortality experience and extended benefit policy reserves. While these changes had a relatively modest impact on the DPAC unlocking, they had a larger effect on the policy benefits liability balance. The impact of these unlocking adjustments upon policy benefit reserves was an increase of $14.2 million. This increase is included as a component of contract interest expense in 2018. Similarly, the company unlocked its excess benefit reserves (International life) and two tier annuity reserves in 2017 and 2016. The unlockings of these reserves increased contract interest expense by $13.7 million and $3.0 million in 2017 and 2016, respectively.


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Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, nursing home expenses, real estate expenses and compensation costs. These are summarized in the table that follows.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
General insurance expenses
$
29,028

 
38,074

 
31,298

Nursing home expenses
15,935

 
16,804

 
17,924

Compensation expenses
27,340

 
27,146

 
28,151

Commission expenses
8,816

 
10,738

 
11,206

Real estate expenses
5,125

 
2,993

 
—

Taxes, licenses and fees
7,725

 
11,247

 
5,868

 
 
 
 
 
 
Totals
$
93,969

 
107,002

 
94,447


General insurance expenses include expenditures for software and amortization of previously capitalized information technology
expenditures. The Company has progressively released into production components of system development over the past couple of years initiating amortization of these capitalized costs. Software costs, including amortization expense, for 2018, 2017, and 2016 were $11.3 million, $9.0 million, and $8.6 million, respectively. General insurance expenses also include payments and provisions made relating to potential or contingent legal liabilities. Expenses related to these items were $(1.8) million, $8.5 million, and $4.2 million in 2018, 2017, and 2016, respectively. The 2016 amount includes a $1.3 million payment (including interest and expenses) to insurance authorities in Brazil pertaining to administrative proceedings in that country and a $2.9 million provision for an annuity contract matter in Puerto Rico in litigation. The 2018 amount reflects settlement of the annuity contract matter in Puerto Rico for $1.0 million and the release of the excess provision recorded in 2016. The 2017 amount pertains to an $8.2 million loss contingency recorded by the Company at December 31, 2017 related to excess premiums on certain of its policies. Refer to the Legal Proceedings narrative in Part I, Item 3 of this Form 10-K for further discussion of litigation matters.
  
Nursing home expenses reflect the operations of the Company's two facilities in Reno, Nevada and San Marcos, Texas. The lower expense level in 2018 compared to the prior two years corresponds with decreased revenues from lower census figures and the resultant cost containment measures undertaken to manage profitability.

Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock options and stock appreciation rights ("SARs"), restricted stock units ("RSUs"), and performance share units ("PSUs"). The related share-based compensation costs move in tandem not only with the number of awards outstanding but also with the movement in the market price of the Company's Class A common stock as a result of marking the stock options, SARs, and RSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positive or negative in any given period. In the amounts shown above, share-based compensation expense totaled $1.4 million in 2018, $5.0 million in 2017 and $7.9 million in 2016. These expense levels reflect a change in the Company's Class A common share price from $251.94 at December 31, 2015 to $310.80 at December 31, 2016 to $331.02 at December 31, 2017 and to $300.70 at December 31, 2018. In addition to the changes in price of the Company's Class A common shares, there were 12,590; 22,184; and 14,643 SARs granted to officers of National Western in 2018, 2017 and 2016, respectively.

Real estate expenses pertain to the commercial building operated by Braker P III. The building was acquired at year-end 2016 and the company relocated to this facility during the fourth quarter of 2017. The higher operating expenses for 2018 relative to 2017 reflects the company's occupancy as well as other third party tenants added during 2018.


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Taxes, licenses and fees include premium taxes and licensing fees paid to state insurance departments, guaranty fund assessments, the company portion of social security and Medicare taxes, real estate taxes, state income taxes, and other state and municipal taxes. State income taxes are generally determined by apportioning the company's federal taxable income based upon premium generated from a particular state as a percentage of total premiums. Federal taxable income is derived from the company's statutory financial results. State income tax expense was $0.8 million, $2.5 million, and $0.7 million in 2018, 2017, and 2016, respectively. Premium tax expenses for the years ended December 31, 2018, 2017, and 2016 were $3.4 million, $4.0 million, and $2.6 million, respectively. The 2017 expense also includes withholding tax liabilities for international policy distributions not previously withheld on.
 
Segment Operations

Summary of Segment Earnings

A summary of segment earnings from continuing operations for the years ended December 31, 2018, 2017 and 2016 is provided below.  The segment earnings exclude realized gains and losses on investments, net of taxes.

 
Domestic Life Insurance
 
International Life Insurance
 
Annuities
 
All Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Segment earnings (loss):
 
 
 
 
 
 
 
 
 
2018
$
1,401

 
33,704

 
53,371

 
21,628

 
110,104

2017
2,835

 
59,025

 
17,409

 
21,556

 
100,825

2016
3,411

 
50,942

 
22,687

 
15,357

 
92,397



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Domestic Life Insurance Operations

A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Premiums and other revenues:
 
 
 
 
 
Premiums and contract revenues
$
40,879

 
37,387

 
34,728

Net investment income
23,579

 
73,866

 
39,691

Other revenues
19

 
46

 
119

 
 
 
 
 
 
Total premiums and other revenues
64,477

 
111,299

 
74,538

 
 
 
 
 
 
Benefits and expenses:
 

 
 

 
 

Life and other policy benefits
21,688

 
18,565

 
17,908

Amortization of deferred policy acquisition costs
11,539

 
10,377

 
4,125

Universal life insurance contract interest
8,826

 
59,865

 
28,606

Other operating expenses
20,731

 
18,842

 
18,739

 
 
 
 
 
 
Total benefits and expenses
62,784

 
107,649

 
69,378

 
 
 
 
 
 
Segment earnings (loss) before Federal income taxes
1,693

 
3,650

 
5,160

 
 
 
 
 
 
Provision (benefit) for Federal income taxes
292

 
815

 
1,749

 
 
 
 
 
 
Segment earnings (loss)
$
1,401

 
2,835

 
3,411


Revenues from domestic life insurance operations include life insurance premiums on traditional type products and contract revenues from universal life insurance.  Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period.  A comparative detail of premiums and contract revenues is provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Universal life insurance revenues
$
45,371

 
40,970

 
37,427

Traditional life insurance premiums
5,552

 
5,333

 
5,320

Reinsurance premiums
(10,044
)
 
(8,916
)
 
(8,019
)
 
 
 
 
 
 
Totals
$
40,879

 
37,387

 
34,728


The Company’s domestic life insurance in force, in terms of policy counts, has been declining for some time. The pace of new policies issued has lagged the number of policies terminating from death or surrender by roughly a two-to-one rate over the past several years causing a declining level of insurance in force from which contract revenue is received. Consequently, the number of domestic life insurance policies in force has declined from 51,600 at December 31, 2016 to 50,200 at December 31, 2017 and to 49,000 at December 31, 2018. Policy lapse rates in 2018 increased to 6.5% from 6.0% in 2017 but were less than the rate in 2016 of 7.5%.

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Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. The number of domestic policies issued during 2018 was 28% higher than in 2017 and the volume of insurance issued was 36% more than that in 2017.

In 2013 the Company began deferring the premium load on its highest selling domestic product, single pay life insurance. Amounts deferred are amortized into revenues over future periods corresponding with the duration of the policies. Initially, the premium load amounts deferred exceeded the amounts amortized back into revenues. However, beginning in 2016 the cumulative amounts deferred reached a level such that the current year revenue amortization now exceeds the current period deferral resulting in net increasing revenue from this accounting method.

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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Universal life insurance:
 
 
 
 
 
First year and single premiums
$
169,363

 
132,358

 
114,118

Renewal premiums
19,538

 
20,117

 
20,155

 
 
 
 
 
 
Totals
$
188,901

 
152,475

 
134,273


During the past several years the company has achieved some success in growing dollar amount of sales of its domestic life insurance new business. Sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products are targeting wealth transfer strategies involving the movement of accumulated wealth in alternative investment vehicles, including annuities, into life insurance products. As a result, renewal premium levels have not been exhibiting a corresponding level of increase.

Net investment income for this segment of business, excluding derivative gain/(loss), has been gradually increasing due to the increased new business activity described above (single premium policies) and a higher level of investments needed to support the corresponding growth in policy obligations, especially those for single premium policies. The increase in net investment income has been partially muted by lower investment yields from debt security investment purchases during this time frame. Net investment income also includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal life products. A detail of net investment income for domestic life insurance operations is provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Net investment income (excluding derivatives)
$
41,123

 
36,579

 
33,331

Derivative gain (loss)
(17,544
)
 
37,287

 
6,360

 
 
 
 
 
 
Net investment income
$
23,579

 
73,866

 
39,691

 
 
 
 
 
 
Universal life insurance contract interest
$
8,826

 
59,865

 
28,606



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Life and policy benefits for a smaller block of business are subject to variation from period to period. Claim count activity during 2018 increased 19% compared to 2017 while the average net claim amount increased to $31,800 from $27,700. The low face amount per claim relative to the current issued amounts of insurance per policy reflects the older block of domestic life insurance policies sold which were final expense type products (i.e. purchased to cover funeral costs). The increase in the average net claim amount reflects claims from more recent policy sales (single premium wealth transfer products) which have much higher face amounts of insurance coverage per policy. GAAP reporting requires that claims be recorded after any cash value amounts that have been accumulated in the policies. While domestic claims increased in 2018 compared to 2017, the accumulated cash values on the claims incurred was substantially higher in 2018 (which reduces the net amount at risk on policies). The company's overall mortality experience for this segment has been better than pricing assumptions.

As noted previously in the discussion of results from Consolidated Operations, the company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience with the adjustment reflected in current period amortization expense. To the extent required, the company may also record unlocking adjustments to DPAC balances. The following table identifies the effects of unlocking adjustments on domestic life insurance DPAC balances recorded through amortization expense separate from recurring amortization expense components for 2018, 2017 and 2016.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Amortization of DPAC
 
 
 
 
 
Unlocking adjustments
$
1,015

 
795

 
(9,000
)
Other amortization components
10,524

 
9,582

 
13,125

 
 
 
 
 
 
Totals
$
11,539

 
10,377

 
4,125


The company unlocked the DPAC balances associated with its Domestic Life segment for favorable mortality, extended death benefit reserves, and the investment portfolio yield supporting universal life policy liabilities in 2018. The effect of the prospective unlocking was to decrease DPAC balances by $1.0 million (and increase amortization expense). During 2017, the company unlocked the interest crediting rate spread on certain equity-indexed universal life products which increased amortization expense by $0.8 million. During 2016 the Company unlocked its DPAC balance for favorable mortality and for future profit projections related to universal life insurance riders which had not been previously included in DPAC actuarial software models. These unlockings decreased DPAC amortization expense.

Although not an unlocking, during the fourth quarter of 2018 the company successfully converted its reserve modeling for excess death benefit reserves on UL riders to its existing actuarial software platform. The implementation refined the company's estimate increasing reserves and included an adjustment decreasing the Domestic Life DPAC balance (increasing amortization expense). The amount of the amortization expense increase was $0.8 million.

Contract interest expense includes the fluctuations that are the result of the effect upon the embedded derivative for the performance of the underlying equity indices associated with fixed-indexed universal life products. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact for the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for approximately the same amounts as in net investment income for each respective period. As part of the 2018 unlockings discussed above, the company reduced its excess benefit reserve by $1.0 million which served to decrease contract interest expense by a like amount.

Operating expenses are allocated to lines of business based upon a functional cost analysis of the business activity giving rise to incurred expenses. With the company's decision to cease accepting applications from international residents and the decline in annuity sales volumes, a higher proportion of operating expenses were allocated to the Domestic Life segment given the increase in activity in this segment and its greater share of the overall operational resources.


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International Life Insurance Operations

The Company's international life operations have been a steady contributor to the Company's overall earnings performance and represented a niche where the Company believed it had a competitive advantage historically. A stable population of distribution relationships developed over decades of operations had provided the Company with a persistent block of business.

A comparative analysis of results of operations for the Company's international life insurance segment is detailed below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Premiums and other revenues:
 
 
 
 
 
Premiums and contract revenues
$
108,923

 
120,852

 
125,775

Net investment income
22,603

 
68,399

 
42,331

Other revenues
87

 
83

 
321

 
 
 
 
 
 
Total premiums and other revenue
131,613

 
189,334

 
168,427

 
 
 
 
 
 
Benefits and expenses:
 

 
 

 
 

Life and other policy benefits
22,333

 
23,981

 
18,759

Amortization of deferred policy acquisition costs
24,358

 
(1,473
)
 
18,027

Universal life insurance contract interest
24,590

 
54,502

 
28,636

Other operating expenses
19,593

 
36,341

 
25,933

 
 
 
 
 
 
Total benefits and expenses
90,874

 
113,351

 
91,355

 
 
 
 
 
 
Segment earnings before Federal income taxes
40,739

 
75,983

 
77,072

 
 
 
 
 
 
Provision (benefit) for Federal income taxes
7,035

 
16,958

 
26,130

 
 
 
 
 
 
Segment earnings
$
33,704

 
59,025

 
50,942


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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Universal life insurance revenues
$
103,704

 
115,112

 
120,033

Traditional life insurance premiums
12,739

 
13,628

 
13,956

Reinsurance premiums
(7,520
)
 
(7,888
)
 
(8,214
)
 
 
 
 
 
 
Totals
$
108,923

 
120,852

 
125,775



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Universal life revenues and operating earnings are generated from the amount of life insurance in force and new sales activity. Over the past three years, the volume of insurance in force for this segment has contracted from $17.9 billion at December 31, 2016 to $16.6 billion at December 31, 2017 and to $15.4 billion at December 31, 2018. The decline in volume of in force reflect the company's decision at the end of 2015 to disengage from certain countries. In addition, during 2018 the company made the decision to cease accepting international policy applications from residents from all remaining countries. Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. During 2018, the number of international life policies decreased 48% from the prior year while the volume of insurance issued decreased approximately 50% from the level in 2017.

A third component of international universal life revenues include surrender charges assessed upon surrender of contracts by policyholders. In 2015, termination activity levels increased in conjunction with the company's decision to cease accepting applications from residents in Brazil and certain other countries resulting in additional surrender charge fee revenues. This activity continued into 2016 and 2017 but subsided in 2018. The following table illustrates National Western's recent international life termination experience.

Volume In Force Terminations
Amount in $’s
 
Annualized Termination Rate
 
(millions)
 
 
 
 
 
 
Year Ended December 31, 2018
$
1,706.3

 
10.0
%
Year Ended December 31, 2017
2,309.7

 
12.2
%
Year Ended December 31, 2016
2,340.6

 
11.6
%
Year Ended December 31, 2015
2,659.1

 
12.3
%
Year Ended December 31, 2014
1,825.5

 
8.4
%

The higher incidence of terminations that occurred in the 2015 through 2017 time period related to policies with residents of the countries from which the company discontinued accepting applications in late 2015. As a result of the higher termination incidence, the company unlocked its DPAC balances for this segment of the business during 2016 to incorporate a greater lapse assumption, among other things.

As noted previously, premiums collected on universal life products are not reflected as revenues in the Company's Consolidated Statements of Earnings in accordance with GAAP.  Actual international universal life premiums collected are detailed below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Universal life insurance:
 
 
 
 
 
First year and single premiums
$
11,454

 
16,024

 
21,534

Renewal premiums
78,611

 
86,461

 
94,596

 
 
 
 
 
 
Totals
$
90,065

 
102,485

 
116,130


National Western’s most popular international products have been its fixed-index universal life products in which the policyholder can elect to have the interest rate credited to their policy account values linked in part to the performance of an outside equity index. These products issued were not generally available in the local markets sold. Included in the totals in the above table are collected premiums for fixed-index universal life products of approximately $57.8 million, $65.6 million and $74.9 million for the years ended 2018, 2017 and 2016, respectively. The declining trend in renewal premiums during these periods corresponds with the decline in policies in force due to reduced sales activity and increased termination activity as discussed above.


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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Net investment income (excluding derivatives)
$
33,264

 
35,117

 
36,499

Derivative gain (loss)
(10,661
)
 
33,282

 
5,832

 
 
 
 
 
 
Net investment income
$
22,603

 
68,399

 
42,331

 
 
 
 
 
 
Universal life insurance contract interest
$
24,590

 
54,502

 
28,636



Life and policy benefits primarily consist of death claims on policies. National Western’s clientele for international products are generally wealthy individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased have historically tended to be larger amounts. In the year ended December 31, 2018, the average face amount of insurance purchased was approximately $297,100, reflecting a level somewhat lower than that of immediately prior years reflecting the company's decision to disengage from certain markets and ultimately to cease accepting applications for international life products from international residents. Life and policy benefit expense for the international life segment reflects the larger policies historically purchased, however mortality due to natural causes is comparable to that in the United States. The company's maximum risk exposure per insured life is capped at $500,000 through reinsurance. The average international life net claim amount (after reinsurance) in 2018 increased to $205,200 from $152,200 while the number of claims incurred declined 18% during 2018. Measured over a period of years, the Company's international life mortality experience has generally been better than product pricing assumptions.

The company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels, and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on international life insurance DPAC balances recorded through amortization expense separate from recurring amortization components for 2018, 2017 and 2016.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Amortization of DPAC
 
 
 
 
 
Unlocking adjustments
$
251

 
(27,732
)
 
(8,490
)
Other amortization components
24,107

 
26,259

 
26,517

 
 
 
 
 
 
Totals
$
24,358

 
(1,473
)
 
18,027


In 2018, the company unlocked DPAC balances associated with its International Life segment for extended death benefit reserves and the investment portfolio yield supporting universal life policy liabilities. The effect of the prospective unlocking was to decrease DPAC balances by $0.3 million (and increase amortization expense). In 2017, the company unlocked the DPAC balance for favorable mortality, lower than expected lapses from disengaged countries, the implementation of an interest crediting clawback on certain universal life policies, and the interest crediting rate spread on one of its equity-indexed universal life products which collectively decreased amortization expense by $27.7 million. During 2016, the Company unlocked the DPAC balance for: (1) favorable mortality, (2) higher cost of insurance charges which had been implemented, (3) increased lapse rates for disengaged countries, and (4) for future profit projections related to universal life insurance riders which had not been previously included in DPAC actuarial software models, the result of which collectively decreased amortization expense by $8.5 million.

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Although not an unlocking, during the fourth quarter of 2018 the company successfully converted its reserve modeling for excess death benefit reserves on UL riders to its existing actuarial software platform. The implementation refined the company's estimate increasing these reserves and included an adjustment increasing the International Life DPAC balance (decreasing amortization expense). The amount of the amortization expense decrease was $3.6 million.

Contract interest expense includes the fluctuations that are the result of the effect upon the embedded derivative for the performance of the underlying equity indices associated with fixed-indexed universal life products. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact for the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for approximately the same amounts as in net investment income for each respective period. As part of the 2018 unlockings discussed above, the company increased its excess benefit reserve by $14.1 million which served to increase contract interest expense by a like amount. In addition, as part of the unlocking adjustments made during 2016, the company's benefit reserves for the International Life segment were decreased by $6.2 million. The effect of this decrease was to correspondingly decrease contract interest for the year by a like amount.

Similar to the Domestic Life segment, operating expenses are allocated to lines of business based upon a functional cost analysis of the business activity giving rise to incurred expenses. As discussed in the Domestic Life segment, a greater proportion of the Company's overall operating expenses were allocated toward the Domestic Life segment and away from the International Life and Annuity segments due to decreased activity in the latter two segments. In 2017, the potential and contingent legal liability provisions discussed in the Consolidated Operations section were primarily allocated to the International Life segment.

Annuity Operations

National Western's annuity operations are exclusively in the United States. A comparative analysis of results of operations for the Company's annuity segment is detailed below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Premiums and other revenues:
 
 
 
 
 
Premiums and contract revenues
$
23,694

 
20,691

 
22,220

Net investment income
276,123

 
490,706

 
362,700

Other revenues
66

 
109

 
254

 
 
 
 
 
 
Total premiums and other revenues
299,883

 
511,506

 
385,174

 
 
 
 
 
 
Benefits and expenses:
 

 
 

 
 

Life and other policy benefits
21,276

 
28,939

 
28,862

Amortization of deferred policy acquisition costs
78,874

 
105,483

 
98,987

Annuity contract interest
102,639

 
322,652

 
191,148

Other operating expenses
32,584

 
32,021

 
31,852

 
 
 
 
 
 
Total benefits and expenses
235,373

 
489,095

 
350,849

 
 
 
 
 
 
Segment earnings before Federal income taxes
64,510

 
22,411

 
34,325

 
 
 
 
 
 
Provision (benefit) for Federal income taxes
11,139

 
5,002

 
11,638

 
 
 
 
 
 
Segment earnings
$
53,371

 
17,409

 
22,687



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Premiums and contract charges primarily consist of surrender charge income recognized on terminated policies. The amount of the surrender charge income recognized is determined by the volume of surrendered contracts as well as the duration of each contract at the time of surrender given the pattern of declining surrender charge rates over time that is common to most annuity contracts. The Company's lapse rate for annuity contracts during 2018 was 7.5%, an increase from a rate of 6.0% in 2017 and the 6.5% rate experienced in 2016. Annuity contracts with fixed interest rates are more prone to terminate during periods of rising interest rates as was the situation during 2018.

Deposits collected on annuity contracts are not reflected as revenues in the Company's Consolidated Statements of Earnings in accordance with GAAP.  Actual annuity deposits collected are detailed below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Fixed-index annuities
$
382,153

 
578,647

 
685,023

Other deferred annuities
22,883

 
23,926

 
38,262

Immediate annuities
6,172

 
6,226

 
7,455

 
 
 
 
 
 
Totals
$
411,208

 
608,799

 
730,740


Fixed-index products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since National Western does not offer variable products or mutual funds, fixed-index products provide an important alternative to the company's existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were 93%, 95% and 94% for the years ended December 31, 2018, 2017 and 2016, respectively. The percentage of fixed-index products to total annuity sales reflects the low interest rate environment and the ongoing bull market in equities.

Some of the company's deferred products, including fixed-index annuity products, contain a first year interest bonus ranging from 1% to 7% depending upon the product, in addition to the base first year interest rate. Other products include a premium bonus ranging from 2% to 10% which is credited to the account balance when premiums are applied. These bonus rates are deferred in conjunction with other capitalized policy acquisition costs. The amount deferred to be amortized over future periods amounted to approximately $7.5 million, $17.9 million and $19.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. Amortization of deferred sales inducements is included as a component of annuity contract interest as described later in this discussion of Annuity Operations.

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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Net investment income (excluding derivatives)
$
327,922

 
338,400

 
346,528

Derivative gain (loss)
(51,799
)
 
152,306

 
16,172

 
 
 
 
 
 
Net investment income
$
276,123

 
490,706

 
362,700

 
 
 
 
 
 
Annuity contract interest
$
102,639

 
322,652

 
191,148


As previously described, derivatives are call options purchased to hedge the equity return component of National Western's fixed-index annuity products with any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, reflected in net investment income. Since the embedded derivative option in the policies is bifurcated when determining the contract reserve liability, the impact of the market value change of index options on asset values generally aligns closely with the movement of the embedded derivative liability such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). See further discussion below regarding contract interest activity.

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Consistent with the domestic and international life segments, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on annuity DPAC balances recorded through amortization expense separate from recurring amortization expense components for 2018, 2017 and 2016.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Amortization of DPAC
 
 
 
 
 
Unlocking adjustments
$
(2,216
)
 
15,080

 
3,650

Other amortization components
81,090

 
90,403

 
95,337

 
 
 
 
 
 
Totals
$
78,874

 
105,483

 
98,987


In 2018, the company unlocked the DPAC balances associated with its Annuity segment for assumptions concerning mortality, the election rate of the company's withdrawal benefit rider, and for the investment portfolio yield supporting annuity contract accounts. The effect of the prospective unlocking was to increase DPAC balances by $2.2 million (and decrease amortization expense). In 2017, the company unlocked the DPAC balance associated with its annuity segment for surrender/annuitization assumptions and interest crediting rate spreads. The effect of the prospective unlocking was to increase amortization expense by $15.1 million. During 2016, the annuity DPAC balance was unlocked for surrender and annuitization rates. The effect of this prospective unlocking was to increase amortization expense by $3.7 million.

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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Fixed-indexed annuities
$
14,861

 
230,936

 
102,107

All other annuities
75,028

 
81,073

 
81,439

 
 
 
 
 
 
Gross contract interest
89,889

 
312,009

 
183,546

Bonus interest deferred and capitalized
(7,546
)
 
(17,901
)
 
(19,302
)
Bonus interest amortization
20,296

 
28,544

 
26,904

 
 
 
 
 
 
Total contract interest
$
102,639

 
322,652

 
191,148



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The fluctuation in reported contract interest amounts for fixed-index annuities is driven by sales levels, the level of the business in force and the effect of positive or negative market returns of option values on projected interest credits. As noted above in the net investment income discussion, the amounts shown for contract interest for fixed-index annuities generally align with the derivative gains/(losses) included in net investment income as the impact of the market change of index options on asset values align closely with the movement of the embedded derivative liability held for these products. As noted in the discussion in the Consolidated Operations section, positive returns on expiring options during 2016 through 2018 led to collection of asset management fees by National Western which are subtracted from contract interest credited to policyholders. This serves to lessen the increase in contract interest expense relative to the option gains reported in the Company's net investment income. Asset management fees collected during 2018, 2017, and 2016 were $24.3 million, $31.8 million, and $6.4 million, respectively.

As previously noted, accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year as an offset to projected policyholder interest credits. The projections are based upon the performance of options as of the year-end balance sheet dates. The change in this projection, plus or minus, is included in contract interest expense for the period being reported on. During the years ended December 31, 2018, 2017, and 2016, contract interest was increased/(decreased) by $17.6 million, $6.9 million, and $(15.9) million, respectively, for this occurrence. The increases to contract interest expense reflect lower estimated asset management fees to be collected while the decrease to contract interest expense represents an increase to the amount of asset management fees estimated to be collected. The Annuity segment contains the products which charge asset management fees.
 
Annuity contract interest includes true-up adjustments for the deferred sales inducement balance which are done each period similar to that done with respect to DPAC balances with the adjustment reflected in current period contract interest expense. To the extent required, the company may also record unlocking adjustments to deferred sales inducement balances in conjunction with DPAC balance unlockings. For the years ended December 31, 2018, 2017, and 2016 bonus interest amortization was increased/(decreased) by $(1.3) million, $4.3 million and $1.7 million, respectively, for unlocking adjustments. The unlocking in 2016, in addition to impacting the DPAC and deferred sales inducement balances, also increased the Company's benefit reserves by $12.2 million for the two-tiered deferred annuity block of business which in turn increased contract interest expense.

Life and policy benefits for the Annuity segment include death claims and benefits associated with the company's withdrawal benefit rider. As part of the unlockings performed in 2018, the company unlocked its policy benefits reserves associated with the assumption regarding policyholder utilization of the withdrawal benefit rider provisions attached to annuity contracts. The assumptions were updated for actual utilization experience which was lower than that previously assumed. The effect of this prospective unlocking was to decrease policy reserves by $15.7 million and to decrease life and policy benefits expense.

As noted in the Domestic Life insurance and International Life insurance segments, the Company's overall operating expenses are allocated based upon functional business activity and volumes. Although annuity sales activity decreased somewhat in 2018 relative to the Domestic and International Life segments, the segment maintained a high level of maintenance expenses for the in force block of business which kept operating expenses at a relatively level amount.

Other Operations

The Company's primary business encompasses its domestic and international life insurance operations and its annuity operations.  However, the Company also has small real estate, nursing home, and other investment operations through its wholly owned subsidiaries. Nursing home operations generated $1.3 million, $1.4 million and $0.3 million of pre-tax earnings in 2018, 2017, and 2016, respectively. Amounts for these periods also include the results of BP III which commenced operations at the beginning of the year. BP III incurred pre-tax losses of $(1.9) and $(1.5) million in 2018 and 2017, respectively.

The remaining pre-tax earnings in Other Operations of $26.8 million, $27.8 million, and $23.0 million for the years ended December 31, 2018, 2017, and 2016, respectively, represents investment income from real estate, municipal bonds, and common and preferred equities held in subsidiary company portfolios principally for tax-advantage purposes. Included in these amounts are semi-annual distributions from a life interest in the Libbie Shearn Moody Trust which is an asset held in NWLSM, Inc. Pretax distributions from this trust were $7.5 million, $6.1 million, and $6.0 million in 2018, 2017, and 2016, respectively. In addition to pretax distributions, these amounts also include additional revenue recorded for annually revaluing the actuarial life interest in the Libbie Shearn Moody Trust.



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INVESTMENTS

General

The Company's investment philosophy emphasizes the careful handling of policyowners' and stockholders' funds to achieve security of principal, to obtain the maximum possible yield while maintaining security of principal, and to maintain liquidity in a measure consistent with current and long-term requirements of the Company.

The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2018 and 2017.  The Company emphasizes investment grade debt securities.

 
December 31, 2018
 
December 31, 2017
 
Carrying Value
 
%
 
Carrying Value
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Debt securities
$
10,231,313

 
96.7
 
$
10,288,155

 
95.2
Mortgage loans
203,180

 
1.9
 
208,249

 
1.9
Policy loans
54,724

 
0.6
 
56,405

 
0.5
Derivatives, index options
14,684

 
0.1
 
194,731

 
1.8
Real estate
35,692

 
0.3
 
37,420

 
0.3
Equity securities
17,491

 
0.2
 
18,478

 
0.2
Other
21,159

 
0.2
 
14,408

 
0.1
 
 
 
 
 
 
 
 
Totals
$
10,578,243

 
100.0
 
$
10,817,846

 
100.0

The Company’s investment portfolio decreased (2)% to $10.6 billion at December 31, 2018 compared to $10.8 billion at December 31, 2017 due primarily to the unrealized loss increases associated with investments reported at fair value (debt securities available for sale, index options and equity securities).  

A portion of the Company’s debt securities are designated in the available for sale portfolio, which is reported at fair market value. Unrealized gains associated with this part of the portfolio were $76.6 million at December 31, 2017 but shifted to an unrealized loss position of $(62.6) million at December 31, 2018 incrementally lowering the total portfolio balance. The increase in the unrealized loss position of the portfolio is largely a consequence of market interest rate levels increasing during 2018.

Derivatives are call options purchased to hedge the interest crediting mechanism associated with the Company's fixed-index universal life and annuity policies. These options are reported on the Consolidated Balance Sheets at fair value in accordance with GAAP. The unrealized loss position of options held at December 31, 2018 was $(72.3) million which was $191.7 million lower than the unrealized gain position at December 31, 2017 of $119.4 million. The decrease is due to the lower equity index level at the end of 2018 relative to the market indice levels at the time outstanding options were purchased.


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Debt Securities

The Company maintains a diversified portfolio which consists mostly of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities primarily include U.S. government agency pass-through securities and collateralized mortgage obligations ("CMO"). The Company's investment guidelines prescribe limitations by type of security as a percent of the total investment portfolio and all holdings were within these threshold limits.  As of December 31, the Company's debt securities portfolio consisted of the following for 2018 and 2017:

 
December 31, 2018
 
December 31, 2017
 
Carrying Value
 
%
 
Carrying Value
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Corporate
$
7,544,831

 
73.7
 
$
7,343,473

 
71.4
Residential mortgage-backed
1,193,016

 
11.7
 
1,301,877

 
12.7
Public utilities
1,014,100

 
9.9
 
1,149,651

 
11.2
State and political subdivisions
457,970

 
4.5
 
467,983

 
4.5
Asset-backed securities
10,051

 
0.1
 
13,544

 
0.1
Foreign governments
10,004

 
0.1
 
10,290

 
0.1
U.S. Treasury
1,341

 
—
 
1,337

 
—
 
 
 
 
 
 
 
 
Totals
$
10,231,313

 
100.0
 
$
10,288,155

 
100.0

Substantially all of the Company’s investable cash flows are directed toward the purchase of long-term debt securities.  The Company’s investment policy calls for investing in debt securities that are investment grade, meet quality and yield objectives, and provide adequate liquidity for obligations to policyholders.  Debt securities with intermediate maturities are targeted by the Company as they more closely match the intermediate nature of the Company’s policy liabilities and provide an appropriate strategy for managing cash flows. The Company holds minimal levels of U.S. Treasury securities due to their low yields and deposits most of these holdings with various state insurance departments in order to meet security deposit on hand requirements in these jurisdictions.

Long-term debt securities purchased to fund insurance company operations are summarized below.

 
Year Ended December 31
 
2018
 
2017
 
(Dollars in thousands)
 
 
 
 
Cost of acquisitions
$
737,223

 
$
840,861

Average S&P quality
BBB+

 
BBB+

Effective annual yield
4.20
%
 
3.57
%
Spread to treasuries
1.29
%
 
1.19
%
Effective duration
8.3 years

 
8.1 years


Rating agencies generally view mortgage-backed securities as having additional risk for insurers holding interest sensitive liabilities given the potential for asset/liability disintermediation. Consequently, the Company holds predominantly agency mortgage-backed securities.  Because mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing in collateralized mortgage obligations ("CMO"), which have more predictable cash flow patterns than pass-through securities.  These securities, known as planned amortization class I ("PAC I"), very accurately defined maturity ("VADM") and sequential tranches are designed to amortize in a more predictable manner than other CMO classes or pass-throughs.  The Company does not purchase tranches, such as PAC II and support tranches, that subject the portfolio to greater than average prepayment risk.  Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.


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In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investments in debt securities.  Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks.  This emphasis is reflected in the high average credit rating of the Company's debt securities portfolio with 99.1% held in investment grade securities.  In the table below, investments in debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.

 
December 31, 2018
 
December 31, 2017
 
Carrying Value
 
%
 
Carrying Value
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
AAA
$
102,240

 
1.0
 
$
114,873

 
1.1
AA
2,083,271

 
20.4
 
2,106,243

 
20.5
A
3,135,471

 
30.6
 
3,199,169

 
31.1
BBB
4,816,117

 
47.1
 
4,766,525

 
46.3
BB and other below investment grade
94,214

 
0.9
 
101,345

 
1.0
 
 
 
 
 
 
 
 
Totals
$
10,231,313

 
100.0
 
$
10,288,155

 
100.0

The investments held in debt securities that are below investment grade are the result of subsequent downgrades of the securities.  These holdings are further summarized below.

 
Below Investment Grade Debt Securities
 
Amortized Cost
 
Carrying Value
 
Fair Value
 
% of Invested Assets
 
(In thousands except percentages)
 
 
 
 
 
 
 
 
December 31, 2018
$
102,938

 
94,214

 
92,711

 
0.9
%
 
 
 
 
 
 
 
 
December 31, 2017
$
100,992

 
101,345

 
101,140

 
0.9
%

The Company's percentage of below investment grade securities compared to total invested assets at December 31, 2018 remained level with that of year-end 2017 as upgrades of several securities, primarily energy-related entities, maturities, and calls by several issuers in this category nearly offset new downgrades.  The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets low compared to industry averages.


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Holdings in below investment grade securities by category as of December 31, 2018 are summarized in the following table including the comparable fair value as of December 31, 2017 for those debt securities rated below investment grade at December 31, 2018. The Company continually monitors developments in these industries for issues that may affect security valuation.

 
 
Below Investment Grade Debt Securities
Industry Category
 
Amortized Cost 2018
 
Carrying Value 2018
 
Fair Value
 2018
 
Fair Value
 2017
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
$
4,711

 
4,823

 
4,909

 
4,926

Residential mortgage-backed
 
962

 
878

 
878

 
936

Oil & gas
 
12,005

 
7,995

 
7,995

 
11,316

Manufacturing
 
65,293

 
60,880

 
59,291

 
62,361

Other
 
19,967

 
19,638

 
19,638

 
20,650

 
 
 
 
 
 
 
 
 
Totals
 
$
102,938

 
94,214

 
92,711

 
100,189


The Company closely monitors its below investment grade holdings by reviewing investment performance indicators, including information such as issuer operating performance, debt ratings, analyst reports and other economic factors that may affect these specific investments.  While additional losses are not currently anticipated, based on the existing status and condition of these securities, continued credit deterioration of some securities or the markets in general is possible, which may result in future write-downs.

Generally accepted accounting principles require that investments in debt securities be written down to fair value when declines in value are judged to be other-than-temporary.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Refer to Note (14) Fair Values of Financial Instruments of the accompanying Consolidated Financial Statements for further discussion.

During the year ended December 31, 2018, the Company recorded no other-than-temporary impairment ("OTTI") credit related write-downs on debt securities. See Note (3) Investments of the accompanying Consolidated Financial Statements for further discussion.

Since the Company's adoption of the GAAP guidance and accounting for other-than-temporary impairments due to credit loss versus non-credit loss, the Company has recognized on its securities held at December 31, 2018 a total of $0.6 million of other-than-temporary impairments of which $0.6 million were deemed credit related and recognized as realized investment losses in earnings, and $0.0 million that was deemed non-credit related impairments and recognized in other comprehensive income.


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The Company is required to classify its investments in debt securities into one of three categories: (a) trading securities; (b) securities available for sale; or (c) securities held to maturity. The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities. Of the remaining two categories, available for sale and held to maturity, the Company makes a determination on categorization based on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. As shown in the table below, at December 31, 2018, approximately 29.0% of the Company's total debt securities, based on fair values, were classified as securities available for sale. These holdings in available for sale provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs.

 
December 31, 2018
 
Fair Value
 
Amortized Cost
 
Unrealized Losses
 
(In thousands)
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
Debt securities
$
7,228,268

 
7,285,254

 
(56,986
)
Securities available for sale:
 
 
 
 
 
Debt securities
2,946,059

 
3,008,624

 
(62,565
)
 
 
 
 
 
 
Totals
$
10,174,327

 
10,293,878

 
(119,551
)

Asset-Backed Securities

The Company holds approximately $10.1 million in asset-backed securities as of December 31, 2018.  This portfolio includes $0.7 million of manufactured housing bonds and $9.4 million of home equity loans (also referred to as subprime securities). These holdings have declined from the levels held at December 31, 2017 of $1.0 million and $12.5 million, respectively. The Company does not have any holdings in collaterized bond obligations (“CBO”s), collateralized debt obligations (“CDO”s), or collateralized loan obligations (“CLO”s). Principal risks in holding asset-backed securities are structural, credit, and capital market risks. Structural risks include the securities’ priority in the issuer’s capital structure, the adequacy of and ability to realize proceeds from collateral and the potential for prepayments. Credit risks include corporate credit risks or consumer credit risks for financing such as subprime mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace.

Mortgage Loans and Real Estate

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

The Company targets a minimum specified yield on mortgage loan investments determined by reference to currently available debt security instrument yields, plus a desired amount of incremental basis points.  During the past several years, the low interest rate environment has resulted in fewer loan opportunities being available that meet the Company's required rate of return.  Mortgage loans originated by the Company totaled $29.9 million and $59.4 million for the years 2018 and 2017, respectively.

Loans in foreclosure, loans considered impaired or loans past due 90 days or more are placed on a non-accrual status.  If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any income into the Consolidated Statements of Earnings.  The loan is independently monitored and evaluated as to potential impairment or foreclosure.  If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly.  The Company has no loans past due 90 days which are accruing interest.


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The Company's direct investments in real estate are not a significant portion of its total investment portfolio as most of these investments were acquired through mortgage loan foreclosures.  For the years ended December 31, 2018 and 2017, there were no real estate properties acquired through mortgage loan foreclosure. The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties. 

The Company held net investments in mortgage loans, after allowances for possible losses, totaling $203.2 million and $208.2 million at December 31, 2018 and 2017, respectively.  The diversification of the portfolio by geographic region, property type, and loan-to-value ratio was as follows:

 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Mortgage Loans by Geographic Region:
 
 
 
 
 
 
 
West South Central
$
116,205

 
57.0

 
$
119,794

 
57.3

East North Central
20,944

 
10.3

 
30,876

 
14.8

South Atlantic
29,829

 
14.6

 
19,155

 
9.2

East South Central
13,801

 
6.8

 
14,273

 
6.8

West North Central
12,751

 
6.3

 
12,967

 
6.2

Pacific
6,626

 
3.2

 
8,014

 
3.8

Middle Atlantic
2,138

 
1.0

 
2,215

 
1.1

Mountain
1,561

 
0.8

 
1,605

 
0.8

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7


 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
96,075

 
47.1

 
$
87,805

 
42.0

Office
71,194

 
34.9

 
74,301

 
35.6

Hotel
14,454

 
7.1

 
13,782

 
6.6

Land/Lots
3,498

 
1.7

 
10,563

 
5.1

All other
18,634

 
9.2

 
22,448

 
10.7

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7



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December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Mortgage Loans by Loan-to-Value Ratio (1):
 
 
 
 
 
 
 
Less than 50%
$
66,371

 
32.6

 
$
82,224

 
39.4

50% to 60%
22,610

 
11.1

 
27,395

 
13.1

60% to 70%
102,857

 
50.4

 
86,849

 
41.6

70% to 80%
6,642

 
3.3

 
—

 
—

80% to 90%
5,375

 
2.6

 
6,929

 
3.3

Greater than 90%
—

 
—

 
5,502

 
2.6

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7


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

The greater than 90% category is related to loans made with a long standing borrower which are backed by the investment property, contracted leases and the guarantee of the borrower.

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

Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that a loan is impaired, a loss is recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is typically based on the loan’s observable market price or the fair value of the collateral less cost to sell. Impairments and changes in the valuation allowance are reported in net realized capital gains (losses) in the Consolidated Statements of Earnings.

The Company recognized no impairment losses for the years ended December 31, 2018, 2017 and 2016, respectively.  The current mortgage loan valuation allowance represents a general valuation allowance established for the Company's mortgage loan portfolio based upon the Company's loss experience for more than ten years and is not specifically identified to individual loans.

The following table represents the mortgage loan allowance for the years ended December 31, 2018 and 2017:

 
2018
 
2017
 
(In thousands)
 
 
 
 
Balance, beginning of period
$
650

 
650

Provision
25

 
—

Releases
—

 
—

 
 
 
 
Balance, end of period
$
675

 
650




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The Company does not recognize interest income on loans past due ninety days or more.  The Company had no mortgage loans past due six months or more at December 31, 2018 and 2017. There was no interest income that was not recognized in 2018, 2017 and 2016.

The contractual maturities of mortgage loan principal balances at December 31, 2018 and 2017 were as follows:

 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Principal Balance by Contractual Maturity:
 
 
 
 
 
 
 
Due in one year or less
$
23,839

 
11.7
 
$
22,966

 
11.0
Due after one year through five years
39,391

 
19.3
 
41,248

 
19.7
Due after five years through ten years
134,574

 
65.8
 
119,966

 
57.2
Due after ten years through fifteen years
6,642

 
3.2
 
25,429

 
12.1
Due after fifteen years
—

 
—
 
—

 
—
 
 
 
 
 
 
 
 
Totals
$
204,446

 
100.0
 
$
209,609

 
100.0

The Company's direct investments in real estate total approximately $35.7 million at December 31, 2018 and $37.4 million at December 31, 2017, and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western.  The Company recognized operating income on these properties of approximately $2.2 million, $2.9 million and $2.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.  The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded net realized investment gains of $1.8 million, $2.7 million and $2.9 million associated with real estate investments in the years ended December 31, 2018, 2017 and 2016, respectively.

Derivatives, Index Options

The Company offers fixed-index universal life and annuity products that guarantee the return of principal to policyholders and, at the policyholder’s election, credit interest based on a percentage gain in a specified equity market index (policyholders may alternatively elect a fixed interest rate). Premiums and deposits received on these products are predominantly invested in investment grade fixed income securities with a portion used to purchase derivatives consisting of call options on the applicable market index to fund the index credits due to fixed-index policyholders. The call options purchased are one year over-the-counter option contracts coinciding with the initial issuance of the policy and subsequent annual renewal periods in order to match the Company’s funding requirements for the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the annual index credit is reset and a new one-year call option is purchased to fund the next annual index credit.
 
Although the call options are employed to be effective hedges against the Company’s policyholder obligations from an economic standpoint, they do not meet the requirements for hedge accounting under GAAP. Accordingly, the call options are marked to fair value on each reporting date with the change in fair value, plus or minus, included as a component of net investment income. The change in fair value of the call options includes the gains or losses recognized at the expiration of the option term and the changes in fair value for open contracts.

The Company’s design of its fixed-index products incorporates a budget for the purchase of over-the-counter call options to fund the index credits due to policyholders. Management monitors current prices of these call options and manages the cost of purchases through the terms of the policy contracts. These terms permit the Company to change caps, participation rates, and asset fees, subject to guaranteed minimums, thus managing the cost of the call options quoted by counterparties. In addition, the Company's product terms allow for the Company to withdraw from offering a particular index option at any time effective on the next policy anniversary date.

The fair value of derivative instruments presented in the Company’s Consolidated Financial Statements totaling $14.7 million at December 31, 2018 and $194.7 million at December 31, 2017 pertain to notional policyholder account values of $2.6 billion and $3.2 billion at December 31, 2018 and 2017, respectively, electing interest credits based upon applicable market index performance.


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Market Risk

Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices.  The most significant market risk exposure for National Western is interest rate risk. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and fair value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The fair values of fixed income debt securities correlate to external market interest rate conditions as market values typically increase when market interest rates decline and decrease when market interest rates rise.  However, market values may fluctuate for other reasons, such as changing economic conditions, market dislocations or increasing event-risk concerns.

Interest Rate Risk

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

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

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

 
December 31,
 
2018
 
2017
 
(In thousands except percentages)
 
 
 
 
Debt securities - fair value
$
10,174,327

 
10,475,235

Debt securities - amortized cost
$
10,293,878

 
10,211,534

 
 
 
 
Fair value as a percentage of amortized cost
98.84
%
 
102.58
 %
Unrealized gains (losses) at year-end
$
(119,551
)
 
263,701

Ten-year U.S. Treasury bond - increase (decrease) in yield for the year
0.28
%
 
(0.04
)%

The Company's unrealized gain (loss) balance for debt securities held at December 31, 2018 and 2017 is shown in the following table.
 
Unrealized Gain (Loss) Balance
 
Net Balance at
 
Net Balance at
 
 
 
December 31,
 
December 31,
 
Change in Net
 
2018
 
2017
 
Balance
 
(In thousands)
 
 
 
 
 
 
Debt securities held to maturity
$
(56,986
)
 
187,080

 
(244,066
)
Debt securities available for sale
(62,565
)
 
76,621

 
(139,186
)
 
 
 
 
 
 
Totals
$
(119,551
)
 
263,701

 
(383,252
)


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Debt securities held to maturity are recorded at their amortized cost basis. Accordingly, the unrealized amounts shown in the table above for Debt securities held to maturity are not incorporated into the Company's Consolidated Financial Statements at December 31, 2018 and 2017, respectively.

Changes in interest rates typically have a sizable effect on the fair values of the Company's debt securities. During 2018, the market interest rate of the ten-year U.S. Treasury bond increased roughly 28 basis points from 2.41% at year-end 2017 to 2.69% at year-end 2018. Therefore, the increase in unrealized losses was primarily the result of the increase in interest rate levels.  However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have a lesser effect on the Company's financial results.

The Company manages interest rate risk principally through ongoing cash flow testing as required for insurance regulatory purposes. Computer models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows.  Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities. The Company seeks to minimize the impact of interest risk through surrender charges that are imposed to discourage policy surrenders. Interest rate changes can be anticipated in the computer models and the corresponding risk addressed by management actions affecting asset and liability instruments.  However, potential changes in the values of financial instruments indicated by hypothetical interest rate changes will likely be different from actual changes experienced, and the differences could be significant.

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

The Company seeks to minimize the impact of interest rate risk through surrender charges that are imposed to discourage policy surrenders and to offset unamortized acquisition costs. Certain products, such as supplementary contracts with life contingencies, are not subject to surrender or discretionary withdrawal. The Company may also include a market value adjustment (“MVA”) feature on its annuity products which could increase or decrease the amount paid to contract holders upon surrender of their contract as a means to further mitigate interest rate risk.

The following table profiles the Company’s insurance liabilities at December 31, 2018 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.

 
December 31, 2018
 
Amount
 
%
 
(In thousands)
 
 
 
 
 
 
Subject to discretionary withdrawal:
 
 
 
With market value adjustment
$
696,456

 
9.2
With surrender charge of 5% or more
5,226,196

 
69.4
With surrender charge of 5% or less
1,224,533

 
16.2
Not subject to discretionary withdrawal
388,711

 
5.2
 
 
 
 
Total
$
7,535,896

 
100.0


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Interest Rate Sensitivity

The following table illustrates the market risk sensitivity of the Company's interest rate sensitive assets.  The table shows the effect of a change in interest rates on the fair value of the portfolio using models that measure the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.

 
Fair Values of Assets
Changes in Interest Rates in Basis Points
 
-100
 
0
 
+100
 
+200
 
+300
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Debt and equity securities
$
10,644,791

 
10,191,817

 
9,752,955

 
9,334,894

 
8,941,251

Mortgage loans
212,217

 
202,762

 
193,914

 
185,628

 
177,862

Other loans
12,969

 
12,709

 
12,456

 
12,209

 
11,966

Derivatives
13,955

 
14,684

 
15,466

 
16,308

 
17,211


The selection of the 100 basis point parallel shift in the yield curve was made as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could vary materially from those illustrated due to the nature of the estimates and assumptions used in the above analysis. Expected maturities of debt securities may differ from contractual maturities due to call or prepayment provisions.  The models assume that prepayments on mortgage-backed securities are influenced by agency and pool types, the level of interest rates, loan age, refinancing incentive, month of the year, and underlying coupon.  During periods of declining interest rates, principal payments on mortgage-backed securities and collateralized mortgage obligations tend to increase as the underlying mortgages are prepaid.  Conversely, during periods of rising interest rates, the rate of prepayment slows.  Both of these situations can expose the Company to the possibility of asset-liability cash flow and yield mismatch. The model uses a proprietary method of sampling interest rate paths along with a mortgage prepayment model to derive future cash flows. The initial interest rates used are based on the current U.S. Treasury yield curve as well as current mortgage rates for the various types of collateral in the portfolio.

Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings.  Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as base rates at December 31, 2018. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts and incorporate both Company experience and mortality assumptions associated with such contracts.

In addition to the securities analyzed above, the Company invests in index options which are derivative financial instruments used to hedge the equity return component of the Company's indexed annuity and life products.  The values of these options are primarily impacted by equity price risk, as the options' fair values are dependent on the performance of the underlying reference index.  However, increases or decreases in investment returns from these options are substantially offset by corresponding increases or decreases in amounts paid to indexed policyholders, subject to minimum guaranteed policy interest rates.

The Company's market risk liabilities, which include policy liabilities for annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described.  As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of a 100 basis point decrease and increases in increments of 100 basis points in the U.S. Treasury yield curve as of December 31, 2018.  The potential impact on net earnings from these interest rate changes are summarized below.

 
Changes in Interest Rates in Basis Points
 
-100
 
+100
 
+200
 
+300
 
(In thousands)
 
 
 
 
 
 
 
 
Impact on net earnings
$
(546
)
 
3,004

 
7,686

 
14,888


These estimated impacts on earnings are net of tax effects and the estimated effects of deferred policy acquisition costs.


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The above described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections.  Estimated cash flows in the Company's model assume cash flow reinvestments, which are representative of the Company's current investment strategy.  Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers.  Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies.  The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs.  The model considers only annuity and supplemental contracts in force at December 31, 2018, and does not consider new product sales or the possible impact of interest rate changes on sales.

Credit Risk

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

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

The Company’s net exposure to loss due to credit risk if option counterparties failed to completely perform according to the terms of their one-year contracts is as follows at December 31, 2018 and 2017.

 
 
 
 
December 31, 2018
 
 
Moody/
 
Fair
 
Collateral
 
Net
Counterparty
 
S&P Rating
 
Value
 
Held
 
Exposure
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Credit Suisse
 
A1/A
 
$
802

 
795

 
7

Wells Fargo
 
Aa2/A+
 
4,469

 
3,476

 
993

Bank of America
 
Aa3/A+
 
4,109

 
4,476

 
—

Barclays Bank
 
A2/A
 
419

 
175

 
244

BNP Paribas
 
Aa3/A
 
204

 
213

 
—

JPMorgan Chase
 
Aa2/A+
 
990

 
—

 
990

Royal Bank of Canada
 
Aa2/AA-
 
1,614

 
1,719

 
—

Canadian Imperial Bank
 
Aa2/A+
 
2,077

 
2,305

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
$
14,684

 
13,159

 
2,234



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December 31, 2017
 
 
Moody/
 
Fair
 
Collateral
 
Net
Counterparty
 
S&P Rating
 
Value
 
Held
 
Exposure
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Credit Suisse
 
A1/A
 
$
38,633

 
40,795

 
—

Wells Fargo
 
Aa2/AA-
 
39,521

 
43,074

 
—

Bank of America
 
Aa3/A+
 
61,238

 
65,260

 
—

Barclays Bank
 
A1/A
 
14,360

 
15,262

 
—

BNP Paribas
 
Aa3/A
 
15,157

 
16,683

 
—

JPMorgan Chase
 
Aa3/A+
 
18,437

 
14,090

 
4,347

Royal Bank of Canada
 
A1/AA-
 
7,385

 
7,453

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
$
194,731

 
202,617

 
4,347


The Company has never incurred a loss on index options due to counterparty default.

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


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds.  To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities.  Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company.  The approach of matching asset and liability durations and yields requires an appropriate mix of investments.  Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.  The Company (National Western) may also borrow up to $75 million on its bank line of credit for short-term cash needs.  There were no borrowings outstanding under the line of credit at December 31, 2018.

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


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The following table sets forth withdrawal characteristics of National Western's annuity reserves and deposit liabilities (based on statutory reporting liability values) as of the dates indicated.

 
December 31, 2018
 
December 31, 2017
 
Amount
 
% of Total
 
Amount
 
% of Total
 
(In thousands except percentages)
 
 
 
 
 
 
 
 
Not subject to discretionary withdrawal provisions
$
388,711

 
5.2
%
 
$
408,888

 
5.2
%
 
 
 
 
 
 
 
 
Subject to discretionary withdrawal, with adjustment:
 
 
 
 
 
 
 
With market value adjustment
696,456

 
9.2
%
 
973,442

 
12.4
%
At contract value less current surrender charge of 5% or more
5,226,196

 
69.4
%
 
5,480,555

 
70.0
%
 
 
 
 
 
 
 
 
Subtotal
6,311,363

 
83.8
%
 
6,862,885

 
87.6
%
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of less than 5%
1,224,533

 
16.2
%
 
969,173

 
12.4
%
 
 
 
 
 
 
 
 
Total annuity reserves and deposit liabilities
$
7,535,896

 
100.0
%
 
$
7,832,058

 
100.0
%

The actual amounts paid out by product line in connection with surrenders and withdrawals for the years ended December 31 are noted in the table below.

 
December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Product Line:
 
 
 
 
 
Traditional Life
$
3,755

 
4,487

 
6,238

Universal Life
98,819

 
120,824

 
114,964

Annuities
629,930

 
515,583

 
516,820

 
 
 
 
 
 
Total
$
732,504

 
640,894

 
638,022


The above contractual withdrawals, as well as the level of surrenders experienced, were generally consistent with the Company's assumptions in asset-liability management, and the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may need to undergo a new underwriting process in order to obtain a new insurance policy elsewhere. The Company's disengagement from several international markets in 2015 initially influenced higher withdrawals from these areas but this level of activity has subsequently subsided. Annuity dollar outflows are generally more sensitive to economic conditions and interest rate levels. In addition, the maturation of policies within the annuity block of business (i.e. moving into durations having no surrender charges or minimal surrender charges), has been gradual as evidenced by the previous table depicting withdrawal characteristics of the in force reserves. During 2018, interest rate levels marginally increased coinciding with policy decisions of the Federal Reserve and this upward movement in rates did prompt a higher incidence annuity dollar outflows. Cash flow projections and tests under various market interest rate scenarios and assumptions are performed to assist in evaluating liquidity needs and adequacy.  The Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.


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Cash flows from the Company's insurance operations have historically been sufficient to meet current needs.  Cash flows from operating activities were $326.6 million, $276.1 million, and $309.1 million in 2018, 2017, and 2016, respectively.  The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $633.2 million, $779.0 million, and $595.0 million in 2018, 2017, and 2016, respectively. Cash flows from security maturities, redemptions, and prepayments coincide primarily with scheduled maturity dates of securities given the Company's buy and hold investment philosophy but may become amplified during periods of significant declines in interest rates due to prepayments and bond calls.  Conversely, these cash flow items could experience reduced levels of activity if interest rates rise in the future.  Net cash inflows/(outflows) from the Company's universal life and annuity product operations totaled $(440.6) million, $(163.3) million, and $(52.8) million in 2018, 2017, and 2016, respectively. The trend in net outflows reflects the declining annuity sales pattern during the period and in 2018 the higher incidence of annuity cash surrenders and withdrawals.

Capital Resources

The Company relies on retained earnings for its capital resources as there is no long-term debt outstanding and the Company does not anticipate the need for any long-term debt in the near future.  As of December 31, 2018, the Company maintained commitments for its normal operating and investment activities. In addition, the Company had pending an acquisition under a Stock Purchase Agreement executed October 3, 2018, which was subject to receiving the requisite regulatory approvals at December 31, 2018. As disclosed in Note (8) Subsequent Events in the Notes to Consolidated Financial Statements in Attachment A of Part IV Item 15. Exhibits and Financial Statement Schedules of this filing, the Company subsequently completed the announced acquisition on January 31, 2019 paying $205.5 million for the targeted companies. 

The Company has declared and paid an annual dividend on its common shares since 2005 although its practice remains to substantially reinvest earnings internally to finance the development of new business. Despite the fact the Company's market price of its Class A common shares has been trading at a discount to the book value per share for some time, there are no imminent plans for the Company to repurchase its shares as the Board of Directors has adopted a strategic policy of building a strong capital base to maintain its high financial strength ratings and having the ability to take competitive advantages and acquisitions as they arise. The capacity of National Western to pay dividends to NWLGI is limited by law in the state of Colorado to earned profits (statutory unassigned surplus).  At December 31, 2018, the maximum amount legally available for distribution during 2019 without further regulatory approval is $30.7 million.

The National Association of Insurance Commissioners ("NAIC") has established risk-based capital ("RBC") standards for U.S. life insurers as well as a risk-based capital model act ("RBC Model Act"). The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC amounts based upon four categories of risk (asset risk, insurance risk, interest rate risk, and business risk). The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premium and policy benefit reserve items. The formula is an early warning tool to identify potential weakly capitalized companies for purposes of initiating further regulatory action. Independent rating agencies utilize proprietary versions similar to the NAIC RBC model incorporating additional risk factors identified in their respective rating methodology. At December 31, 2018, National Western maintained statutory capital substantially in excess of applicable statutory requirements.


OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is Company practice to not enter into off-balance sheet arrangements or to issue guarantees to third parties, other than in the normal course of issuing insurance contracts.  Commitments related to insurance products sold are reflected as liabilities for future policy benefits.  Insurance contracts guarantee certain performances by National Western.

Insurance reserves are the means by which life insurance companies determine the liabilities that must be established to assure that future policy benefits are provided for and can be paid.  These reserves are required by law and based upon standard actuarial methodologies to ensure fulfillment of commitments guaranteed to policyholders and their beneficiaries, even though the obligations may not be due for many years. Refer to Note (1) Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for a discussion of reserving methods.


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

 
Payment Due by Period
 
Total
 
Less Than 1 Year
 
1 - 3 Years
 
3 - 5 Years
 
More Than 5 Years
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Loan commitments
$
17,800

 
17,800

 
—

 
—

 
—

Lease obligations (1)
1,434

 
359

 
717

 
358

 
—

Life claims payable (2)
75,533

 
75,533

 
—

 
—

 
—

Other long-term reserve liabilities reflected on the balance sheet under GAAP (3)
12,083,235

 
1,053,205

 
1,961,346

 
1,695,351

 
7,373,333

 
 
 
 
 
 
 
 
 
 
Total
$
12,178,002

 
1,146,897

 
1,962,063

 
1,695,709

 
7,373,333


(1)  Refer to Note (9) Commitments and Contingencies in the Notes to Consolidated Financial Statements relating to Company leases.

(2)  Life claims payable include benefit and claim liabilities for which the Company believes the amount and timing of the payment is essentially fixed and determinable.  Such amounts generally relate to incurred and reported death and critical illness claims including an estimate of claims incurred but not reported.

(3)  Other long-term liabilities include estimated life and annuity obligations related to death claims, policy surrenders, policy withdrawals, maturities and annuity payments based on mortality, lapse, annuitization, and withdrawal assumptions consistent with the Company’s historical experience. These estimated life and annuity obligations are undiscounted projected cash outflows that assume interest crediting and market growth consistent with assumptions used in amortizing deferred acquisition costs. They do not include any offsets for future premiums or deposits. Other long-term liabilities also include determinable payout patterns related to immediate annuities.  Due to the significance of the assumptions used, the actual cash outflows will differ both in amount and timing, possibly materially, from these estimates.


ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING

Recently Issued Accounting Standards

Refer to Note 1, Summary of Significant Accounting Policies.

Correction of Errors

None.


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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The information called for by Item 7A is set forth in the Investments section of the Management's Discussion and Analysis of Financial Condition and Results of Operations.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Attachment A, Index to Consolidated Financial Statements, Notes and Schedules, in Part IV, Item 15. of this report.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with auditors that are reportable pursuant to Item 304 of Regulation S-K.


ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within required time periods.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure matters.

Internal controls over financial reporting change as the Company modifies and enhances its systems and processes to meet business needs.  Any significant changes in controls are evaluated prior to implementation to help ensure continued effectiveness of internal controls and the control environment. As reported in previous filings, during the 2016 and 2017 calendar years, the Company converted its annuity and traditional life new business and in force policies to its internally developed policy administration system and has been processing such business since that time. Prior to each implementation and conversion, the Company performed model office testing encompassing the new processes and procedures to be employed using the new system and defined its internal controls with respect to such processing in this environment. During the course of calendar year 2018 management has continued to perform post-implementation testing and analysis of the processing and internal controls implemented as ongoing modifications are made to its proprietary policy administration system. Management has determined that these ongoing modifications and enhancements did not materially affect the Company's internal controls over financial reporting such that the information required to be reported and disclosed in its reports under the Exchange Act was adversely impacted.

While other changes have taken place in internal controls during the year ended December 31, 2018, none of these changes have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of this evaluation.

The Company's management, with the participation of the Company's Chairman of the Board, President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report and concluded that the Company’s disclosure controls and procedures are effective.


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Management's Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.  Under the supervision and participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 was conducted based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (Updated 2013).  Based on the Company's assessment under the criteria of this framework, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2018.

Attestation Report of the Company’s Registered Public Accounting Firm

The Company engages BKD LLP as the independent registered accounting firm to audit the Company’s financial statements and internal control over financial reporting and express their opinion thereon. A copy of BKD LLP’s audit report on the Company’s internal control over financial reporting is set forth on the page that follows.

Changes in Internal Control Over Financial Reporting

Internal controls over financial reporting change as the Company modifies and enhances its systems and processes to meet business needs.  Any significant changes in controls are evaluated prior to implementation to help ensure continued effectiveness of internal controls and the control environment. In the normal course of operations, the Company employed remediation procedures throughout 2018 in areas where control deficiencies had been previously identified. No other changes have taken place in internal controls during the year ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. There have been no other significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of this examination.

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Report of Independent Registered Public Accounting Firm




Audit Committee, Board of Directors and Stockholders
National Western Life Group, Inc.
Austin, Texas

Opinion on the Internal Control over Financial Reporting

We have audited National Western Life Group, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013 edition) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company and our report dated March 1, 2019, expressed an unqualified opinion thereon.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.


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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.


/s/BKD, LLP


Little Rock, Arkansas
March 1, 2019


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ITEM 9B. OTHER INFORMATION

There is no information required to be disclosed on Form 8-K for the quarter ended December 31, 2018 which has not been previously reported.


PART III

The information required by Part III is incorporated by reference from our definitive proxy statement for our annual meeting of shareholders to be held June 21, 2019 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2018.


PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1.  Listing of Financial Statements

See Attachment A, Index to Consolidated Financial Statements, Notes and Schedules, on page 85 for a list of financial statements included in this report.

(a) 2.  Listing of Financial Statement Schedules

See Attachment A, Index to Consolidated Financial Statements, Notes and Schedules, on page 85 for a list of financial statement schedules included in this report.

All other schedules are omitted because they are not applicable, not required, or because the information required by the schedule is included elsewhere in the financial statements or notes.


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(a) 3.  Listing of Exhibits

The exhibits listed below, as part of Form 10-K, are numbered in accordance with the numbering used in Item 601 of Regulation S-K of The Securities and Exchange Commission.

National Western Life Group, Inc.:

Exhibit 2.1
-
Agreement and Plan of Merger, dated April 6, 2015, among National Western Life Insurance Company, a Colorado corporation, National Western Life Group, Inc., a Delaware corporation, and NWLIC MergerCo., Inc. (Incorporated by reference to Annex I of the Registration Statement on Form S-4 (File No. 333-203257) filed by National Western Life Group, Inc. with the SEC on April 6, 2015) (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated October 2, 2015).
 
 
 
Exhibit 2.2
-
Stock Purchase Agreement, dated October 3, 2018, among National Western Life Insurance Company, a Colorado corporation, National Western Life Group, Inc., a Delaware corporation, and CNS Corporation filed by National Western Life Group, Inc. with the SEC on October 4, 2018 (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K dated October 4, 2018).
 
 
 
Exhibit 10(a)
-
National Western Life Insurance Company 2016 Executive Officer Bonus Program (Exhibit 10(a) to Form 8-K dated December 15, 2015).
 
 
 
Exhibit 10(b)
-
National Western Life Insurance Company 2016 Domestic Marketing Officer Bonus Program (Exhibit 10(b) to Form 8-K dated December 15, 2015).
 
 
 
Exhibit 10(c)
-
National Western Life Insurance Company 2016 International Marketing Officer Bonus Program (Exhibit 10(c) to Form 8-K dated December 15, 2015).
 
 
 
Exhibit 10(d)
-
National Western Life Insurance Company 2016 Officer Bonus Program (Exhibit 10(d) to Form 8-K dated December 15, 2015).
 
 
 
Exhibit 10(e)
-
National Western Life Insurance Company Change in Control & Severance Agreement - dated December 21, 2015
 
 
 
Exhibit 10(f)
-
National Western Life Insurance Company 2017 Executive Officer Bonus Program (Exhibit 10(f) to Form 8-K dated December 16, 2016).
 
 
 
Exhibit 10(g)
-
National Western Life Insurance Company 2017 Domestic Marketing Officer Bonus Program (Exhibit 10(g) to Form 8-K dated December 16, 2016).
 
 
 
Exhibit 10(h)
-
National Western Life Insurance Company 2017 International Marketing Officer Bonus Program (Exhibit 10(h) to Form 8-K dated December 16, 2016).
 
 
 
Exhibit 10(i)
-
National Western Life Insurance Company 2017 Officer Bonus Program (Exhibit 10(i) to Form 8-K dated December 16, 2016).
 
 
 
Exhibit 10(j)
-
National Western Life Insurance Company 2018 Executive Officer Bonus Program (Exhibit 10(j) to Form 8-K dated December 18, 2017).
 
 
 
Exhibit 10(k)
-
National Western Life Insurance Company 2018 Domestic Marketing Officer Bonus Program (Exhibit 10(k) to Form 8-K dated December 18, 2017).
 
 
 
Exhibit 10(l)
-
National Western Life Insurance Company 2018 International Marketing Officer Bonus Program (Exhibit 10(l) to Form 8-K dated December 18, 2017).
 
 
 

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Exhibit 10(m)
-
National Western Life Insurance Company 2018 Officer Bonus Program (Exhibit 10(m) to Form 8-K dated December 18, 2017).
 
 
 
Exhibit 10(n)
-
National Western Life Insurance Company Change in Control & Severance Agreement - dated December 21, 2017
 
 
 
Exhibit 10(o)
-
National Western Life Insurance Company 2019 Officer Bonus Program (Exhibit 10(o) to Form 8-K dated December 14, 2018).
 
 
 
-
National Western Life Insurance Company Change in Control Agreement - dated February 28, 2019
 
 
 
-
Subsidiaries of the Registrant.
 
 
 
-
Consent of Independent Registered Public Accounting Firm.
 
 
 
-
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
-
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
-
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


National Western Life Insurance Company:
Exhibit 3ii(i)
-
Amended and Restated Bylaws of National Western Life Insurance Company, dated March 16, 2015 (incorporated by reference to Exhibit 3ii(i) to the Company's Form 8-K dated March 16, 2015).
 
 
 
Exhibit 3.1
-
Restated Certificate of Incorporation of National Western Life Group, Inc. (Incorporated by reference to Annex II of the Supplement to the Proxy Statement/Prospectus (File No. 333-203257) filed with the SEC on June 12, 2015) (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated October 2, 2015).
 
 
 
Exhibit 3.2
-
Bylaws of National Western Life Group, Inc. (Incorporated by reference to Annex III of the Supplement to the Proxy Statement/Prospectus (File No. 333-203257) filed with the SEC on June 12, 2015) (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K dated October 2, 2015).
 
 
 
Exhibit 10(a)
-
National Western Life Insurance Company Non-Qualified Defined Benefit Plan dated July 26, 1991 (incorporated by reference to Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1995).
 
 
 
Exhibit 10(c)
-
National Western Life Insurance Company Non-Qualified Deferred Compensation Plan, as amended and restated, dated March 27, 1995 (incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1995).
 
 
 
Exhibit 10(d)
-
First Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1995 (incorporated by reference to Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1995).
 
 
 
Exhibit 10(e)
-
National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1995).
 
 
 

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Exhibit 10(f)
-
First Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 1996).
 
 
 
Exhibit 10(g)
-
Second Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(g) to the Company's Form 10-K for the year ended December 31, 1996).
 
 
 
Exhibit 10(h)
-
Second Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 1996).
 
 
 
Exhibit 10(i)
-
Third Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1996).
 
 
 
Exhibit 10(j)
-
Fourth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective June 20, 1997 (incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1997).
 
 
 
Exhibit 10(k)
-
First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan effective June 19, 1998 (incorporated by reference to Exhibit 10(k) to the Company's Form 10-Q for the quarter ended June 30, 1998).
 
 
 
Exhibit 10(m)
-
Fifth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1998 (incorporated by reference to Exhibit 10(m) to the Company's Form 10-Q for the quarter ended September 30, 1998).
 
 
 
Exhibit 10(n)
-
Sixth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(n) to the Company's Form 10-K for the year ended December 31, 1998).
 
 
 
Exhibit 10(o)
-
Third Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(o)  to the Company's Form 10-K for the year ended December 31, 1998).
 
 
 
Exhibit 10(p)
-
Exchange Agreement by and among National Western Life Insurance Company, NWL Services, Inc., Alternative Benefit Management, Inc., and American National Insurance Company effective November 23, 1998 (incorporated by reference to Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1998).
 
 
 
Exhibit 10(s)
-
Seventh Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(s) to the Company's Form 10-K for the year ended December 31, 2000).
 
 
 
Exhibit 10(u)
-
Eighth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 1, 2000 (incorporated by reference to Exhibit 10(u) to the Company's Form 10-K for the year ended December 31, 2000).
 
 
 
Exhibit 10(v)
-
Fourth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 1, 2000 (incorporated by reference to Exhibit 10(v) to the Company's Form 10-K for the year ended December 31, 2000).
 
 
 
Exhibit 10(w)
-
Second Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(w) to the Company's Form 10-Q for the quarter ended September 30, 2001).

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Exhibit 10(z)
-
Fifth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective January 1, 2001 (incorporated by reference to Exhibit 10(z) to the Company's Form 10-K for the year ended December 31, 2001).
 
 
 
Exhibit 10(ae)
-
Sixth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective August 23, 2002 (incorporated by reference to Exhibit 10(ae) to the Company's Form 10-Q for the quarter ended September 30, 2002).
 
 
 
Exhibit 10(af)
-
Seventh Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective October 18, 2002 (incorporated by reference to Exhibit 10(af) to the Company's Form 10-Q for the quarter ended September 30, 2002).
 
 
 
Exhibit 10(ai)
-
Eighth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective January 1, 2003 (incorporated by reference to Exhibit 10(ai) to the Company's Form 10-K for the year ended December 31, 2002).
 
 
 
Exhibit 10(am)
-
Ninth amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective November 1, 2003 (incorporated by reference to Exhibit 10(am) to the Company's Form 10-K for the year ended December 31, 2003).
 
 
 
Exhibit 10(an)
-
Ninth amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 5, 2003 (incorporated by reference to Exhibit 10(an) to the Company's Form 10-K for the year ended December 31, 2003.)
 
 
 
Exhibit 10(ar)
-
Third Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(ar) to the Company's Form 10-Q for the quarter ended September 30, 2004).
 
 
 
Exhibit 10(as)
-
Amendment to the National Western Life Insurance Company Group Excess Benefit Plan effective December 15, 2004 (incorporated by reference to Exhibit 10(as) to the Company's Form 10-K for the year ended December 31, 2004).
 
 
 
Exhibit 10(at)
-
The National Western Life Insurance Company Employee Health Plan was amended and restated effective August 20, 2004 (incorporated by reference to Exhibit 10(at) to the Company's Form 10-K for the year ended December 31, 2004).
 
 
 
Exhibit 10(au)
-
Tenth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 31, 2004 (incorporated by reference to Exhibit 10(au) to the Company's Form 10-K for the year ended December 31, 2004).
 
 
 
Exhibit 10(az)
-
National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(az) to Form 8-K dated July 1, 2005).
 
 
 
Exhibit 10(ba)
-
First Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(ba) to Form 8-K dated August 22, 2005).
 
 
 
Exhibit 10(bb)
-
Second Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody (Exhibit 10(bb) to Form 8-K dated December 15, 2005).
 
 
 
Exhibit 10(bc)
-
Tenth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan (Exhibit 10(bc) to Form 8-K dated December 15, 2005).
 
 
 
Exhibit 10(bd)
-
National Western Life Insurance Company Retirement Bonus Program for Robert L. Moody (Exhibit 10(bd) to Form 8-K dated December 15, 2005).

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Exhibit 10(be)
-
Eleventh Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan (Exhibit 10(be) to Form 8-K dated December 15, 2005).
 
 
 
Exhibit 10(bf)
-
Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company (Exhibit 10(bf) to Form 8-K dated December 15, 2005).
 
 
 
Exhibit 10(bl)
-
Amendment No. 16 to Loan Agreement (Exhibit 10(bl) to Form 8-K dated July 31, 2006).
 
 
 
Exhibit 10(bu)
-
National Western Life Insurance Company 2008 Incentive Plan (Exhibit 10(bu) to S-8 dated September 2, 2008).
 
 
 
Exhibit 10(ca)
-
National Western Life Insurance Company Non-Qualified Defined Benefit Plan for Robert L. Moody As Amended and Restated Effective as of January 1, 2009 (incorporated by reference to Exhibit 10(ca) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(cb)
-
Non-Qualified Defined Benefit Plan for the President of National Western Life Insurance Company As Amended and Restated Effective as of January 1, 2009 (incorporated by reference to Exhibit 10(cb) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(cc)
-
National Western Life Insurance Company Grandfathered Non-Qualified Defined Benefit Plan As Amended and Restated Effective as of December 31, 2004 (incorporated by reference to Exhibit 10(cc) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(cd)
-
National Western Life Insurance Company Non-Qualified Defined Benefit Plan As Amended and Restated Effective as of January 1, 2009 (incorporated by reference to Exhibit 10(cd) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(ce)
-
National Western Life Insurance Company Grandfathered Non-Qualified Deferred Compensation Plan As Amended and Restated Effective as of December 31, 2004 (incorporated by reference to Exhibit 10(ce) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(cf)
-
National Western Life Insurance Company Non-Qualified Deferred Compensation Plan As Amended and Restated Effective as of January 1, 2009 (incorporated by reference to Exhibit 10(cf) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(cg)
-
First Amendment to The National Western Life Insurance Company Pension Plan As Amended and Restated Effective as of January 1, 2007 (incorporated by reference to Exhibit 10(cg) to the Company's Form 10-K for the year ended December 31, 2008).
 
 
 
Exhibit 10(ch)
-
Amended National Western Life Insurance Company Group Excess Benefit Plan, effective May 1, 2009 (incorporated by reference to Exhibit 10(ch) to the Company's Form 10-Q for the quarter ended March 31, 2009).
 
 
 
Exhibit 10(ci)
-
Revolving Credit Loan Agreement with Moody National Bank (Exhibit 10(ci) to Form 8-K dated August 31, 2009).
 
 
 
Exhibit 10(co)
-
Amended National Western Life Insurance Company Pension Plan, effective January 1, 2008. (incorporated by reference to Exhibit 10(co) to the Company's Form 10-Q for the quarter ended March 31, 2010).
 
 
 
Exhibit 10(cp)
-
Management/Consultant Agreement dated March 29, 2000 by and between Regent Care Operations, Limited Partnership and Regent Management Services, Limited Partnership. (incorporated by reference to Exhibit 10(cp) to the Company's Form 10-K /A for the year ended December 31, 2010).

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Exhibit 10(cq)
-
Management Agreement dated October 1, 2008 by and between Regent Care San Marcos B-3, Limited Partnership and Regent Management Services, Limited Partnership. (incorporated by reference to Exhibit 10(cq) to the Company's Form 10-K /A for the year ended December 31, 2010).
 
 
 
Exhibit 10(cr)
-
Administrative Services Only Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan. (incorporated by reference to Exhibit 10(cr) to the Company's Form 10-K /A for the year ended December 31, 2010).
 
 
 
Exhibit 10(cs)
-
Premium Payment Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan. (incorporated by reference to Exhibit 10(cs) to the Company's Form 10-K /A for the year ended December 31, 2010).
 
 
 
Exhibit 10(ct)
-
Administrative Services Only Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan. (incorporated by reference to Exhibit 10(ct) to the Company's Form 10-K /A for the year ended December 31, 2010).
 
 
 
Exhibit 10(cu)
-
Premium Payment Agreement dated January 1, 2001 by and between National Western Life Insurance Company and American National Insurance Company (ANICO) pertaining to ANICO Excess Benefit Plan. (incorporated by reference to Exhibit 10(cu) to the Company's Form 10-K /A for the year ended December 31, 2010).
 
 
 
Exhibit 10(dh)
-
National Western Life Insurance Company 2014 Executive Officer Bonus Program (Exhibit 10(dh) to Form 8-K dated December 11, 2013).
 
 
 
Exhibit 10(di)
-
National Western Life Insurance Company 2014 Domestic Marketing Officer Bonus Program (Exhibit 10(di) to Form 8-K dated December 11, 2013).
 
 
 
Exhibit 10(dj)
-
National Western Life Insurance Company 2014 International Marketing Officer Bonus Program (Exhibit 10(dj) to Form 8-K dated December 11, 2013).
 
 
 
Exhibit 10(dk)
-
National Western Life Insurance Company 2014 Officer Bonus Program (Exhibit 10(dk) to Form 8-K dated December 11, 2013).
 
 
 
Exhibit 10(dl)
-
National Western Life Insurance Company 2015 Executive Officer Bonus Program (Exhibit 10(dl) to Form 8-K dated December 10, 2014).
 
 
 
Exhibit 10(dm)
-
National Western Life Insurance Company 2015 Domestic Marketing Officer Bonus Program (Exhibit 10(dm) to Form 8-K dated December 10, 2014).
 
 
 
Exhibit 10(dn)
-
National Western Life Insurance Company 2015 International Marketing Officer Bonus Program (Exhibit 10(dn) to Form 8-K dated December 10, 2014).
 
 
 
Exhibit 10(do)
-
National Western Life Insurance Company 2015 Officer Bonus Program (Exhibit 10(do) to Form 8-K dated December 10, 2014).

(b) Exhibits

Exhibits required by Regulation S-K are listed as to location in the Listing of Exhibits in Item 15.(a)3 above.  Exhibits not referred to have been omitted as inapplicable or not required.


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(c) Financial Statement Schedules

The financial statement schedules required by Regulation S-K are listed as to location in Attachment A, Index to Consolidated Financial Statements, Notes and Schedules, on page 85 of this report.


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ATTACHMENT A

Index to Consolidated Financial Statements, Notes and Schedules

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

All other schedules are omitted because they are not applicable, not required, or because the information required by the schedule is included elsewhere in the Consolidated Financial Statements or notes.


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Table of Contents







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Audit Committee, Board of Directors and Stockholders
National Western Life Group, Inc.
Austin, Texas

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of National Western Life Group, Inc. (the "Company") as of December 31, 2018 and 2017, the related consolidated statements of earnings, comprehensive income (loss), changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and schedules I (summary of investments other than investments in related parties), II (condensed financial information of registrant) and V (valuation and qualifying accounts) (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and our report dated March 1, 2019, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/BKD, LLP


We have served as the Company's auditor since 2014.

Little Rock, Arkansas
March 1, 2019


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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(In thousands)



ASSETS
2018
 
2017
 
 
 
 
Investments:
 
 
 
Debt securities held to maturity, at amortized cost (fair value: $7,228,268 and $7,434,104)
$
7,285,254

 
7,247,024

Debt securities available for sale, at fair value (amortized cost: $3,008,624 and $2,964,510)
2,946,059

 
3,041,131

Mortgage loans, net of allowance for possible losses ($675 and $650)
203,180

 
208,249

Policy loans
54,724

 
56,405

Derivatives, index options
14,684

 
194,731

Equity securities, at fair value (cost: $14,329 and $12,890)
17,491

 
18,478

Other long-term investments
56,851

 
51,828

 
 
 
 
Total investments
10,578,243

 
10,817,846

 
 
 
 
Cash and cash equivalents
131,976

 
217,624

Deferred policy acquisition costs
841,704

 
819,511

Deferred sales inducements
133,714

 
135,570

Accrued investment income
96,338

 
96,818

Federal income tax receivable
17,934

 
—

Other assets
131,782

 
137,725

 
 
 
 
Total assets
$
11,931,691

 
12,225,094


See accompanying notes to Consolidated Financial Statements.





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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(In thousands)



LIABILITIES AND STOCKHOLDERS' EQUITY
2018
 
2017
 
 
 
 
LIABILITIES:
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,608,850

 
9,962,589

Traditional life reserves
135,436

 
135,895

Other policyholder liabilities
135,694

 
128,009

Deferred Federal income tax liability
39,384

 
25,408

Federal income tax payable
—

 
2,701

Other liabilities
111,550

 
138,318

 
 
 
 
Total liabilities
10,030,914

 
10,392,920

 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, and 9)


 


 
 
 
 
STOCKHOLDERS' EQUITY (Note 10):
 

 
 

Common stock:
 

 
 

Class A - $.01 par value in 2018 and 2017; 7,500,000 shares authorized; 3,436,020 shares issued and outstanding in 2018 and 3,436,166 shares issued and outstanding in 2017
34

 
34

Class B - $.01 par value in 2018 and 2017; 200,000 shares authorized, issued, and outstanding in 2018 and 2017
2

 
2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income (loss)
(37,015
)
 
14,281

Retained earnings
1,896,040

 
1,776,141

 
 
 
 
Total stockholders' equity
1,900,777

 
1,832,174

 
 
 
 
Total liabilities and stockholders' equity
$
11,931,691

 
12,225,094


See accompanying notes to Consolidated Financial Statements.





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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands except per share amounts)



 
2018
 
2017
 
2016
 
 
 
 
 
 
Premiums and other revenue:
 
 
 
 
 
Universal life and annuity contract charges
$
155,205

 
159,968

 
163,447

Traditional life premiums
18,291

 
18,962

 
19,276

Net investment income
349,077

 
659,685

 
467,674

Other revenues
20,603

 
21,070

 
18,901

Net realized investment gains (losses):
 
 
 
 
 
Total other-than-temporary impairment (“OTTI”) (losses) recoveries
12

 
487

 
110

Portion of OTTI losses recognized in other comprehensive income
(12
)
 
(599
)
 
(110
)
Net OTTI losses recognized in earnings
—

 
(112
)
 
—

Other net investment gains
8,423

 
14,875

 
13,070

Total net realized investment gains (losses)
8,423

 
14,763

 
13,070

 
 
 
 
 
 
Total revenues
551,599

 
874,448

 
682,368

 
 
 
 
 
 
Benefits and expenses:
 

 
 

 
 

Life and other policy benefits
65,297

 
71,485

 
65,529

Amortization of deferred policy acquisition costs
114,771

 
114,387

 
121,139

Universal life and annuity contract interest
136,055

 
437,019

 
248,390

Other operating expenses
93,969

 
107,002

 
94,448

 
 
 
 
 
 
Total benefits and expenses
410,092

 
729,893

 
529,506

 
 
 
 
 
 
Earnings before Federal income taxes
141,507

 
144,555

 
152,862

 
 
 
 
 
 
Federal income taxes
24,749

 
34,134

 
51,970

 
 
 
 
 
 
Net earnings
$
116,758

 
110,421

 
100,892

 
 
 
 
 
 
Basic Earnings Per Share:
 

 
 

 
 

Class A
$
33.02

 
31.23

 
28.53

Class B
$
16.51

 
15.61

 
14.27

 
 
 
 
 
 
Diluted Earnings Per Share:
 
 
 
 
 
Class A
$
33.02

 
31.23

 
28.53

Class B
$
16.51

 
15.61

 
14.27


See accompanying notes to Consolidated Financial Statements.


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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)



 
2018
 
2017
 
2016
 
 
 
 
 
 
Net earnings
$
116,758

 
110,421

 
100,892

 
 
 
 
 
 
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
(56,818
)
 
8,288

 
12,621

Net unrealized liquidity gains (losses)
2

 
195

 
37

Reclassification adjustment for net amounts included in net earnings
(2,718
)
 
(3,403
)
 
(2,155
)
 
 
 
 
 
 
Net unrealized gains (losses) on securities
(59,534
)
 
5,080

 
10,503

 
 
 
 
 
 
Foreign currency translation adjustments
1,354

 
(9
)
 
(164
)
 
 
 
 
 
 
Benefit plans:
 
 
 
 
 
Amortization of net prior service cost and net gain
11,298

 
(3,873
)
 
(116
)
 
 
 
 
 
 
Other comprehensive income (loss)
(46,882
)
 
1,198

 
10,223

 
 
 
 
 
 
Comprehensive income (loss)
$
69,876

 
$
111,619

 
111,115


See accompanying notes to Consolidated Financial Statements.

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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)



 
2018
 
2017
 
2016
 
 
 
 
 
 
Common stock:
 
 
 
 
 
Balance at beginning of period
$
36

 
36

 
36

Shares exercised under stock option plan
—

 
—

 
—

 
 
 
 
 
 
Balance at end of period
36

 
36

 
36

 
 
 
 
 
 
Additional paid-in capital:
 

 
 

 
 

Balance at beginning of period
41,716

 
41,716

 
41,716

Shares exercised under stock option plan
—

 
—

 
—

 
 
 
 
 
 
Balance at end of period
41,716

 
41,716

 
41,716

 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 

 
 

 
 

Unrealized gains (losses) on non-impaired securities:
 

 
 

 
 

Balance at beginning of period
33,664

 
22,813

 
12,347

Change in unrealized gains (losses) during period
(59,536
)
 
4,885

 
10,466

Reclassification to retained earnings (see Note 1)
(4,414
)
 
5,966

 
—

 
 
 
 
 
 
Balance at end of period
(30,286
)
 
33,664

 
22,813

 
 
 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

 
 

Balance at beginning of period
(10
)
 
(203
)
 
(240
)
Amortization
9

 
(242
)
 
72

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

 
631

 
—

Additional credit loss on previously impaired securities
—

 
—

 
—

Change in shadow deferred policy acquisition costs
(6
)
 
(194
)
 
(35
)
Reclassification to retained earnings (see Note 1)
—

 
(2
)
 
—

 
 
 
 
 
 
Balance at end of period
(7
)
 
(10
)
 
(203
)
 
 
 
 
 
 
 
 
 
(Continued on next page)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)


 
2018
 
2017
 
2016
 
 
 
 
 
 
Unrealized losses on impaired available for sale securities:
 
 
 

 
 

Balance at beginning of period
(1
)
 
(1
)
 
(1
)
Change in shadow deferred policy acquisition costs
(1
)
 
—

 
—

Recoveries, net of tax
—

 
—

 
—

Reclassification to retained earnings (see Note 1)
—

 
—

 
—

 
 
 
 
 
 
Balance at end of period
(2
)
 
(1
)
 
(1
)
 
 
 
 
 
 
Foreign currency translation adjustments:
 

 
 

 
 

Balance at beginning of period
3,223

 
2,661

 
2,825

Change in translation adjustments during period
1,354

 
(9
)
 
(164
)
Reclassification to retained earnings (see Note 1)
—

 
571

 
—

 
 
 
 
 
 
Balance at end of period
4,577

 
3,223

 
2,661

 
 
 
 
 
 
Benefit plan liability adjustment:
 

 
 

 
 

Balance at beginning of period
(22,595
)
 
(14,718
)
 
(14,602
)
Amortization of net prior service cost and net gain, net of tax
11,298

 
(3,873
)
 
(116
)
Reclassification to retained earnings (see Note 1)
—

 
(4,004
)
 
—

 
 
 
 
 
 
Balance at end of period
(11,297
)
 
(22,595
)
 
(14,718
)
 
 
 
 
 
 
Accumulated other comprehensive income (loss) at end of period
(37,015
)
 
14,281

 
10,552

 
 
 
 
 
 
Retained earnings:
 
 
 
 
 
Balance at beginning of period
1,776,141

 
1,669,524

 
1,569,905

Reclassification from accumulated other comprehensive income (loss) (see Note 1)
4,414

 
(2,531
)
 
—

Net earnings
116,758

 
110,421

 
100,892

Stockholder dividends
(1,273
)
 
(1,273
)
 
(1,273
)
 
 
 
 
 
 
Balance at end of period
1,896,040

 
1,776,141

 
1,669,524

 
 
 
 
 
 
Total stockholders' equity
$
1,900,777

 
1,832,174

 
1,721,828



See accompanying notes to Consolidated Financial Statements.

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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)



 
2018
 
2017
 
2016
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net earnings
$
116,758

 
110,421

 
100,892

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 

Universal life and annuity contract interest
136,055

 
437,019

 
248,390

Surrender charges and other policy revenues
(37,138
)
 
(42,061
)
 
(44,828
)
Realized (gains) losses on investments
(8,423
)
 
(14,763
)
 
(13,070
)
Accretion/amortization of discounts and premiums, investments
(424
)
 
(281
)
 
(176
)
Depreciation and amortization
11,825

 
10,005

 
8,057

(Increase) decrease in value of equity securities
1,789

 
—

 
—

(Increase) decrease in value of derivatives
80,004

 
(222,875
)
 
(28,364
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
43,479

 
21,554

 
9,206

(Increase) decrease in accrued investment income
480

 
2,427

 
374

(Increase) decrease in other assets
(6,068
)
 
(6,769
)
 
167

Increase (decrease) in liabilities for future policy benefits
(12,474
)
 
7,694

 
8,988

(Decrease) increase in other policyholder liabilities
7,685

 
(15,382
)
 
(11,871
)
(Decrease) increase in Federal income tax liability
(20,635
)
 
1,912

 
13,301

Increase (decrease) in deferred Federal income tax
26,438

 
(40,227
)
 
10,152

(Decrease) increase in other liabilities
(12,728
)
 
27,456

 
7,925

 
 
 
 
 
 
Net cash provided by operating activities
326,623

 
276,130

 
309,143

 
 
 
 
 
 
Cash flows from investing activities:
 

 
 

 
 

Proceeds from sales of:
 

 
 

 
 

Debt securities held to maturity
—

 
—

 
975

Debt securities available for sale
28,098

 
22,184

 
15,123

Other investments
6,460

 
10,008

 
5,116

Proceeds from maturities and redemptions of:
 
 
 
 
  

Debt securities held to maturity
437,311

 
490,841

 
404,802

Debt securities available for sale
195,874

 
288,208

 
190,150

Derivatives, index options
191,031

 
219,865

 
21,848

Property and equipment
8

 
3,024

 
1,528

Purchases of:
 
 
 
 
  

Debt securities held to maturity
(472,224
)
 
(570,716
)
 
(383,722
)
Debt securities available for sale
(264,999
)
 
(291,427
)
 
(347,495
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Continued on Next Page)
 
 
 
 
 
 
 
 
 
 
 
 

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NATIONAL WESTERN LIFE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)


 
2018
 
2017
 
2016
 
 
 
 
 
 
Equity securities
(2,442
)
 
(1,160
)
 
(679
)
Derivatives, index options
(86,692
)
 
(75,330
)
 
(74,658
)
Other investments
(8,314
)
 
(331
)
 
(29,505
)
Property and equipment
(3,138
)
 
(9,116
)
 
(50,214
)
Principal payments on mortgage loans
35,159

 
25,901

 
18,469

Cost of mortgage loans acquired
(29,884
)
 
(59,448
)
 
(84,561
)
(Increase) decrease in policy loans
1,681

 
2,294

 
3,258

 
 
 
 
 
 
Net cash provided by (used in) investing activities
27,929

 
54,797

 
(309,565
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Dividends on common stock
(1,273
)
 
(1,273
)
 
(1,273
)
Deposits to account balances for universal life and annuity contracts
560,583

 
728,873

 
847,147

Return of account balances on universal life and annuity contracts
(1,001,224
)
 
(892,135
)
 
(899,961
)
 
 
 
 
 
 
Net cash provided by (used in) financing activities
(441,914
)
 
(164,535
)
 
(54,087
)
 
 
 
 
 
 
Effect of foreign exchange
1,714

 
(15
)
 
(251
)
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(85,648
)
 
166,377

 
(54,760
)
Cash and cash equivalents at beginning of year
217,624

 
51,247

 
106,007

 
 
 
 
 
 
Cash and cash equivalents at end of year
$
131,976

 
217,624

 
51,247


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
 
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 

Interest
$
40

 
40

 
44

Income taxes
$
19,202

 
72,449

 
28,243

 
 
 
 
 
 
Noncash operating activities:
 
 
 
 
 
Deferral of sales inducements
$
(12,753
)
 
(10,650
)
 
(7,620
)

See accompanying notes to Consolidated Financial Statements.




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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) Principles of Consolidation. On October 1, 2015, National Western Life Insurance Company ("National Western") completed its previously announced holding company reorganization. As a result of the reorganization, National Western became a wholly owned subsidiary of National Western Life Group, Inc. ("NWLGI"), a Delaware Corporation, and NWLGI replaced National Western as the publicly held company.

The accompanying Consolidated Financial Statements included the accounts of National Western, NWL Services, Inc., and Regent Care San Marcos Holdings, LLC, the wholly owned subsidiaries of NWGLI, as well as the wholly owned subsidiaries of National Western: The Westcap Corporation, NWLSM, Inc., and NWL Financial, Inc. All significant intercorporate transactions and accounts have been eliminated in consolidation and references to the "Company" as contained herein refer to the consolidated entity.

(B) Basis of Presentation.  The accompanying Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") which require 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 Consolidated Financial Statements include (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) commitments and contingencies, (5) valuation allowances for deferred tax assets, (6) other-than-temporary impairment losses on debt securities, and (7) valuation allowances for mortgage loans and real estate.

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 years ended December 31, 2018, 2017 and 2016.

Affected Line Item In the Consolidated Statements of Earnings
 
Amount Reclassified from Accumulated Other Comprehensive Income
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Other net investment gains (losses)
 
$
3,441

 
5,348

 
3,316

 Net OTTI losses recognized in earnings
 
—

 
(112
)
 
—

 Earnings before Federal income taxes
 
3,441

 
5,236

 
3,316

 Federal income taxes
 
723

 
1,833

 
1,161

 
 
 
 
 
 
 
 Net earnings
 
$
2,718

 
3,403

 
2,155



National Western also files financial statements with insurance regulatory authorities which are prepared on the basis of statutory accounting practices prescribed or permitted by the Colorado Division of Insurance which are significantly different from Consolidated Financial Statements prepared in accordance with GAAP.  These differences are described in detail in the statutory information section of this note.

Certain amounts in the prior year Consolidated Financial Statements have been reclassified to conform to the current year presentation.


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(C) Investments. Investments in debt securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. The Company has the ability to hold the securities until maturity, as it would be unlikely that forced sales of securities would be required, prior to maturity, to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in fair value that are deemed other-than-temporary.

Investments in debt securities that are not classified as securities held to maturity are reported as securities available for sale. Securities available for sale are reported in the accompanying Consolidated Financial Statements at fair value.  Valuation changes resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity in accumulated other comprehensive income (loss).  These unrealized gains or losses in stockholders' equity are reported net of taxes and adjustments to deferred policy acquisition costs.

Transfers of securities between categories are recorded at fair value at the date of transfer.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method.  For mortgage-backed and asset-backed securities, the effective interest method is used based on anticipated prepayments and the estimated economic life of the securities.  When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments.  The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition (retrospective method).  This adjustment is reflected in net investment income. For loan-backed securities not meeting the definition of "highly rated", the prospective method is evaluated and, if materially different from the retrospective method, utilized to account for these securities. The retrospective adjustment method has been used to value all loan-backed and structured securities included in the accompanying Consolidated Financial Statements.

Quarterly the Company reviews its investment portfolio for market value changes to identify changes caused by issuer credit deterioration, changes in market interest rates and changes in economic conditions.  If this review indicates a decline in fair value that is other-than-temporary, the Company’s carrying amount in the investment is reduced to its estimated fair value.  In accordance with GAAP guidance the estimated credit versus non-credit components are bifurcated.  The credit component is taken through earnings.  The non-credit component is reclassified as unrealized loss in other comprehensive income.  The Company would not recognize impairment of securities due to changing of interest rates or market dislocations unless the Company had the intent to sell the securities prior to recovery or maturity.

The Company considers a number of factors in determining whether the impairment is other-than-temporary.  These include, but are not limited to:  1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline in fair value, 4) the intent and ability to hold the investment until recovery, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer.  Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments.  Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered.

Realized gains and losses for securities available for sale and securities held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold or called.  Prepayment penalty fees received from issuers that call their securities before maturity are excluded from the calculation of realized gain or loss and are included as a component of investment income. Decline in the fair value of securities below their cost basis that are deemed other-than-temporary are bifurcated into separate credit and non-credit declinations.  The noncredit related declines are reclassified as unrealized losses in accumulated other comprehensive income (loss).  Credit losses are recorded in earnings and result in the establishment of a new cost basis for the security.  The new discount or reduced premium amount is amortized over the remaining life of the impaired debt security prospectively based on the amount and timing of future estimated cash flows.

Mortgage loans and other long-term investments are stated at cost, less unamortized discounts, deferred fees, and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Real estate is stated at the lower of cost or fair value less estimated costs to sell.


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Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected.  The Company has identified these loans through its normal loan review procedures.  Impaired loans include: 1) nonaccrual loans, 2) loans which are 90 days or more past due, unless they are well secured and are in the process of collection, and 3) other loans which management believes are impaired.  Impaired loans are measured based on: 1) the present value of expected future cash flows discounted at the loan's effective interest rate, 2) the loan's observable market price, or 3) the fair value of the collateral if the loan is collateral dependent.  When the Company has loans considered impaired substantially all are measured at the fair value of the collateral.  In limited cases, the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.

While the Company closely manages its investment portfolio, future changes in issuer facts and circumstances can result in impairments beyond those currently identified.

(D) Cash and Cash Equivalents. For purposes of the Consolidated Statements of Cash Flows, the Company considers all short-term investments with a maturity at the date of purchase of three months or less to be cash equivalents.

(E) Derivatives.   Fixed-index products combine features associated with traditional fixed annuities and universal life contracts, with the option to have interest rates linked in part to an underlying equity index.  The equity return component of such policy contracts is identified separately and accounted for in future policy benefits as embedded derivatives on the Consolidated Balance Sheets.  The remaining portions of these policy contracts are considered the host contracts and are recorded separately within future policy benefits as fixed annuity or universal life contracts. The host contracts are accounted for under debt instrument type accounting.  The host contracts are recorded as discounted debt instruments that are accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates.

The Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its index annuity and life products.  The amounts which may be credited to policyholders are linked, in part, to the returns of the underlying index. The index options act as hedges to match closely the returns on the underlying index.  Cash is exchanged upon purchase of the index options and no principal or interest payments are made by either party during the option periods. Upon maturity or expiration of the options, cash is paid to the Company based on the underlying index performance and terms of the contract.  As a result, amounts credited to policyholders' account balances are substantially offset by changes in the value of the options.

The Company does not elect hedge accounting relative to derivative instruments. The derivatives are reported at their fair value in the accompanying Consolidated Financial Statements.  Changes in the values of the index options and changes in the policyholder liabilities are both reflected in the Consolidated Statement of Earnings.  Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in values, are reflected as net investment income in the Consolidated Statement of Earnings.  Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Consolidated Statement of Earnings.

Although there is credit risk in the event of nonperformance by counterparties to the index options, the Company does not expect any counterparties to fail to meet their obligations, given their high credit ratings.  In addition, credit support agreements are in place with all counterparties for option holdings in excess of specific limits, which further reduces the Company's credit exposure.  At December 31, 2018 and 2017, the fair value of index options owned by the Company totaled $14.7 million and $194.7 million, respectively. Of these amounts, $(72.3) million and $119.4 million represent unrealized gains and losses on the options held at December 31, 2018 and 2017, respectively.

(F) Insurance Revenues and Expenses. Premiums on traditional life insurance products are recognized as revenues as they become due from policyholders. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period.  Expenses for these policies include interest credited to policy account balances, benefit claims incurred in excess of policy account balances and amortization of deferred policy acquisition costs and deferred sales inducements.


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Under GAAP, commissions, sales inducements, and certain expenses related to policy issuance and underwriting, all of which vary with and are related to the production of new business, are deferred. For traditional products, these costs are amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies.  The Company evaluates the recoverability of deferred policy acquisition and sales inducement costs on a quarterly basis.  In this evaluation, the Company considers estimated future gross profits or future premiums, as applicable for the type of contract.  The Company also considers expected mortality, interest earned and credited rates, persistency, and expenses. In accordance with GAAP guidance, the Company must also write off deferred acquisition costs and unearned revenue liabilities upon internal replacement of certain contracts as well as annuitizations of deferred annuities.

A summary of information relative to deferred policy acquisition costs ("DPAC") is provided in the table below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Deferred policy acquisition costs, beginning of year
$
819,511

 
835,194

 
853,451

 
 
 
 
 
 
Policy acquisition costs deferred:
 
 
 

 
 

Agents' commissions
75,899

 
95,088

 
112,048

Other
8,195

 
8,433

 
7,808

 
 
 
 
 
 
Total costs deferred
84,094

 
103,521

 
119,856

 
 
 
 
 
 
Amortization of deferred policy acquisition costs
(114,771
)
 
(114,387
)
 
(121,139
)
Adjustments for unrealized (gains) losses on investment securities
52,870

 
(4,817
)
 
(16,974
)
 
 
 
 
 
 
Deferred policy acquisition costs, end of year
$
841,704

 
819,511

 
835,194



A summary of information relative to deferred sales inducements is provided in the table below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Deferred sales inducements, beginning of year
$
135,570

 
147,111

 
159,166

 
 
 
 
 
 
Sales inducement costs deferred
7,546

 
17,901

 
19,302

Amortization of sales inducements
(20,299
)
 
(28,552
)
 
(26,922
)
Adjustments for unrealized (gains) losses on investment securities
10,897

 
(890
)
 
(4,435
)
 
 
 
 
 
 
Deferred sales inducements, end of year
$
133,714

 
135,570

 
147,111




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Amortization of deferred policy acquisition costs increased marginally to $114.8 million in the year ended December 31, 2018 compared to $114.4 million reported in 2017. Amortization expense in 2018 included $1.0 million in net prospective unlocking adjustments which decreased amortization expense for the following: (a) mortality and withdrawal benefit election rate assumptions on indexed deferred annuities which decreased amortization expense by $6.2 million; (b) mortality, surrender and annuitization rates, and the portfolio investment yield on non-indexed deferred annuities which increased amortization expense by $4.0 million; and (c) mortality, extended death benefit reserves, and the portfolio investment yield on universal life products which increased amortization expense by $1.2 million. 

Amortization expense in 2017 included $11.9 million in prospective unlocking adjustments which decreased amortization expense for the following: (a) reducing interest crediting rate spreads in the Domestic Life segment which increased amortization expense by $0.8 million; (b) International Life segment for favorable mortality, improved lapse rates in certain markets, an interest rate clawback provision, and reducing interest crediting rate spreads, collectively decreasing amortization expense by $(27.7) million; and (c) in the Annuity segment updating surrender and annuitization rates on two tier annuities, reducing interest crediting rate spreads, and adjusting withdrawal benefit assumptions, which collectively increased amortization expense by $15.1 million.

Amortization expense in 2016 included $13.8 million in prospective unlocking adjustments which decreased amortization expense for the following: (a) updating DPAC future gross profit projections for universal life insurance riders in the Domestic Life and International Life segments which had not been previously included in software models which decreased amortization expense by $(2.1) million; (b) favorable mortality in the Domestic Life segment which decreased amortization expense by $(8.2) million; (c) in the International segment favorable mortality, increased cost of insurance charges that had been implemented, and higher lapse rates for policies associated with the residents that the company ceased accepting applications from, collectively decreasing amortization expense by $(7.3) million; and (d) updating surrender and annuitization rates on indexed, single tier, and two tier annuities which increased amortization expense by $3.7 million.

Similar to deferred policy acquisition costs, amortization of deferred sales inducements includes unlocking adjustments. In 2018, the deferred sales inducement balance was unlocked for the indexed and non-indexed deferred annuity items discussed above which increased contract interest expense by $1.3 million. In 2017, the deferred sales inducement balance was unlocked for updating surrender and annuitization rates on two tier annuities, reducing interest crediting rate spreads, and adjusting withdrawal benefit assumptions which increased contract interest expense by $4.3 million. In 2016, the deferred sales inducement balance was unlocked for updating surrender and annuitization rates on annuities as discussed above which increased contract interest expense by $1.7 million.

Under GAAP, the liability for future policy benefits on traditional products has been calculated using assumptions as to future mortality (based on the 1965-1970, 1975-1980, and 2001 Select and Ultimate mortality tables), interest ranging from 3.25% to 8.00%, and withdrawals based on Company experience. For universal life and annuity contracts, the liability for future policy benefits represents the account balance. Fixed-index products combine features associated with traditional fixed annuities and universal life contracts, with the option to have interest rates linked in part to an equity index.  In accordance with GAAP guidance, the equity return component of such policy contracts must be identified separately and accounted for as embedded derivatives.  The remaining portions of these policy contracts are considered the host contracts and are recorded separately as fixed annuity or universal life contracts. The host contracts are accounted for under GAAP guidance provisions that require debt instrument type accounting.  The host contracts are recorded as discounted debt instruments that are accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates. The embedded derivatives are recorded at fair value.

(G) Deferred Federal Income Taxes. Federal income taxes are accounted for under the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance for deferred tax assets is provided if all or some portion of the deferred tax asset may not be realized.  An increase or decrease in a valuation allowance that results from a change in circumstances that affects the realizability of the related deferred tax asset is included in income in the period the change occurs.


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(H) Depreciation of Property, Equipment, and Leasehold Improvements. Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods.  Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.

(I) Statutory Information. Domiciled in Colorado, National Western prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance.  The Colorado Division of Insurance has adopted the provisions of the National Association of Insurance Commissioners' ("NAIC") Statutory Accounting Practices (“SSAP”) as the basis for its statutory accounting practices.

The following are major differences between GAAP and accounting practices prescribed or permitted by the Colorado Division of Insurance (“statutory accounting practices”).

1.  The Company accounts for universal life and annuity contracts based on the provisions of GAAP.  The basic difference between GAAP and statutory accounting practices with respect to certain long-duration contracts is that deposits for universal life and annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses.  Only contracts with no insurance risk qualify for such treatment under statutory accounting practices.  For all other contracts, statutory accounting practices do reflect such items as revenues and expenses.

A summary of direct premiums and deposits collected is provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Annuity deposits
$
411,208

 
608,799

 
730,740

Universal life insurance deposits
278,971

 
254,960

 
250,459

Traditional life and other premiums
21,561

 
22,624

 
22,377

 
 
 
 
 
 
Totals
$
711,740

 
886,383

 
1,003,576



2.  Statutory accounting practices require commissions and related acquisition costs to be expensed as incurred, whereas under GAAP these items are deferred and amortized.

3.   For statutory accounting purposes, liabilities for future policy benefits for life insurance policies are calculated by the net level premium method or the commissioners reserve valuation method.  Future policy benefit liabilities for annuities are calculated based on the continuous commissioners annuity reserve valuation method and provisions of Actuarial Guidelines 33 and 35.

4.  Deferred Federal income taxes are provided for temporary differences which are recognized in the Consolidated Financial Statements in a different period than for Federal income tax purposes.  Deferred taxes are also recognized in statutory accounting practices; however, there are limitations as to the amount of deferred tax assets that may be reported as admitted assets.  The change in the deferred taxes is recorded directly in surplus, rather than as a component of income tax expense.

5.  For statutory accounting purposes, debt securities are recorded at amortized cost, except for securities in or near default, which are reported at fair value.  Under GAAP, debt securities are carried at amortized cost or fair value based on their classification as either held to maturity or available for sale.

6.  Investments in subsidiaries are recorded as affiliated common stock investments at their respective SSAP investment value under statutory accounting, whereas the financial statements of the subsidiaries have been consolidated with those of the Company under GAAP.

7.   The asset valuation reserve and interest maintenance reserve, which are investment valuation reserves prescribed by statutory accounting practices, have been eliminated, as they are not required under GAAP.

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8.  The table below provides the Company’s net gain from operations, net income, unassigned surplus (retained earnings) and capital and surplus (stockholders' equity), on the statutory basis used to report to regulatory authorities for the years ended December 31.

 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Net gain from operations before Federal and foreign income taxes
$
27,359

 
197,597

 
124,571

 
 
 
 
 
 
Net income
$
31,296

 
126,932

 
88,712

 
 
 
 
 
 
Unassigned surplus
$
1,370,468

 
1,330,491

 
1,207,298

 
 
 
 
 
 
Capital and surplus
$
1,413,532

 
1,374,554

 
1,251,361



(J) Stock Compensation. The Company accounts for its share-based compensation for GAAP reporting using liability accounting, and measures compensation cost using the fair value method at each reporting date.  For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions including the Company's stock price, volatility, option price, vesting dates, exercise dates and projected option lapses.  The Company used the intrinsic value method for statutory basis reporting through 2015. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The fair value method was adopted for statutory basis reporting effective January 1, 2016.

(K) Accounting Standards and Changes in Accounting

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, 2020, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.


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In August 2018, the FASB issued a new Concepts Statement No. 8 Conceptual Framework for Financial Reporting - Chapter 8, Notes to Financial Statements. This was issued as part of a disclosure framework project aimed at improving disclosures in financial statements. This issuance provides conceptual guidance that may be followed when determining items to include as disclosures in the notes to financial statements. In conjunction with this issuance, the FASB also issued two accounting standard updates (“ASU”) which identified a particular FASB Topic and evaluated its disclosures through the new conceptual framework of Concepts Statement No. 8, Chapter 8. This process resulted in the issuance of the following two ASUs.
In August 2018, FASB issued ASU 2018-13 Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure requirements for Fair Value Measurement. This update removed disclosures for 1) amount of and reasons for transfers between Level 1 and Level 2 for fair value hierarchy, 2) policy for timing of transfers between levels, 3) valuation process for Level 3 fair value measurements. This update also added disclosure requirement as follows: 1) changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements held at end of reporting period; 2) range and weighted average (or other reasonable quantitative measurement) of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments will be effective for interim periods beginning after December 15, 2019.
In August 2018, FASB issued ASU 2018-14 Compensation-Retirement Benefits - Defined Benefit Plans-General (Subtopic 715-20) Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This update removed disclosures for 1) amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year, 2) amount and timing of plan assets expected to be returned to the employer, 3) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan, 4) the effects of a one-percentage-point change in assumed health care cost trend rates on the (a) aggregate of the service and interest cost components of the net periodic benefit costs and (b) benefit obligation for postretirement health care benefits. This update also added disclosures as follow: 1) weighted-average interest crediting rates for cash balance plans and other plans with promised crediting rates, 2) explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Finally, this update clarified that the following information for defined benefit pension plans should be disclosed: 1) projected benefit obligation (PBO) and fair value of plan assets for plans with PBO in excess of plan assets, 2) accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments will be effective for fiscal periods ending after December 31, 2020.
In August 2018, the SEC released a final rule updating disclosure requirements, Disclosure Update and Simplification, which resulted in the additional interim disclosure of an analysis of changes in stockholders’ equity to be required for the current and comparative quarter and year-to-date interim periods. Registrants will be required to provide an analysis of changes in each caption of stockholders’ equity and noncontrolling interests, which will need to be accompanied by dividends per share and in the aggregate for each class of shares. The disclosure must be presented in the form of a reconciliation, either as a separate statement or in the footnotes. The amendments will be effective for interim periods beginning after November 5, 2018.
In June 2016, the FASB released ASU 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition model. The objective of the expected credit loss model is for the reporting entity to recognize its estimate of expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. The guidance is effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained income. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium. The amortization period for premiums is being shortened to the earliest call date. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Adoption of the guidance is not expected to have a material effect on the Company’s results of operations or financial position.

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Accounting pronouncements adopted
In January 2018, the Company adopted ASU 2017-07 Compensation-Retirement Benefits (Topic 615): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The new guidance requires that an employer that offers to its employees defined benefit pension or other postretirement benefit plans report the service cost component in the same line item or items as other compensation costs. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement to present the other components of net periodic benefit cost must be disclosed. In addition, the guidance allows only the service cost component to be eligible for capitalization when applicable. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements. The Company does not capitalize service costs.
On February 14, 2018, the FASB released ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The update addresses certain stranded income tax effects in accumulated other comprehensive income caused by the Tax Cuts and Job Act ("Tax Act") which was passed in December 2017. Under the new FASB rules, financial statement preparers are provided the option to reclassify stranded tax effects within accumulated other comprehensive income in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recorded. Companies must apply the new guidance for fiscal years, including interim periods within such years, starting after December 15, 2018, with early adoption permitted. The amendments are to be applied in either the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the federal corporate income tax rate from the Tax Act is recognized. The Company elected to adopt the requirements of this update in its Consolidated Financial Statements for the year ended December 31, 2017 and has reported the resultant reclassification amount, $2.5 million, as a charge to Retained Earnings in the accompanying Consolidated Statements of Stockholders' Equity.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance requires companies to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. As an insurance enterprise, the primary sources of revenue are excluded from this guidance, including insurance premiums, contract charges, and investment revenues. We have certain types of non-insurance and non-investment revenue from contracts with customers that fall under this guidance. These revenues are recognized when obligations under the terms of the contract are satisfied. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those services. For these revenues, the performance obligation is fulfilled as services are rendered. Revenues from contracts with customers identified under Topic 606 are not material, representing 2% of our total revenues for the year ended December 31, 2017. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied either on a full or modified retrospective basis. The adoption of this ASU did not have a material effect on the results of operations or financial position of the Company.
In January 2016, the FASB released ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value be recorded as adjustments directly to the income statement. The provisions of this update became effective for the Company beginning January 1, 2018. The prospective adoption of this update resulted in the reclassification of $4.4 million pertaining to unrealized gains, net of tax, out of Accumulated Other Comprehensive Income into Retained Earnings as a cumulative effect of a change in accounting principle, as shown in the Condensed Consolidated Statements of Changes in Stockholders' Equity. Equity securities, previously included in Securities Available for Sale are now reported as a separate line item on the Consolidated Balance Sheet. The change in fair value of equity securities, previously reported in Other Comprehensive income, is now included in net investment income in the Condensed Consolidated Statements of Earnings. As the Company's equity securities holdings are not significant, the adoption of the requirements of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.

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In May 2017, the FASB released ASU 2017-09, Compensation - Stock Compensation. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Accounting Standards Codification ("ASC") Topic 718. An entity shall account for the effects of a modification described in ASC paragraphs 718-20-35-3 through 35-9, unless all the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The provisions of this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. There was no impact to the Company’s financial position, results of operations or cash flows as the result of the adoption of this ASU.
In July 2017, the FASB released ASU 2017-11, Earnings Per Share; Distinguishing Liabilities from Equity; and, Derivatives and Hedging. This update includes: (I) Accounting for Certain Financial Instruments with Down Round Features, and (II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. Part I of this update changes the classification analysis of certain equity-linked financial instruments with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Part II of this update recharacterizes the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. There was no impact to the Company’s financial position, results of operations or cash flows as the result of the adoption of this ASU.
In June 2018, the FASB released ASU 2018-07 Compensation - Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting. This update largely aligns the accounting for share-based payment awards issued to employees and nonemployees. Previously, nonemployee stock compensation was accounted for under Subtopic 505-50 but will now fall under Topic 718. Changes to the accounting for nonemployee awards include 1) measurement based on fair value of the equity instrument at grant date, rather than previous requirement to measure based on the more reliable option of the fair value of the consideration or the fair value of the equity instrument, 2) initial measurement at grant date, rather than the earlier of the date at which commitment for performance is reached or performance is complete, and 3) when performance conditions are present, the probability of satisfying performance conditions should be considered in measurement rather than the previous requirement to measure at the lowest aggregate fair value. The amendments in the new guidance are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal period. There was no impact to the Company’s financial position, results of operations or cash flows as the result of the adoption of this ASU.
In February 2016, the FASB issued new guidance on leasing transactions (ASU 2016-02, Leases - Topic 842). The new guidance is effective for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective transition approach (subject to optional practical expedients). The new guidance requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Leases would be classified as finance or operating leases and both types of leases will be recognized on the balance sheet. Lessor accounting will remain largely unchanged from current guidance except for certain targeted changes. The new guidance will also require new qualitative and quantitative disclosures. Early adoption is permitted. There was no impact to the Company’s financial position, results of operations or cash flows as the result of the adoption of this ASU.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future Consolidated Financial Statements.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(2)  DEPOSITS WITH REGULATORY AUTHORITIES

The following assets were on deposit with state and other regulatory authorities, as required by law, at the end of each year.

 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Debt securities held to maturity
$
14,708

 
14,596

Debt securities available for sale
570

 
685

Short-term investments
475

 
475

 
 
 
 
Totals
$
15,753

 
15,756




(3)  INVESTMENTS

(A)  Investment Income

The major components of net investment income are as follows:

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Gross investment income:
 
 
 
 
 
Debt and equity securities
$
399,645

 
409,401

 
416,638

Mortgage loans
12,066

 
11,045

 
7,964

Policy loans
3,185

 
3,485

 
3,700

Derivative gains (losses)
(80,004
)
 
222,875

 
28,364

Short term investments
2,249

 
1,012

 
668

Other investment income
13,289

 
13,137

 
11,432

 
 
 
 
 
 
Total investment income
350,430

 
660,955

 
468,766

Less investment expenses
1,353

 
1,270

 
1,092

 
 
 
 
 
 
Net investment income
$
349,077

 
659,685

 
467,674



(B)  Mortgage Loans and Real Estate

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


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

The Company requires a minimum specified yield on mortgage loan investments determined by reference to currently available debt security instrument yields, plus a desired amount of incremental basis points.  During the past several years, the low interest rate environment has resulted in fewer loan opportunities being available that meet the Company's required rate of return. Mortgage loans originated by the Company totaled $29.9 million and $59.4 million for the years 2018 and 2017, respectively.

Loans in foreclosure, loans considered impaired or loans past due 90 days or more are placed on a non-accrual status.  If a mortgage loan is determined to be on non-accrual status, the mortgage loan does not accrue any income into the Consolidated Statements of Earnings.  The loan is independently monitored and evaluated as to potential impairment or foreclosure.  If delinquent payments are made and the loan is brought current, then the Company returns the loan to active status and accrues income accordingly.  The Company has no loans past due 90 days which are accruing interest.

The Company's direct investments in real estate historically have not been a significant portion of its total investment portfolio as most of these type of investments are acquired through mortgage loan foreclosures.  The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties.  These investments have generally served to enhance the Company's overall investment portfolio returns.

The Company held net investments in mortgage loans, after allowances for possible losses, totaling $203.2 million and $208.2 million at December 31, 2018 and 2017, respectively.  The diversification of the portfolio by geographic region, property type, and loan-to-value ratio was as follows:

 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
Mortgage Loans by Geographic Region:
 
 
 
 
 
 
 
West South Central
$
116,205

 
57.0

 
$
119,794

 
57.3

East North Central
20,944

 
10.3

 
30,876

 
14.8

South Atlantic
29,829

 
14.6

 
19,155

 
9.2

East South Central
13,801

 
6.8

 
14,273

 
6.8

West North Central
12,751

 
6.3

 
12,967

 
6.2

Pacific
6,626

 
3.2

 
8,014

 
3.8

Middle Atlantic
2,138

 
1.0

 
2,215

 
1.1

Mountain
1,561

 
0.8

 
1,605

 
0.8

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
96,075

 
47.1

 
$
87,805

 
42.0

Office
71,194

 
34.9

 
74,301

 
35.6

Hotel
14,454

 
7.1

 
13,782

 
6.6

Land/Lots
3,498

 
1.7

 
10,563

 
5.1

All other
18,634

 
9.2

 
22,448

 
10.7

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7



 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
Mortgage Loans by Loan-to-Value Ratio (1):
 
 
 
 
 
 
 
Less than 50%
$
66,371

 
32.6

 
$
82,224

 
39.4

50% to 60%
22,610

 
11.1

 
27,395

 
13.1

60% to 70%
102,857

 
50.4

 
86,849

 
41.6

70% to 80%
6,642

 
3.3

 
—

 
—

80% to 90%
5,375

 
2.6

 
6,929

 
3.3

Greater than 90%
—

 
—

 
5,502

 
2.6

Gross balance
203,855

 
100.0

 
208,899

 
100.0

 
 
 
 
 
 
 
 
Allowance for possible losses
(675
)
 
(0.3
)
 
(650
)
 
(0.3
)
 
 
 
 
 
 
 
 
Totals
$
203,180

 
99.7

 
$
208,249

 
99.7


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

The greater than 90% category is related to loans made with a long standing borrower which are backed by the investment property, contracted leases and the guarantee of the borrower.

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


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When it is determined that a loan is impaired, a loss is recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value is typically based on the loan’s observable market price or the fair value of the collateral less cost to sell. Impairments and changes in the valuation allowance are reported in net realized capital gains (losses) in the Consolidated Statements of Earnings.

The Company recognized no impairment losses for the years ended December 31, 2018, 2017 and 2016.  The current mortgage loan valuation allowance represents a general valuation allowance established for the Company's mortgage loan portfolio based upon the Company's loss experience over an extended period of time and is not specifically identified to individual loans. Impairments are based on information which indicated that the Company may not collect all amounts in accordance with the mortgage agreement. While the Company closely monitors its mortgage loan portfolio, future changes in economic conditions can result in impairments beyond those currently identified.

The following table represents the mortgage loan allowance for the years ended December 31, 2018 and 2017:

 
2018
 
2017
 
(In thousands)
 
 
 
 
Balance, beginning of period
$
650

 
650

Provision
25

 
—

Releases
—

 
—

 
 
 
 
Balance, end of period
$
675

 
650



The Company does not recognize interest income on loans past due 90 days or more.  The Company had no mortgage loans past due six months or more at December 31, 2018, 2017 and 2016.  There was no interest income not recognized in 2018, 2017 and 2016.

The contractual maturities of mortgage loan principal balances at December 31, 2018 and 2017 were as follows:

 
December 31, 2018
 
December 31, 2017
 
Amount
 
%
 
Amount
 
%
 
(In thousands)
 
 
 
(In thousands)
 
 
Principal Balance by Contractual Maturity:
 
 
 
 
 
 
 
Due in one year or less
$
23,839

 
11.7
 
$
22,966

 
11.0
Due after one year through five years
39,391

 
19.3
 
41,248

 
19.7
Due after five years through ten years
134,574

 
65.8
 
119,966

 
57.2
Due after ten years through fifteen years
6,642

 
3.2
 
25,429

 
12.1
 
 
 
 
 
 
 
 
Totals
$
204,446

 
100.0
 
$
209,609

 
100.0



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company's direct investments in real estate investments are not a significant portion of its total investment portfolio. These investments totaled approximately $35.7 million at December 31, 2018 and $37.4 million at December 31, 2017, and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western.  The Company’s real estate holdings are reflected in other long-term investments in the accompanying Consolidated Financial Statements.  The Company records real estate at the lower of cost or fair value less estimated cost to sell, which is determined on an individual asset basis.  The Company recognized operating income on these properties of approximately $2.2 million, $2.9 million and $2.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.  The Company had real estate investments that were non-income producing for the preceding twelve months totaling $5.2 million, $0.1 million and $0.2 million at December 31, 2018, 2017 and 2016, respectively. Included in the balance at December 31, 2018 is National Western's prior home office facility, owned by The Westcap Corporation ("Westcap"), which was being held for sale. Effective February 20, 2019, Westcap entered into an agreement to sell this property for approximately $8.6 million. Closing of the transaction is expected to occur during the third calendar quarter of 2019.

The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded net realized investment gains on disposals of $1.8 million, $2.7 million and $2.9 million associated with these real estate investments in the years ended December 31, 2018, 2017 and 2016, respectively.  The net realized investment gain in 2018 was on a sale of previously occupied home office property located in Austin, Texas. The net realized investment gains in 2017 were on disposed properties located in Austin, Texas and Dallas, Texas. The net realized investment gains in 2016 were on disposed properties located in Brazoria County (Texas), Ruidoso, New Mexico, and Austin, Texas. During the year ended 2016 the Company purchased two properties, one located in Cypress, Texas and the other in Tupelo, Mississippi for a total of $16.8 million.

(C)  Debt Securities

The table below presents amortized costs and fair values of securities held to maturity at December 31, 2018.

 
Securities Held to Maturity
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
1,341

 
116

 
—

 
1,457

States and political subdivisions
457,404

 
9,764

 
(2,376
)
 
464,792

Public utilities
930,629

 
5,928

 
(12,944
)
 
923,613

Corporate
4,715,775

 
27,652

 
(87,043
)
 
4,656,384

Residential mortgage-backed
1,176,216

 
13,771

 
(11,932
)
 
1,178,055

Home equity
3,193

 
47

 
(10
)
 
3,230

Manufactured housing
696

 
41

 
—

 
737

 
 
 
 
 
 
 
 
Totals
$
7,285,254

 
57,319

 
(114,305
)
 
7,228,268




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The table below presents amortized costs and fair values of securities available for sale at December 31, 2018. As indicated in Note (1) Summary of Significant Accounting Policies, effective January 1, 2018, equity securities are no longer included in the Securities Available for Sale category.

 
Securities Available for Sale
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
States and political subdivisions
$
570

 
—

 
(4
)
 
566

Foreign governments
9,974

 
30

 
—

 
10,004

Public utilities
82,943

 
1,045

 
(517
)
 
83,471

Corporate
2,893,221

 
15,473

 
(79,638
)
 
2,829,056

Residential mortgage-backed
15,947

 
937

 
(84
)
 
16,800

Home equity
5,969

 
193

 
—

 
6,162

Manufactured housing
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
$
3,008,624

 
17,678

 
(80,243
)
 
2,946,059



The table below presents amortized costs and fair values of securities held to maturity at December 31, 2017.

 
Securities Held to Maturity
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
1,337

 
177

 
—

 
1,514

States and political subdivisions
467,437

 
21,907

 
(100
)
 
489,244

Public utilities
1,062,545

 
30,527

 
(894
)
 
1,092,178

Corporate
4,430,099

 
121,978

 
(7,876
)
 
4,544,201

Residential mortgage-backed
1,280,307

 
27,445

 
(6,216
)
 
1,301,536

Home equity
4,262

 
57

 
(4
)
 
4,315

Manufactured housing
1,037

 
79

 
—

 
1,116

 
 
 
 
 
 
 
 
Totals
$
7,247,024

 
202,170

 
(15,090
)
 
7,434,104




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The table below presents amortized costs and fair values of securities available for sale at December 31, 2017.

 
Securities Available for Sale
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
States and political subdivisions
$
575

 
—

 
(29
)
 
546

Foreign governments
9,964

 
326

 
—

 
10,290

Public utilities
83,466

 
3,640

 
—

 
87,106

Corporate
2,842,381

 
81,737

 
(10,744
)
 
2,913,374

Residential mortgage-backed
20,246

 
1,376

 
(52
)
 
21,570

Home equity
7,878

 
367

 
—

 
8,245

Manufactured housing
—

 
—

 
—

 
—

 
2,964,510

 
87,446

 
(10,825
)
 
3,041,131

 
 
 
 
 
 
 
 
Equity securities
12,890

 
5,708

 
(120
)
 
18,478

 
 
 
 
 
 
 
 
Totals
$
2,977,400

 
93,154

 
(10,945
)
 
3,059,609



The Company's investment policy is to invest in high quality securities with the primary intention of holding these securities until the stated maturity.  As such, the portfolio has exposure to interest rate risk, which is the risk that funds are invested today at a market interest rate and in the future interest rates rise causing the current market price on that investment to be lower.  This risk is not a significant factor relative to the Company's buy and hold portfolio, since the intention is to receive the stated interest rate and principal at maturity to match liability requirements to policyholders.  Also, the Company takes steps to manage these risks.  For example, the Company purchases mortgage-backed securities types that have more predictable cash flow patterns.

In addition, the Company is exposed to credit risk which is continually monitored.  Credit risk is the risk that an issuer of a security will not be able to fulfill their obligations relative to a security payment schedule and maturity date.  The Company reviewed pertinent information for all issuers in an unrealized loss position at December 31, 2018 including market pricing history, credit ratings, analyst reports, as well as data provided by the issuers themselves.  The Company then made a determination on each specific issuer relating to whether an other-than-temporary impairment existed.  For the securities that have not been impaired at December 31, 2018, the Company intends to hold these securities until recovery in fair value and expects to receive all amounts due relative to principal and interest.

The Company held below investment grade debt securities totaling $94.2 million and $101.3 million at December 31, 2018 and 2017, respectively. These amounts represent 0.9% and 0.9% of total invested assets for December 31, 2018 and 2017, respectively.  Below investment grade holdings are the result of credit rating downgrades subsequent to purchase, as the Company only invests in high quality securities with ratings quoted as investment grade.  Below investment grade securities generally have greater default risk than higher rated corporate debt.  The issuers of these securities are usually more sensitive to adverse industry or economic conditions than are investment grade issuers.

For the year ended December 31, 2018, the Company recorded net realized gains totaling $8.4 million related to the disposition of investment securities.  The net realized gains included $0.0 million losses for other-than-temporary impairment write-downs on investments. For the years ended December 2017 and 2016, the Company recorded net realized gains totaling $14.8 million and $13.1 million, respectively, related to disposition of securities.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table shows the gross unrealized losses and fair values of the Company's held to maturity investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2018.

 
Securities Held to Maturity
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
88,253

 
(2,124
)
 
10,645

 
(252
)
 
98,898

 
(2,376
)
Public utilities
396,980

 
(8,371
)
 
98,632

 
(4,573
)
 
495,612

 
(12,944
)
Corporate
2,144,969

 
(55,125
)
 
650,401

 
(31,918
)
 
2,795,370

 
(87,043
)
Residential mortgage-backed
202,986

 
(2,032
)
 
311,374

 
(9,900
)
 
514,360

 
(11,932
)
Home equity
—

 
—

 
1,976

 
(10
)
 
1,976

 
(10
)
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,833,188

 
(67,652
)
 
1,073,028

 
(46,653
)
 
3,906,216

 
(114,305
)


The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2018.

 
Securities Available For Sale
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
566

 
(4
)
 
—

 
—

 
566

 
(4
)
Public utilities
38,903

 
(517
)
 
—

 
—

 
38,903

 
(517
)
Corporate
1,468,953

 
(44,575
)
 
442,798

 
(35,063
)
 
1,911,751

 
(79,638
)
Residential mortgage-backed
—

 
—

 
878

 
(84
)
 
878

 
(84
)
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
1,508,422

 
(45,096
)
 
443,676

 
(35,147
)
 
1,952,098

 
(80,243
)


The Company does not consider securities to be other-than-temporarily impaired where the market decline is attributable to factors such as market volatility, liquidity, spread widening and credit quality where it is anticipated that a recovery of all amounts due under the contractual terms of the security will occur and the Company has the intent and ability to hold until recovery or maturity.  Based on its review, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2018. The Company monitors the investment portfolio on an ongoing basis for any changes in issuer facts and circumstances that could result in future impairments.

Gross unrealized losses for debt securities are made up of 653 individual issues, or 50.6% of the total debt securities held by the Company. The market value of these bonds as a percent of amortized cost averages 96.8%.  Of the 653 securities, 195, or approximately 29.9%, fall in the 12 months or greater aging category; and 644 were rated investment grade at December 31, 2018.  

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The following table shows the gross unrealized losses and fair values of the Company's held to maturity investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2017.

 
Securities Held to Maturity
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
6,308

 
(14
)
 
4,869

 
(86
)
 
11,177

 
(100
)
Public utilities
68,368

 
(407
)
 
34,091

 
(487
)
 
102,459

 
(894
)
Corporate
248,844

 
(1,296
)
 
431,591

 
(6,580
)
 
680,435

 
(7,876
)
Residential mortgage-backed
130,015

 
(738
)
 
192,399

 
(5,478
)
 
322,414

 
(6,216
)
Home equity
2,830

 
(4
)
 
—

 
—

 
2,830

 
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
456,365

 
(2,459
)
 
662,950

 
(12,631
)
 
1,119,315

 
(15,090
)


The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category, and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2017.

 
Securities Available For Sale
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
State and political subdivisions
$
546

 
(29
)
 
—

 
—

 
546

 
(29
)
Corporate
201,575

 
(1,134
)
 
296,845

 
(9,610
)
 
498,420

 
(10,744
)
Residential mortgage-backed
1,325

 
(14
)
 
1,085

 
(38
)
 
2,410

 
(52
)
Home equity
1,653

 
—

 
—

 
—

 
1,653

 
—

 
205,099

 
(1,177
)
 
297,930

 
(9,648
)
 
503,029

 
(10,825
)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
1,246

 
(77
)
 
289

 
(43
)
 
1,535

 
(120
)
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
206,345

 
(1,254
)
 
298,219

 
(9,691
)
 
504,564

 
(10,945
)


Unrealized losses increased in 2018 from 2017 levels primarily as a result of an increase in market interest rate levels during the year and a slight widening of spreads on corporate debt securities.  The Company does not consider these investments to be other-than-temporarily impaired because the Company does not intend to sell these securities before recovery in fair value and expects to receive all amounts due relative to principal and interest.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The amortized cost and fair value of investments in debt securities at December 31, 2018, by contractual maturity, are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Debt Securities Available for Sale
 
Debt Securities Held to Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(In thousands)
 
 
 
 
 
 
 
 
Due in 1 year or less
$
159,967

 
162,279

 
371,423

 
375,021

 
 
 
 
 
 
 
 
Due after 1 year through 5 years
1,076,437

 
1,073,423

 
2,885,587

 
2,889,770

 
 
 
 
 
 
 
 
Due after 5 years through 10 years
1,697,093

 
1,636,466

 
2,486,014

 
2,418,209

 
 
 
 
 
 
 
 
Due after 10 years
53,211

 
50,929

 
362,125

 
363,246

 
2,986,708

 
2,923,097

 
6,105,149

 
6,046,246

 
 
 
 
 
 
 
 
Mortgage and asset-backed securities
21,916

 
22,962

 
1,180,105

 
1,182,022

 
 
 
 
 
 
 
 
Total
$
3,008,624

 
2,946,059

 
7,285,254

 
7,228,268



The Company uses the specific identification method in computing realized gains and losses.  The table below details the nature of realized gains and losses, excluding impairments, during the year.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Available for sale debt securities:
 
 
 
 
 
Realized gains on disposal
$
3,447

 
5,208

 
2,644

Realized losses on disposal
(6
)
 
(7
)
 
(29
)
Held to maturity debt securities:
 
 
 
 
 

Realized gains on redemption
3,208

 
6,944

 
6,940

Realized losses on redemption
—

 
(74
)
 
(137
)
Equity securities realized gains
—

 
147

 
702

Real estate
1,799

 
2,657

 
2,950

Mortgage loans
(25
)
 
—

 
—

Other
—

 
—

 
—

 
 
 
 
 
 
Totals
$
8,423

 
14,875

 
13,070



One small municipal bond was sold out of the held to maturity portfolio during 2016 due to a material deterioration in the creditworthiness of the territory it pertained to. No sales were made out of the held to maturity portfolio in 2018 and 2017.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Except for the total U.S. government agency mortgage-backed securities held, the Company had no other investments in any entity in excess of 10% of stockholders' equity at December 31, 2018 or 2017.

The table below presents net impairment losses recognized in earnings for the periods indicated.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Total other-than-temporary impairment recoveries (losses) on debt securities
$
12

 
599

 
110

Portion recognized in comprehensive income
(12
)
 
(599
)
 
(110
)
 
 
 
 
 
 
Net impairment losses on debt securities recognized in earnings
—

 
—

 
—

Equity securities impairments
—

 
(112
)
 
—

 
 
 
 
 
 
Totals
$
—

 
(112
)
 
—



For the years ended December 31, 2018 , 2017, and 2016, the Company recovered $0.0 million, $0.6 million, and $0.1 million, respectively, on previously impaired asset-backed securities. The credit component of the asset-backed securities impairment was determined as the difference between amortized cost and the present value of the cash flows expected to be received, discounted at the original yield. The significant inputs used to project cash flows on asset-backed securities are estimated future prepayment rates, default rates and default loss severity.  

The table below presents a roll forward of credit losses on securities for which the Company also recorded non-credit other-than-temporary impairments in other comprehensive loss.

 
Year Ended
 
Year Ended
 
December 31, 2018
 
December 31, 2017
 
(In thousands)
 
 
 
 
Beginning balance, cumulative credit losses related to other-than-temporary impairments
$
627

 
1,440

Reductions for securities disposed during current period
—

 
(813
)
Additions for OTTI where credit losses have been previously recognized
—

 
—

 
 
 
 
Ending balance, cumulative credit losses related to other-than-temporary impairments
$
627

 
627




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(D)  Net Unrealized Gains (Losses)

Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 2018 and 2017, are as follows:

 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Gross unrealized gains
$
17,678

 
93,034

Gross unrealized losses
(80,263
)
 
(10,856
)
Adjustments for:
 
 
 

Deferred policy acquisition costs and sales inducements
24,237

 
(39,579
)
Deferred Federal income tax expense
8,053

 
(8,946
)
 
(30,295
)
 
33,653

 
 
 
 
Net unrealized gains related to securities transferred to held to maturity
—

 
—

 
 
 
 
Net unrealized gains (losses) on investment securities
$
(30,295
)
 
33,653



(E)  Transfer of Securities

There were no transfers in 2018, 2017 or 2016 between the held to maturity portfolio and the available for sale portfolio.


(4)  REINSURANCE

The Company reinsures the risk on any one life in excess of $500,000.  Total life insurance in force was $18.6 billion and $19.7 billion at December 31, 2018 and 2017, respectively.  Of these amounts, life insurance in force totaling $4.0 billion and $4.4 billion was ceded to reinsurance companies on a yearly renewable term basis at December 31, 2018 and 2017, respectively.  In accordance with the reinsurance contracts, reinsurance receivables, including amounts related to claims incurred but not reported and liabilities for future policy benefits, totaled $1.1 million and $1.3 million at December 31, 2018 and 2017, respectively. Premiums and contract revenues were reduced by $20.8 million, $20.3 million and $19.7 million for reinsurance premiums ceded during 2018, 2017 and 2016, respectively. Benefit expenses were reduced by $31.2 million, $7.5 million and $12.0 million, for reinsurance recoveries during 2018, 2017 and 2016, respectively. A contingent liability exists with respect to reinsurance, as the Company remains liable if the reinsurance companies are unable to perform and meet their obligations under the existing agreements.  The Company does not assume reinsurance.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(5)  FEDERAL INCOME TAXES

Total Federal income taxes were allocated as follows:

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Taxes (benefits) on earnings from continuing operations:
 
 
 
 
 
Current
$
(1,697
)
 
74,361

 
41,544

Deferred
26,446

 
(23,129
)
 
10,426

Remeasurement of deferred taxes due to Tax Act
—

 
(17,098
)
 
—

 
 
 
 
 
 
Taxes on earnings
24,749

 
34,134

 
51,970

 
 
 
 
 
 
Taxes (benefits) on components of stockholders' equity:
 

 
 

 
 

Net unrealized gains and losses on securities available for sale
(15,870
)
 
2,736

 
5,382

Foreign currency translation adjustments
360

 
(5
)
 
(88
)
Change in benefit plan liability
3,003

 
(2,085
)
 
(62
)
 
 
 
 
 
 
 
 
 
 
 
 
Total Federal income taxes (benefit)
$
12,242

 
34,780

 
57,202



On December 22, 2017, the United States Congress enacted the Tax Cuts and Jobs Act ("Tax Act").  See Note 1 for further discussion. Among other things, the Tax Act reduces the federal corporate income tax rate from 35% to 21% effective in 2018.  As a result of the change in the federal corporate income tax rate the Company was required to remeasure its deferred tax assets and liabilities at December 31, 2017 using the new corporate rate. This produced a one-time income tax benefit, with a corresponding decrease to the net deferred tax liability, of $17.1 million. 

As a consequence of the Tax Act, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in February 2018 which provided the option for reclassification of certain stranded tax effects from accumulated other comprehensive income ("AOCI") to retained earnings. The Company elected to early adopt this standard as of December 31, 2017. Included in the remeasurement of deferred tax assets and liabilities producing the one-time income tax benefit discussed above were stranded taxes included in AOCI of $2.5 million.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The provisions for Federal income taxes attributable to earnings from continuing operations vary from amounts computed by applying the statutory income tax rate to income statement earnings before Federal income taxes due to differences between the financial statement reporting and income tax treatment of certain items. These differences and the corresponding tax effects are as follows:

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Income tax expense at statutory rate (21% in 2018 and 35% in 2017 and 2016)
$
29,716

 
50,594

 
53,502

Dividend received deduction
(820
)
 
(1,099
)
 
(850
)
Tax exempt interest
(1,416
)
 
(2,276
)
 
(2,193
)
Non deductible salary expense
54

 
—

 
—

Adjustments pertaining to prior tax years
(3,071
)
 
895

 
1,076

Nondeductible insurance
96

 
160

 
160

Nondeductible expenses
198

 
178

 
588

Remeasurement of deferred taxes due to Tax Act
—

 
(17,098
)
 
—

Excess premium liability
—

 
2,870

 
—

Other, net
(8
)
 
(90
)
 
(313
)
 
 
 
 
 
 
Taxes on earnings from continuing operations
$
24,749

 
34,134

 
51,970



The Company's policy is to record changes to deferred taxes for rate changes in the period when changes in tax laws have been enacted. Included in the 2018 adjustments pertaining to prior tax years is $0.5 million related to the writedown of deferred taxes due to the rate change in the Tax Act adjusted in the tax return. As described above there was a net decrease to the net deferred tax liability of $17.1 million recorded for the year ended December 31, 2017 caused by the rate change in the Tax Act. There were no deferred tax changes attributable to enacted tax rate changes for the years ended December 31, 2016. The excess premium liability provision represents the nondeductible tax effect of an $8.2 million loss contingency recorded by the Company at December 31, 2017 related to excess premiums on certain of its policies.

The Company generally expects its effective tax rate to be less than the current statutory rate due to recurring permanent differences that reduce tax expense, principally tax exempt interest income and the dividend received deduction.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 are presented below.

 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Deferred tax assets:
 
 
 
Future policy benefits, excess of financial accounting liabilities over tax liabilities
$
189,100

 
162,424

Investment securities write-downs for financial accounting purposes
311

 
196

Benefit plan liabilities
7,444

 
10,355

Real estate, principally due to adjustments for financial accounting purposes
16

 
—

Accrued operating expenses recorded for financial accounting purposes not currently tax deductible
4,426

 
6,222

Tax reform reserve adjustment
—

 
83,935

Accrued and unearned investment income recognized for tax purposes and deferred for financial accounting purposes
109

 
265

Net unrealized losses on debt securities available for sale
7,390

 
—

Other
74

 
94

 
 
 
 
Total gross deferred tax assets
208,870

 
263,491

 
 
 
 
Deferred tax liabilities:
 

 
 

Deferred policy acquisition and sales inducement costs, principally expensed for tax purposes
(170,940
)
 
(180,780
)
Tax reform reserve adjustment
(61,170
)
 
(83,935
)
Debt securities, principally due to deferred market discount for tax
(7,370
)
 
(7,526
)
Real estate, principally due to adjustments for financial accounting purposes
—

 
(5
)
Net unrealized gains on securities available for sale
—

 
(8,945
)
Foreign currency translation adjustments
(1,217
)
 
(857
)
Fixed assets, due to different depreciation bases
(7,546
)
 
(6,853
)
Other
(11
)
 
2

 
 
 
 
Total gross deferred tax liabilities
(248,254
)
 
(288,899
)
 
 
 
 
Net deferred tax liabilities
$
(39,384
)
 
(25,408
)


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Beginning January 1, 2018, the Tax Act imposed a limitation on life insurance tax reserves based upon the greater of net surrender value or 92.81% of the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined.  The Company recognized the provisional tax impacts related to the change in the methodology employed to calculate tax reserves.  As a result, the Company recorded a deferred tax asset and offsetting deferred tax liability of $83.9 million in the Consolidated Financial Statements for the year ended December 31, 2017.  The amount recorded by the Company was considered provisional as the Company did not have the information currently available in appropriate detail to analyze and calculate the amount required under the change in methodology. Following additional guidance and software updates provided during 2018, the Company performed additional analysis and determined that the correct deferred tax liability as of December 31, 2017 approximated $69.9 million. This amount has been incorporated into the measurement of net deferred tax liabilities as of December 31, 2018. The total tax reserve adjustment of $332.9 million resulting from the limitation imposed under the Tax Act will be recognized as an increase of $41.6 million in taxable income per year through the year 2025. At the statutory rate of 21%, this results in additional tax of $8.7 million per year.

There were no valuation allowances for deferred tax assets at December 31, 2018 and 2017. In assessing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and available tax planning strategies in making this assessment.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

In accordance with GAAP, the Company assessed whether it had any significant uncertain tax positions related to open examination or other IRS issues and determined that there were none.  Accordingly, no reserve for uncertain tax positions has been recorded.   Should a provision for any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company's policy to accrue for such in its income tax accounts. There were no such accruals as of December 31, 2018 or 2017. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2014.

Allocation of the consolidated Federal income tax liability amongst the Company and its consolidated subsidiaries is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury Regulations.  Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits.


(6)  INFORMATION REGARDING CONTROLLING STOCKHOLDER

Robert L. Moody Sr., Chairman Emeritus of the Board of Directors of NWLGI, owns 99.0% of the total outstanding shares of the Company's Class B common stock and 33.7% of the Class A common stock as of December 31, 2018.

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. Also, in the event of liquidation of the Company, the Class A stockholders shall first 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 common stock, based on the number of shares held.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(7)  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 complies 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 credit for service, future qualified defined benefit plan expense is projected to be minimal.  The plan was amended in 2018 to increase the maximum pension value that may be distributed in a lump sum and to decrease the commencement age for in-service distributions by participants. Fair values of plan assets and liabilities are measured as of December 31 for each year.  A detail of plan disclosures is provided below.

Obligations and Funded Status

 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Changes in projected benefit obligations:
 
 
 
Projected benefit obligations at beginning of year
$
24,659

 
24,553

Service cost
111

 
106

Interest cost
899

 
957

Plan amendments
(1,396
)
 
—

Actuarial gain (loss)
494

 
558

Benefits paid
(2,829
)
 
(1,515
)
 
 
 
 
Projected benefit obligations at end of year
21,938

 
24,659

 
 
 
 
Changes in plan assets:
 

 
 

Fair value of plan assets at beginning of year
19,312

 
18,279

Actual return on plan assets
(414
)
 
2,442

Contributions
100

 
106

Benefits paid
(2,829
)
 
(1,515
)
 
 
 
 
Fair value of plan assets at end of year
16,169

 
19,312

 
 
 
 
Funded status at end of year
$
(5,769
)
 
(5,347
)

The service cost shown above for each year 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Amounts recognized in the Company's Consolidated Financial Statements:
 
 
 
Assets
$
—

 
—

Liabilities
(5,769
)
 
(5,347
)
 
 
 
 
Net amount recognized
$
(5,769
)
 
(5,347
)
 
 
 
 
Amounts recognized in accumulated other comprehensive income:
 
 
 
Net loss
$
8,435

 
8,147

Prior service cost
—

 
—

 
 
 
 
Net amount recognized
$
8,435

 
8,147


 
The accumulated benefit obligation was $21.9 million and $24.7 million at December 31, 2018 and 2017, respectively.

Components of Net Periodic Benefit Cost
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Components of net periodic benefit costs:
 
 
 
 
 
Interest cost
$
899

 
957

 
1,000

Service cost
111

 
106

 
105

Expected return on plan assets
(1,300
)
 
(1,227
)
 
(1,215
)
Amortization of prior service cost
—

 
—

 
—

Amortization of net loss
524

 
638

 
772

 
 
 
 
 
 
Net periodic benefit cost
234

 
474

 
662

 
 
 
 
 
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
 

 
 

 
 

Net loss (gain)
812

 
(658
)
 
 

Amortization of prior service cost
—

 
—

 
 

Amortization of net loss (gain)
(524
)
 
(638
)
 
 

 
 
 
 
 
 
Total recognized in other comprehensive income
288

 
(1,296
)
 
 

 
 
 
 
 
 
Total recognized in net periodic benefit cost and other comprehensive income
$
522

 
(822
)
 
 



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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The estimated net loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019, based on the average expected future service of plan participants, is $0.6 million.  The estimated prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019 will be minimal.

Assumptions
 
December 31,
 
2018
 
2017
 
 
 
 
Weighted-average assumptions used to determine benefit obligations:
 
 
 
Discount rate
4.00
%
 
3.75
%
Rate of compensation increase
n/a

 
n/a


 
December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Weighted-average assumptions used to determine net periodic benefit cost:
 
 
 
 
 
Discount rate
3.75
%
 
4.00
%
 
4.00
%
Expected long-term return on plan assets
7.00
%
 
7.00
%
 
7.00
%
Rate of compensation increase
n/a

 
n/a

 
n/a



The assumed long-term rate of return on plan assets is generally set at the rate expected to be earned based on the long-term investment policy of the plan and the various classes of invested funds, based on the input of the plan’s investment advisors and consulting actuary and the plan’s historic rate of return.  As of December 31, 2018, the plan’s average 10-year and inception-to-date returns were 8.66% and 6.90%, respectively.

In setting the annual discount rate assumption, the Pension Committee reviews current 10 year and 30 year corporate bond yields, the current spread to treasuries, and their relative change during the past twelve months. It also considers the present value of the projected benefit payment stream based on the Citigroup Pension Discount Curve and market data observations provided by independent consultants.

In setting the annual portfolio rate of return assumption, the Pension Committee considers the Plan’s actual long-term performance, the portfolio’s current allocation and individual investment holdings, the Committee’s and the investment manager’s expectations for future long term investment strategy and expected performance, and the advice of consultants knowledgeable about overall market expectations and benchmark rates of return used by comparable companies.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Plan Assets

As discussed in Note 14, Fair Values of Financial Instruments, the Company adopted GAAP guidance which defines fair value and establishes a framework for measuring fair value of financial assets.  Using this guidance, the Company has categorized its pension plan assets into a three level hierarchy, based on the priority of inputs to the valuation process.  The fair value hierarchy classifications are reviewed annually. Reclassification of certain financial assets and liabilities may result based on changes in the observability of valuation attributes.  The following tables set forth the Company’s pension plan assets within the fair value hierarchy as of December 31, 2018 and 2017.

 
December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
209

 
209

 
—

 
—

Equity securities
 

 
 
 
 
 
 
Domestic
9,909

 
9,909

 
—

 
—

International
193

 
193

 
—

 
—

Debt securities
 

 
 
 
 
 
 
Corporate bonds
5,858

 


 
5,858

 
—

 
 
 
 
 
 
 
 
Total
$
16,169

 
10,311

 
5,858

 
—



 
December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
662

 
662

 
—

 
—

Equity securities
 

 
 
 
 
 
 
Domestic
11,885

 
11,885

 
—

 
—

International
394

 
394

 
—

 
—

Debt securities
 

 
 
 
 
 
 
Corporate bonds
6,371

 
—

 
6,371

 
—

 
 
 
 
 
 
 
 
Total
$
19,312

 
12,941

 
6,371

 
—


Investment securities.  Fair values for investments in debt and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services. In cases where prices are unavailable from these sources, values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.

Cash and cash equivalents.  Carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate their fair values.


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The plan’s weighted-average asset allocations by asset category have been as follows:

 
December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Asset Category:
 
 
 
 
 
Equity securities
63%
 
64%
 
62%
Debt securities
36%
 
33%
 
31%
Cash and cash equivalents
1%
 
3%
 
7%
 
 
 
 
 
 
Total
100%
 
100%
 
100%


The Company has established and maintains an investment policy statement for the assets held in the plan's trust.  The investment strategies are of a long-term nature and are designed to meet the following objectives:

Ÿ
ensure that funds are available to pay benefits as they become due
Ÿ
set forth an investment structure detailing permitted assets and expected allocation ranges among classes
Ÿ
ensure that plan assets are managed in accordance with ERISA

The pension plan is a highly diversified portfolio. The 99% of pension assets not invested in cash is allocated among 208 different investments, with no single credit representing more than 2.6% of the fair value of the portfolio.  The investment policy statement sets forth the following acceptable ranges for each asset's class.

 
Acceptable Range
 
 
Asset Category:
 
Equity securities
55-70%
Debt securities
30-40%
Cash and cash equivalents
0-15%


Deviations from these ranges are permitted if such deviations are consistent with the duty of prudence under ERISA.  Investments in natural resources, venture capital, precious metals, futures and options, real estate, and other vehicles that do not have readily available objective valuations are not permitted.  Short sales, use of margin or leverage, and investment in commodities and art objects are also prohibited.

The investment policy statement is reviewed annually to ensure that the objectives are met considering any changes in benefit plan design, market conditions, or other material considerations.

Contributions

At present, National Western expects to contribute $644,000 to the plan during 2019 which amount includes a $500,000 voluntary contribution. Additional amounts may be contributed at the company's discretion.  The plan’s funding status is reviewed periodically throughout the year by National Western’s Pension Plan Committee.  The company intends to contribute at least the minimum amounts necessary for tax compliance and to maintain an Adjusted Funding Target Attainment Percentage ("AFTAP") of over 80% to meet the Pension Protection Act Plan’s threshold.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2019
$
1,482

2020
1,472

2021
1,455

2022
1,415

2023
1,372

2024-2028
6,561



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 this 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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A detail of plan disclosures related to the amendments of the original plan and the additional two plans is provided below:

Obligations and Funded Status

 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Changes in projected benefit obligations:
 
 
 
Projected benefit obligations at beginning of year
$
36,914

 
26,232

Service cost
361

 
818

Interest cost
852

 
1,387

Actuarial (gain) loss
(13,870
)
 
10,459

Benefits paid
(1,982
)
 
(1,982
)
 
 
 
 
Projected benefit obligations at end of year
22,275

 
36,914

 
 
 
 
Change in plan assets:
 

 
 

Fair value of plan assets at beginning of year
—

 
—

Contributions
1,982

 
1,982

Benefits paid
(1,982
)
 
(1,982
)
 
 
 
 
Fair value of plan assets at end of year
—

 
—

 
 
 
 
Funded status at end of year
$
(22,275
)
 
(36,914
)


 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Amounts recognized in the Company's Consolidated Financial Statements:
 
 
 
Assets
$
—

 
—

Liabilities
(22,275
)
 
(36,914
)
 
 
 
 
Net amount recognized
$
(22,275
)
 
(36,914
)
 
 
 
 
Amounts recognized in accumulated other comprehensive income:
 

 
 

Net loss
$
4,475

 
19,049

Prior service cost
522

 
582

 
 
 
 
Net amount recognized
$
4,997

 
19,631




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The accumulated benefit obligation was $18.1 million and $20.7 million at December 31, 2018 and 2017, respectively.

Components of Net Periodic Benefit Cost
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
Service cost
$
361

 
818

 
438

Interest cost
852

 
1,387

 
1,058

Amortization of prior service cost
59

 
59

 
59

Amortization of net loss
704

 
3,274

 
2,003

 
 
 
 
 
 
Net periodic benefit cost
1,976

 
5,538

 
3,558

 
 
 
 
 
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
 
 
Net (gain) loss
(13,870
)
 
10,459

 
 
Amortization of prior service cost
(59
)
 
(59
)
 
 
Amortization of net (gain) loss
(704
)
 
(3,274
)
 
 
 
 
 
 
 
 
Total recognized in other comprehensive income
(14,633
)
 
7,126

 
 
 
 
 
 
 
 
Total recognized in net periodic benefit cost and other comprehensive income
$
(12,657
)
 
12,664

 
 

 
The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the income statement.
The estimated net loss to be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019, based on the average expected future service of plan participants, is $0.5 million.  The estimated prior service cost to be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019 will be $59,000.

Assumptions
 
December 31,
 
2018
 
2017
 
 
 
 
Weighted-average assumptions used to determine benefit obligations:
 
 
 
Discount rate
4.00
%
 
3.75
%
Rate of compensation increase
8.00
%
 
8.00
%


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Weighted-average assumptions used to determine net periodic benefit costs:
 
 
 
 
 
Discount rate
3.75
%
 
4.00
%
 
4.00
%
Expected long-term return on plan assets
n/a

 
n/a

 
n/a

Rate of compensation increase
8.00
%
 
8.00
%
 
8.00
%


The plan is unfunded and therefore no assumption has been made related to the expected long-term return on plan assets.

Plan Assets

The plan is unfunded and therefore had no assets at December 31, 2018 or 2017.

Contributions

National Western expects to contribute approximately $2.0 million to the plan in 2019.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2019
$
1,982

2020
1,982

2021
1,982

2022
1,982

2023
1,982

2024-2028
7,228



(B)  Defined Contribution Pension Plans

In addition to the defined benefit pension plans, National Western sponsors a qualified 401(k) plan for substantially all employees and a non-qualified deferred compensation plan primarily for senior officers.  The company made annual contributions to the 401(k) plan in 2018, 2017, and 2016 of up to four percent of each employee's compensation, based on the employee's personal level of salary deferrals to the plan. All company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 2018, 2017 and 2016, company contributions totaled $615,000, $549,000 and $421,000, respectively.

The non-qualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 2018, 2017 and 2016, company contributions totaled $127,000, $119,000, and $95,000, respectively.


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(C)  Postretirement Employment Plans Other Than Pension

National Western sponsors a health care plan that was amended in 2004 to provide postretirement benefits to certain fully-vested individuals.  The plan is unfunded.  The company uses a December 31 measurement date for the plan.  A detail of plan disclosures related to the plan is provided below:

Obligations and Funded Status
 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Changes in projected benefit obligations:
 
 
 
Projected benefit obligations at beginning of year
$
3,774

 
3,366

Interest cost
158

 
139

Actuarial loss (gain)
298

 
274

Benefits paid
—

 
(5
)
 
 
 
 
Projected benefit obligations at end of year
4,230

 
3,774

 
 
 
 
Changes in plan assets:
 

 
 

Fair value of plan assets at beginning of year
—

 
—

Contributions
—

 
5

Benefits paid
—

 
(5
)
 
 
 
 
Fair value of plan assets at end of year
—

 
—

 
 
 
 
Funded status at end of year
$
(4,230
)
 
(3,774
)


 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Amounts recognized in the Company's Consolidated Financial Statements:
 
 
 
Assets
$
—

 
—

Liabilities
(4,230
)
 
(3,774
)
 
 
 
 
Net amount recognized
$
(4,230
)
 
(3,774
)
 
 
 
 
Amounts recognized in accumulated other comprehensive income:
 

 
 

Net loss
$
816

 
669

Prior service cost
51

 
155

 
 
 
 
Net amount recognized
$
867

 
824




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Components of Net Periodic Benefit Cost
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Components of net periodic benefit cost:
 
 
 
 
 
Interest cost
$
158

 
139

 
121

Amortization of prior service cost
103

 
103

 
103

Amortization of net loss
151

 
41

 
—

 
 
 
 
 
 
Net periodic benefit cost
412

 
283

 
224

 
 
 
 
 
 
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
 

 
 

 
 

Net (gain) loss
298

 
274

 
 

Amortization of prior service cost
(103
)
 
(103
)
 
 
Amortization of net (gain) loss
(151
)
 
(41
)
 
 

 
 
 
 
 
 
Total recognized in other comprehensive income
44

 
130

 
 

 
 
 
 
 
 
Total recognized in net periodic benefit cost and other comprehensive income
$
456

 
413

 
 



The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the income statement.
The estimated net loss to be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019, based on the average expected future service of plan participants, is $79,000.  The estimated prior service cost to be amortized from accumulated other comprehensive income into net periodic benefit cost over 2019 will be $52,000.

Assumptions
 
December 31,
 
2018
 
2017
 
 
 
 
Weighted-average assumptions used to determine benefit obligations:
 
 
 
Discount rate
4.00
%
 
3.75
%
Expected long-term return on plan assets
n/a

 
n/a


For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2019, decreasing annually by 0.5% until reaching an ultimate rate of 5%.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Assumed health care trend rates have a significant effect on the amounts reported for the health care plans.  A one percentage point change in assumed health care cost trend rates would have the following effects for the years ended.

 
December 31, 2018
 
December 31, 2017
 
1% Point Increase
 
1% Point Decrease
 
1% Point Increase
 
1% Point Decrease
 
(In thousands)
Effect on total of service and interest cost components
$
24

 
(24
)
 
22

 
(21
)
 
 
 
 
 
 
 
 
Effect on postretirement benefit obligation
$
630

 
(624
)
 
607

 
(592
)


Plan Assets

The plans are unfunded and therefore had no assets at December 31, 2018 and 2017.

Contributions

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2019
$
104

2020
111

2021
118

2022
124

2023
129

2024-2028
749




(8)  SHORT-TERM BORROWINGS

National Western has available a $75 million bank line of credit (with Moody National Bank, its custodian bank and a related party) primarily for cash management purposes. The line of credit facility was increased from $40 million effective October 1, 2018. The Company is required to maintain a collateral security deposit in trust with the sponsoring bank having a fair value equal to 110% of any outstanding liability. The Company had no outstanding borrowings with the bank at December 31, 2018 or 2017.  The Company maintained assets having an amortized value of $84.5 million (fair value of $86.6 million) on deposit with the lender at December 31, 2018.


(9)  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.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



National Western was the named defendant in the case of Damaris Maldonado Vinas, et al. vs. National Western Life Insurance, in which the plaintiffs, after National Western had paid the death benefits to the beneficiary (Francisco Iglesias-Alvarez) upon the annuitant’s (Carlos Iglesias-Alvarez) death, sought to annul two annuity policies issued by National Western at the behest of Carlos Iglesias-Alvarez and which named Francisco Iglesias-Alvarez as their beneficiary.  On March 31, 2016, the United States District Court for the District of Puerto Rico (the "Court") issued its Opinion and Order on the pending Motions for Summary Judgment submitted by the parties, and therein denied National Western’s motion and granted plaintiffs’ motion voiding the two annuities and requesting a refund of the premiums paid ($2.9 million).  National Western vigorously defended the case and believes that the Court’s Opinion and Order is contrary to applicable law.  As such, National Western filed a Motion for Reconsideration of Opinion and Order and Corresponding Judgment with the Court on April 27, 2016, which the Court denied on May 5, 2016. National Western filed a Notice of Appeal on June 10, 2016, filed its Appeal Brief on September 12, 2016, and oral arguments with the U.S. Court of Appeals for the First Circuit were held on March 9, 2017. On June 29, 2017, the Court of Appeals vacated the district court's judgment and remanded to the district court to determine whether it is nevertheless equitable for the case to proceed without Francisco Iglesias-Alvarez. Plaintiffs filed a Motion in Support of Determination in Equity and Good Conscience That Action Should Proceed Among Existing Parties Under Fed.R.Civ.P. 19(B) on September 14, 2017, and National Western filed its Opposition to Plaintiffs' Motion on October 27, 2017. On April 2, 2018 the Court asked the parties for additional briefing regarding the Court's jurisdiction over Francisco Iglesias-Alvarez, which the parties filed on April 30, 2018. On May 14, 2018, National Western filed its Opposition to Plaintiffs' Brief.  Plaintiffs filed a Motion to Strike on May 22, 2018, which National Western opposed on June 4, 2018. On August 6, 2018, the Court issued an Opinion and Order dismissing plaintiffs’ case without prejudice and plaintiffs filed a Notice of Appeal to the First Circuit Court of Appeals on September 4, 2018. The case settled in December of 2018, without an admission of liability by either party, via a settlement amount less than the amount previously accrued.

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 challenges the directors’ oversight of insurance sales to non-U.S. residents and alleges 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 seeks 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 are baseless and without merit, will vigorously defend this lawsuit, and will seek reimbursement of all legal costs and expenses from plaintiff.  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 will grant the defendants' Pleas and asking 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 their 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 their 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 $1,314,053.73 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 the company 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 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 $13.5 million in commitments to fund new loans and $4.3 million in commitments to extend credit relating to existing loans at December 31, 2018. The Company evaluates each customer's creditworthiness on a case-by-case basis.

(C)  Guaranty Association Assessments

National Western is subject to state guaranty association assessments in all states in which it is licensed to do business.  These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Many states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years.  However, several states do not allow such credits.

The Company estimates its liabilities for guaranty association assessments by using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations.  The Company monitors and revises its estimates for assessments as additional information becomes available which could result in changes to the estimated liabilities.  As of December 31, 2018, 2017 and 2016, liabilities for guaranty association assessments totaled $0.1 million, $0.3 million and $0.3 million, respectively. Other operating expenses related to state guaranty association assessments were minimal for the years ended December 31, 2018, 2017 and 2016.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(D)  Leases

The Company leases various computers and other office related equipment under operating leases. Rental expenses for these leases were $0.4 million, $0.3 million and $0.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.  In October 2017, the Company entered into a lease agreement for new equipment under a capital lease. This lease will expire in December 2022. The present value of future payments capitalized amounted to $1.6 million and amortization commenced in 2018. The Company's future annual lease obligations as of December 31, 2018 are as shown below (in thousands).

2019
$
359

2020
359

2021
358

2022
358

Total minimum lease payments
1,434

 
 
Less: Interest
(117
)
 
 

Present value of net minimum lease payments
$
1,317




(10)  STOCKHOLDERS' EQUITY

(A)  Changes in Common Stock Shares Outstanding

Changes in shares of common stock outstanding are provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Common stock shares outstanding:
 
 
 
 
 
Shares outstanding at beginning of year
3,636

 
3,636

 
3,636

Shares exercised under stock option plan
—

 
—

 
—

 
 
 
 
 
 
Shares outstanding at end of year
3,636

 
3,636

 
3,636




(B)  Dividend Restrictions

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 the Company.  The maximum dividend payment which may be made without prior approval in 2019 is $30.7 million.

As discussed in Note (1) Consolidation and Basis of Presentation, on October 1, 2015, National Western completed its previously announced holding company reorganization and became a wholly owned subsidiary of NWLGI. While remaining under the same Colorado Division of Insurance restrictions pertaining to dividend amounts, dividends declared by National Western from that date forward are payable entirely to NWLGI as the sole owner.
 

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On October 19, 2018, the Board of Directors of NWLGI declared a cash dividend to stockholders on record as of November 7, 2018 which was paid December 3, 2018.  The dividends approved were $0.36 per common share to Class A stockholders and $0.18 per common share to Class B stockholders.  A dividend in the same amounts per share on Class A and Class B shares was declared in October 2017 and paid in December of 2017.

During 2018, the Board of Directors of National Western declared ordinary cash dividends aggregating $6.0 million which were paid to NWLGI in 2018. During 2017, the Board of Directors of National Western declared ordinary cash dividends totaling $7.0 million which were paid to NWLGI during that year. Dividends paid from National Western to NWLGI are eliminated in consolidation.

(C)  Regulatory Capital Requirements

The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners ("NAIC").  The formulas for determining the amount of risk-based capital ("RBC") specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk.  Regulatory compliance is determined by a ratio of National Western's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC.  Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action.  National Western's current authorized control level RBC of $127.3 million is significantly below its regulatory total adjusted capital of $1.4 billion.

(D)  Share-Based Payments

The Company had a stock and incentive plan ("1995 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, in tandem with stock options or freestanding; (3) restricted stock or restricted stock units; and, (4) performance awards. The 1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010. 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 stock appreciation rights ("SARs") or other awards were allowed to be granted, could not exceed 300,000. Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A common stock shares eligible for issue not to exceed 300,000. These plans were 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).

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 1995 Plan and 2008 Plan had been exercised, forfeited, or expired. Employee stock option and 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' stock option and SAR grants vest 20% annually following one year of service from the date of grant.

Effective during March 2006, the Company adopted and implemented a limited stock buy-back program with respect to the 1995 Plan which provides stock option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders may 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 1995 Plan; however, the program necessitated a change in accounting from the equity classification to the liability classification. In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan. These plans were assumed as well by NWLGI from National Western pursuant to the terms of the holding company reorganization.


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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 commons shares, often referred to as "phantom stock-based awards". 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. The RSUs are payable in cash at the vesting date equal to the 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 in 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.

Directors of the Company are eligible to receive RSUs under the Incentive Plan. As shown in the table below, during the twelve months ended December 31, 2018 and 2017, the Company granted RSUs to directors based upon the closing market price per Class A common share at the time of the grant. Unlike RSUs granted to officers, the RSUs granted to directors vest one year from the date of grant. They are payable in cash at the vesting date equal to the closing price of the Company's Class A common share at that time.

The following table shows all grants issued to officers and directors for the twelve months ended December 31, 2018 and 2017. These grants were made based upon closing market price per Class A common share at the grant date.

 
Twelve Months Ended
 
December 31, 2018
 
December 31, 2017
 
Officers
 
Directors
 
Officers
 
Directors
 
 
 
 
 
 
 
 
SARs
12,590

 
—

 
22,184

 
—

RSUs
3,149

 
1,980

 
5,341

 
3,290

PSUs
5,070

 
—

 
8,736

 
—


The Company uses the current fair value method to measure compensation cost for awards granted under the share-based plans. As of December 31, 2018 and 2017, the liability balance was $11.9 million and $15.2 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, 2018
291,000

 
18,018

 
$
242.07

Exercised
—

 
(18,018
)
 
$
242.07

Forfeited
—

 
—

 
$
—

Expired
—

 
—

 
$
—

Stock options granted
—

 
—

 
$
—

 
 
 
 
 
 
Balance at December 31, 2018
291,000

 
—

 
$
—




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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
Liability Awards
Other Share/Unit Awards:
SARs
 
RSUs
 
PSUs
 
 
 
 
 
 
Balance at January 1, 2018
92,667

 
11,721

 
14,052

Exercised
(14,034
)
 
(3,124
)
 
—

Forfeited
(1,780
)
 
(556
)
 
—

Granted
12,590

 
5,129

 
5,070

 
 
 
 
 
 
Balance at December 31, 2018
89,443

 
13,170

 
19,122



The total intrinsic value of options, SARs, and RSUs exercised was $4.7 million, $1.8 million, and $3.6 million for the years ended December 31, 2018, 2017, and 2016 respectively. The total share-based liabilities paid were $4.7 million, $1.8 million, and $3.6 million for the years ended December 31, 2018, 2017, and 2016, respectively. The total fair value of options, SARs, and RSUs vested during the years ended December 31, 2018, 2017, and 2016 was $3.1 million, $2.7 million, and $1.5 million, respectively.

The following table summarizes information about SARs outstanding at December 31, 2018.

 
SARs Outstanding
 
 
 
Number Outstanding
 
Weighted-Average Remaining Contractual Life
 
Number Exercisable
 
 
 
 
 
 
Exercise prices:
 
 
 
 
 
132.56
19,568

 
3.0 years
 
19,568

210.22
25,000

 
4.9 years
 
16,400

216.48
11,649

 
7.1 years
 
7,589

311.16
10,427

 
8.1 years
 
3,444

310.55
203

 
8.3 years
 
67

334.34
10,006

 
9.0 years
 
3,329

303.77
12,590

 
10.0 years
 
—

 
 
 
 
 
 
Totals
89,443

 
 
 
50,397

 
 
 
 
 
 
Aggregate intrinsic value
 

 
 
 
 

(in thousands)
$
6,533

 
 
 
$
5,413



The aggregate intrinsic value in the table above is based on the closing stock price of $300.70 per share on December 31, 2018.

In estimating the fair value of SARs/options outstanding at December 31, 2018 and 2017, the Company employed the Black-Scholes option pricing model with assumptions as detailed below.

 
December 31, 2018

 
December 31, 2017

 
 
 
 
Expected term of SARs/options
3.0 to 10.0 years


0.3 to 10.0 years

Expected volatility weighted-average
22.14
%
 
21.55
%
Expected dividend yield
0.12
%
 
0.11
%
Risk-free rate weighted-average
2.58
%
 
1.82
%


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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

The pre-tax compensation expense/(benefit) recognized in the Consolidated Financial Statements related to these plans was $1.4 million, $5.0 million and $7.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. The related tax (benefit)/expense recognized was $(0.3) million, $(1.8) million and $(2.8) million for the years ended December 31, 2018, 2017 and 2016, respectively.

For the years ended December 31, 2018, 2017 and 2016, the total pre-tax compensation expense related to nonvested share-based awards not yet recognized was $7.1 million, $7.8 million and $2.3 million, respectively.  The December 31, 2018 amount is expected to be recognized over a weighted-average period of 1.6 years.  The Company recognizes compensation cost over the graded vesting periods.


(11)  EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income available to each class of common stockholders on an as if distributed basis by the weighted-average number of common shares outstanding for the period.  Diluted earnings per share, by definition, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, that then shared in the distributed earnings of each class of common stock. U.S. GAAP requires a two-class presentation for the Company’s two classes of common stock (Note 6, Information Regarding Controlling Stockholder).  The Company currently has no share-based compensation awards outstanding that could be redeemed for shares of common stock.
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
Class A
 
Class B
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
116,758

 
 
 
110,421

 
 
 
100,892

 
 
Dividends – Class A shares
(1,237
)
 
 
 
(1,237
)
 
 
 
(1,237
)
 
 
Dividends – Class B shares
(36
)
 
 
 
(36
)
 
 
 
(36
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Undistributed earnings
$
115,485

 
 
 
109,148

 
 
 
99,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allocation of net earnings:
 

 
 
 
 

 
 
 
 

 
 
Dividends
$
1,237

 
36

 
1,237

 
36

 
1,237

 
36

Allocation of undistributed earnings
112,219

 
3,266

 
106,061

 
3,087

 
96,802

 
2,817

 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
$
113,456

 
3,302

 
107,298

 
3,123

 
98,039

 
2,853

 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
—

 
—

 
1

 
—

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

 
200

 
3,436

 
200

 
3,437

 
200

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
33.02

 
16.51

 
31.23

 
15.61

 
28.53

 
14.27

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
33.02

 
16.51

 
31.23

 
15.61

 
28.53

 
14.27




(12)  COMPREHENSIVE INCOME

GAAP guidance requires that all items recognized under accounting standards as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements.  This guidance requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This guidance affects the Company's reporting presentation of certain items such as foreign currency translation adjustments, unrealized gains and losses on investment securities, and benefit plan liabilities.  These items are reflected as components of other comprehensive income (loss), net of taxes, as reported in the accompanying Consolidated Financial Statements.  


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



During the year ended December 31, 2017, the Company remeasured its deferred tax assets and liabilities as a consequence of the Tax Act (see Notes 1 and 5) lowering the federal corporate income tax rate from 35% to 21%. This tax remeasurement was recorded in the Company's Consolidated Statements of Earnings, including taxes associated with components of other comprehensive income (loss). Recognizing the outcome of "stranding" deferred taxes in Accumulated Other Comprehensive Income ("AOCI"), the FASB released guidance permitting the reclassification of stranded tax effects from AOCI to retained earnings. Adoption of this guidance by the Company at December 31, 2017 resulted in a one-time income tax benefit of $2.5 million to other comprehensive income (loss). Components of other comprehensive income (loss) for 2018, 2017 and 2016 and the related tax effect are detailed below.

 
Amounts Before Taxes
 
Tax (Expense)
Benefit
 
Amounts Net of Taxes
 
(In thousands)
 
 
 
 
 
 
2018:
 
 
 
 
 
Unrealized gains on securities, net of effects of deferred costs of $63,816:
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
$
(71,921
)
 
15,103

 
(56,818
)
Unrealized liquidity losses
3

 
(1
)
 
2

Reclassification adjustment for net gains included in net earnings
(3,441
)
 
723

 
(2,718
)
Amortization of net unrealized gains (losses) and related to transferred securities
—

 
—

 
—

 
 
 
 
 
 
Net unrealized gains (losses) on securities
(75,359
)
 
15,825

 
(59,534
)
 
 
 
 
 
 
Foreign currency translation adjustments
1,714

 
(360
)
 
1,354

Benefit plan liability adjustment
14,301

 
(3,003
)
 
11,298

 
 
 
 
 
 
Other comprehensive income (loss)
$
(59,344
)
 
12,462

 
(46,882
)





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
Amounts Before Taxes
 
Tax (Expense) Benefit
 
Amounts Net of Taxes
 
(In thousands)
 
 
 
 
 
 
2017:
 
 
 
 
 
Unrealized gains on securities, net of effects of deferred costs of $(5,670):
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
$
12,752

 
(4,464
)
 
8,288

Unrealized liquidity losses
300

 
(105
)
 
195

Reclassification adjustment for net gains included in net earnings
(5,236
)
 
1,833

 
(3,403
)
Amortization of net unrealized gains (losses) related to transferred securities
—

 
—

 
—

 
 
 
 
 
 
Net unrealized gains (losses) on securities
7,816

 
(2,736
)
 
5,080

 
 
 
 
 
 
Foreign currency translation adjustments
(14
)
 
5

 
(9
)
Benefit plan liability adjustment
(5,958
)
 
2,085

 
(3,873
)
 
 
 
 
 
 
Other comprehensive income (loss)
$
1,844

 
(646
)
 
1,198


 
Amounts Before Taxes
 
Tax (Expense) Benefit
 
Amounts Net of Taxes
 
(In thousands)
 
 
 
 
 
 
2016:
 
 
 
 
 
Unrealized gains on securities, net of effects of deferred costs of $(21,105):
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
$
19,417

 
(6,796
)
 
12,621

Unrealized liquidity losses
57

 
(20
)
 
37

Reclassification adjustment for net gains included in net earnings
(3,315
)
 
1,160

 
(2,155
)
Amortization of net unrealized gains (losses) related to transferred securities
—

 
—

 
—

 
 
 
 
 
 
Net unrealized gains (losses) on securities
16,159

 
(5,656
)
 
10,503

 
 
 
 
 
 
Foreign currency translation adjustments
(251
)
 
87

 
(164
)
Benefit plan liability adjustment
(178
)
 
62

 
(116
)
 
 
 
 
 
 
Other comprehensive income (loss)
$
15,730

 
(5,507
)
 
10,223





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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(13)  SEGMENT AND OTHER OPERATING INFORMATION

(A)  Operating Segment Information

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities.  The Company's segments are organized based on product types and geographic marketing areas.  In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate realized investment gains and losses from operating revenues and earnings.  The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company's results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company's business.  The Company excludes or segregates realized investment gains and losses because such items are often the result of events which may or may not be at the Company's discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company's business.

A summary of segment information, prepared in accordance with GAAP guidance, is provided below.

 
Domestic Life Insurance
 
International Life Insurance
 
Annuities
 
All Others
 
Totals
 
(In thousands)
2018:
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
122,661

 
243,518

 
609,239

 
—

 
975,418

Total segment assets
1,215,864

 
1,211,036

 
8,791,463

 
370,118

 
11,588,481

Future policy benefits
1,039,150

 
894,891

 
7,810,245

 
—

 
9,744,286

Other policyholder liabilities
17,439

 
20,381

 
97,874

 
—

 
135,694

 
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract charges
$
40,879

 
108,923

 
23,694

 
—

 
173,496

Net investment income
23,579

 
22,603

 
276,123

 
26,772

 
349,077

Other revenues
19

 
87

 
66

 
20,431

 
20,603

 
 
 
 
 
 
 
 
 
 
Total revenues
64,477

 
131,613

 
299,883

 
47,203

 
543,176

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
21,688

 
22,333

 
21,276

 
—

 
65,297

Amortization of deferred policy acquisition costs
11,539

 
24,358

 
78,874

 
—

 
114,771

Universal life and annuity contract interest
8,826

 
24,590

 
102,639

 
—

 
136,055

Other operating expenses
20,731

 
19,593

 
32,584

 
21,061

 
93,969

Federal income taxes (benefit)
292

 
7,035

 
11,139

 
4,514

 
22,980

Total expenses
63,076

 
97,909

 
246,512

 
25,575

 
433,072

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
1,401

 
33,704

 
53,371

 
21,628

 
110,104



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




 
Domestic Life Insurance
 
International Life Insurance
 
Annuities
 
All Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
2017:
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
101,253

 
250,128

 
603,700

 
—

 
955,081

Total segment assets
1,106,410

 
1,236,733

 
9,269,956

 
398,597

 
12,011,696

Future policy benefits
950,884

 
915,384

 
8,232,216

 
—

 
10,098,484

Other policyholder liabilities
13,643

 
11,318

 
103,048

 
—

 
128,009

 
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract charges
$
37,387

 
120,852

 
20,691

 
—

 
178,930

Net investment income
73,866

 
68,399

 
490,706

 
26,714

 
659,685

Other revenues
46

 
83

 
109

 
20,832

 
21,070

 
 
 
 
 
 
 
 
 
 
Total revenues
111,299

 
189,334

 
511,506

 
47,546

 
859,685

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
18,565

 
23,981

 
28,939

 
—

 
71,485

Amortization of deferred policy acquisition costs
10,377

 
(1,473
)
 
105,483

 
—

 
114,387

Universal life and annuity contract interest
59,865

 
54,502

 
322,652

 
—

 
437,019

Other operating expenses
18,842

 
36,341

 
32,021

 
19,798

 
107,002

Federal income taxes (benefit)
815

 
16,958

 
5,002

 
6,192

 
28,967

Total expenses
108,464

 
130,309

 
494,097

 
25,990

 
758,860

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
2,835

 
59,025

 
17,409

 
21,556

 
100,825

 

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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
Domestic Life Insurance
 
International Life Insurance
 
Annuities
 
All Others
 
Totals
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
2016:
 
 
 
 
 
 
 
 
 
Selected Balance Sheet Items:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
90,485

 
243,106

 
648,714

 
—

 
982,305

Total segment assets
971,990

 
1,232,648

 
9,193,980

 
298,481

 
11,697,099

Future policy benefits
830,460

 
919,380

 
8,109,255

 
—

 
9,859,095

Other policyholder liabilities
13,998

 
10,528

 
118,865

 
—

 
143,391

 
 
 
 
 
 
 
 
 
 
Condensed Income Statements:
 

 
 

 
 

 
 

 
 

Premiums and contract charges
$
34,728

 
125,775

 
22,220

 
—

 
182,723

Net investment income
39,691

 
42,331

 
362,700

 
22,952

 
467,674

Other revenues
119

 
321

 
254

 
18,207

 
18,901

 
 
 
 
 
 
 
 
 
 
Total revenues
74,538

 
168,427

 
385,174

 
41,159

 
669,298

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
17,908

 
18,759

 
28,862

 
—

 
65,529

Amortization of deferred policy acquisition costs
4,125

 
18,027

 
98,987

 
—

 
121,139

Universal life and annuity contract interest
28,606

 
28,636

 
191,148

 
—

 
248,390

Other operating expenses
18,739

 
25,933

 
31,852

 
17,924

 
94,448

Federal income taxes (benefit)
1,749

 
26,130

 
11,638

 
7,878

 
47,395

Total expenses
71,127

 
117,485

 
362,487

 
25,802

 
576,901

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
3,411

 
50,942

 
22,687

 
15,357

 
92,397



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

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Premiums and Other Revenue:
 
 
 
 
 
Premiums and contract charges
$
173,496

 
178,930

 
182,723

Net investment income
349,077

 
659,685

 
467,674

Other revenues
20,603

 
21,070

 
18,901

Realized gains (losses) on investments
8,423

 
14,763

 
13,070

 
 
 
 
 
 
Total consolidated premiums and other revenue
$
551,599

 
874,448

 
682,368



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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Federal Income Taxes:
 
 
 
 
 
Total segment Federal income taxes
$
22,980

 
28,967

 
47,395

Taxes on realized gains (losses) on investments
1,769

 
5,167

 
4,575

 
 
 
 
 
 
Total taxes on consolidated net earnings
$
24,749

 
34,134

 
51,970



 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Net Earnings:
 
 
 
 
 
Total segment earnings
$
110,104

 
100,825

 
92,397

Realized gains (losses) on investments, net of taxes
6,654

 
9,596

 
8,495

 
 
 
 
 
 
Total consolidated net earnings
$
116,758

 
110,421

 
100,892



 
December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
Assets:
 
 
 
 
 
Total segment assets
$
11,588,481

 
12,011,696

 
11,697,099

Other unallocated assets
343,210

 
213,398

 
197,882

 
 
 
 
 
 
Total consolidated assets
$
11,931,691

 
12,225,094

 
11,894,981



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(B)  Geographic Information

A portion of the Company's premiums and contract revenues are from international policies with residents of countries other than the United States. Premiums and contract revenues detailed by country are provided below.

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
 
 
 
 
 
 
United States
$
82,614

 
74,937

 
75,405

Brazil
27,280

 
33,024

 
38,928

Venezuela
14,414

 
16,105

 
15,534

Taiwan
12,864

 
14,844

 
14,474

Peru
10,969

 
11,714

 
11,378

Chile
8,769

 
9,201

 
8,859

Other foreign countries
37,346

 
39,417

 
37,820

 
 
 
 
 
 
Revenues, excluding reinsurance premiums
194,256

 
199,242

 
202,398

Reinsurance premiums
(20,760
)
 
(20,312
)
 
(19,675
)
 
 
 
 
 
 
Total premiums and contract revenues
$
173,496

 
178,930

 
182,723



Premiums and contract revenues are attributed to countries based on the location of the policyholder. The Company has no significant assets, other than certain limited financial instruments, located in countries other than the United States.

(C)  Major Agency Relationships

A portion exceeding 10% of the Company's annual annuity sales has been sold through one or more of its top independent marketing agencies in recent years. Business from two top agencies accounted for approximately 14% and 13%, respectively, of annuity sales in 2018. In 2018, three domestic independent marketing agencies exceeded 10% of total Domestic Life sales accounting for 35%, 10%, and 10%, respectively.


(14)  FAIR VALUES OF FINANCIAL INSTRUMENTS

For financial instruments the FASB provides guidance which defines fair value, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about fair value measurements.  In compliance with this GAAP guidance, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Consolidated Balance Sheets are categorized as follows:

Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company's Level 1 assets are equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

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Level 2:  Fair value is based upon significant inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable for substantially the full term of the asset or liability through corroboration with observable market data as of the reporting date. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, model-derived valuations whose inputs are observable or whose significant value drivers are observable and other observable inputs. The Company’s Level 2 assets include fixed maturity debt securities (corporate and private bonds, government or agency securities, asset-backed and mortgage-backed securities).  Valuations are generally obtained from third party pricing services for identical or comparable assets or determined through use of valuation methodologies using observable market inputs.

Level 3:  Fair value is based on significant unobservable inputs which reflect the entity’s or third party pricing service’s assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets are over-the-counter derivative contracts and the Company’s Level 3 liabilities consist of share-based compensation obligations and certain product-related embedded derivatives.  Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

The following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated.

 
December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Debt securities, available for sale
$
2,946,059

 
—

 
2,946,059

 
—

Equity securities
17,491

 
17,491

 
—

 
—

Derivatives, index options
14,684

 
—

 
—

 
14,684

 
 
 
 
 
 
 
 
Total assets
$
2,978,234

 
17,491

 
2,946,059

 
14,684

 
 
 
 
 
 
 
 
Policyholder account balances (a)
$
44,781

 
—

 
—

 
44,781

Other liabilities (b)
11,923

 
—

 
—

 
11,923

 
 
 
 
 
 
 
 
Total liabilities
$
56,704

 
—

 
—

 
56,704



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December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
Debt securities, available for sale
$
3,041,131

 
—

 
3,041,131

 
—

Equity securities, available for sale
18,478

 
18,478

 
—

 
—

Derivatives, index options
194,731

 
—

 
—

 
194,731

 
 
 
 
 
 
 
 
Total assets
$
3,254,340

 
18,478

 
3,041,131

 
194,731

 
 
 
 
 
 
 
 
Policyholder account balances (a)
$
211,159

 
—

 
—

 
211,159

Other liabilities (b)
15,242

 
—

 
—

 
15,242

 
 
 
 
 
 
 
 
Total liabilities
$
226,401

 
—

 
—

 
226,401


(a)  Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.
(b)  Represents the liability for share-based compensation.


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The following table provides additional information about fair value measurements for which significant unobservable (Level 3) inputs were utilized to determine fair value.

 
Year Ended December 31, 2018
 
Debt Securities, Available For Sale
 
Equity Securities
 
Derivatives, Index Options
 
Total Assets
 
Other Liabilities
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2018
$
—

 
—

 
194,731

 
194,731

 
226,401

Total realized and unrealized gains (losses):
 
 
 
 
 

 
 
 
 
Included in net income
—

 
—

 
(80,004
)
 
(80,004
)
 
(65,046
)
Included in other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Purchases, sales, issuances and settlements, net:
 
 
 
 
 
 


 
 
Purchases
—

 
—

 
86,953

 
86,953

 
86,953

Sales
—

 
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
—

 
74

Settlements
—

 
—

 
(186,996
)
 
(186,996
)
 
(191,678
)
Transfers into (out of) Level 3
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Balance at end of period
$
—

 
—

 
14,684

 
14,684

 
56,704

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
 
 
 
 
 
 
 
 
 
   Net investment income
$
—

 
—

 
(72,269
)
 
(72,269
)
 
—

   Benefits and expenses
—

 
—

 
—

 
—

 
(70,980
)
 
 
 
 
 
 
 
 
 
 
Total
$
—

 
—

 
(72,269
)
 
(72,269
)
 
(70,980
)


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Year Ended December 31, 2017
 
Debt Securities, Available For Sale
 
Equity Securities, Available For Sale
 
Derivatives, Index Options
 
Total Assets
 
Other Liabilities
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2017
$
—

 
—

 
120,644

 
120,644

 
134,693

Total realized and unrealized gains (losses):
 
 
 
 
 

 
 

 
 
Included in net income
—

 
—

 
222,875

 
222,875

 
240,605

Included in other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Purchases, sales, issuances and settlements, net:
 
 
 
 
 
 


 
 
Purchases
—

 
—

 
75,346

 
75,346

 
75,346

Sales
—

 
—

 
—

 
—

 
—

Issuances
—

 
—

 
—

 
—

 
1,688

Settlements
—

 
—

 
(224,134
)
 
(224,134
)
 
(225,931
)
Transfers into (out of) Level 3
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
Balance at end of period
$
—

 
—

 
194,731

 
194,731

 
226,401

 
 
 
 
 
 
 
 
 
 
Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
 
 
 
 
 
 
 
 
 
   Net investment income
$
—

 
—

 
119,386

 
119,386

 
—

   Benefits and expenses
—

 
—

 
—

 
—

 
122,318

 
 
 
 
 
 
 
 
 
 
Total
$
—

 
—

 
119,386

 
119,386

 
122,318



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The following tables show the quantitative information about the Company's Level 3 assets and liabilities.

 
December 31, 2018
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Derivatives, index options
$
14,684

 
Broker prices
 
Implied volatility
 
 
 
 
 
Inputs from broker proprietary models
 
 
 
 
 
 
Total assets
$
14,684

 
 
 
 
 
 
 
 
 
 
Policyholder account balances
$
44,781

 
Deterministic cash flow model
 
Projected option cost
Other liabilities
11,923

 
Black Scholes
 
Expected term
 
 
 
 
 
Forfeiture assumptions
 
 
 
 
 
 
Total liabilities
$
56,704

 
 
 
 


 
December 31, 2017
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Derivatives, index options
$
194,731

 
Broker prices
 
Implied volatility
 
 
 
 
 
Inputs from broker proprietary models
 
 
 
 
 
 
Total assets
$
194,731

 
 
 
 
 
 
 
 
 
 
Policyholder account balances
$
211,159

 
Deterministic cash flow model
 
Projected option cost
Other liabilities
15,242

 
Black Scholes
 
Expected term
 
 
 
 
 
Forfeiture assumptions
 
 
 
 
 
 
Total liabilities
$
226,401

 
 
 
 


Realized gains (losses) on debt securities assets are reported in the Consolidated Statements of Earnings as net investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on available for sale debt securities are reported as other comprehensive income (loss) within stockholders’ equity of the Consolidated Balance Sheets.

Effective January 1, 2018, the change in fair value of equity securities is reported in the Condensed Consolidated Statement of Earnings as a component of net investment income.

The fair value hierarchy classifications are reviewed each reporting period. Reclassification of certain financial assets and liabilities may result based on changes in the observability of valuation attributes. Reclassifications are reported as transfers into and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.


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GAAP defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements.  Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. GAAP also establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a variety of factors including the type of instrument and the characteristics of instruments. Financial instruments with readily available active quoted prices or those for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. It is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measures.

The following methods and assumptions were used in estimating the fair value of financial instruments and liabilities during the periods presented in the Consolidated Financial Statements.

Fixed maturity securities.  Fair values for debt securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services with any adjustments based upon observable data. In the cases where prices are unavailable for these sources, values are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.

Equity securities.  Fair values for equity securities are based upon quoted market prices, where available. For equity securities that are not actively traded, estimated values are based on values of comparable issues or audited financial statements of the issuer.

Cash and cash equivalents.  The carrying amounts reported in the Consolidated Balance Sheets for these instruments approximate their fair values due to the relatively short time between the purchase of the instrument and its expected repayment or maturity.

Mortgage and other loans. The fair values of performing mortgage and other loans are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair values for significant nonperforming loans are based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows.  Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.

Policy Loans.  Policy loans with fixed interest rates are classified within Level 3. The estimated fair values for these loans are determined using a discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flow estimates are developed by applying a weighted-average interest rate to the outstanding principal balance of the respective group of policy loans and an estimated average maturity. These cash flows are discounted using current risk-free interest rates with no adjustment for borrower credit risk as these loans are collateralized by the cash surrender value of the underlying insurance policy.

Derivatives. Fair values for index (call) options are based on counterparty market prices.  The counterparties use market standard valuation methodologies incorporating market inputs for volatility and risk free interest rates in arriving at a fair value for each option contract. Prices are monitored for reasonableness by the Company using analytical tools. There are no performance obligations related to the call options purchased to hedge the Company’s fixed-index life and annuity policy liabilities.

Life interest in Libbie Shearn Moody Trust.  The fair value of the life interest asset is determined based on assumptions as to future distributions from the Trust over the life expectancy of Mr. Robert L. Moody, Sr., Chairman Emeritus of the Board of Directors of NWLGI. These estimated cash flows are discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions subject to the maximum amount to be received by the Company from life insurance proceeds in the event of Mr. Moody's death. The carrying value or cost basis of the life interest asset is amortized ratably over the remaining expected life of Mr. Moody, updated for changes in expected mortality.


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Annuity and supplemental contracts.  Fair values for the Company's insurance contracts other than annuity contracts are not required to be disclosed. This includes the Company's traditional and universal life products. Fair values for immediate annuities without mortality features are based on the discounted future estimated cash flows using current market interest rates for similar maturities.  Fair values for deferred annuities, including fixed-index annuities, are determined using estimated projected future cash flows discounted at the rate that would be required to transfer the liability in an orderly transaction.  The fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and annuity contracts.

The Company utilizes independent third-party pricing services to determine the majority of its fair values of investment securities. The independent pricing services provide quoted market prices when available or otherwise incorporate a variety of observable market data in their valuation techniques including reported trading prices, broker-dealer quotes, bids and offers, benchmark securities, benchmark yields, credit ratings, and other reference data. The Company reviews prices received from service providers for unusual fluctuations to ensure that the prices represent a reasonable estimate of fair value but generally accepts the price identified from the primary pricing service.

When quoted market prices in active markets are unavailable, the Company determines fair values using various valuation techniques and models based on a range of observable market inputs including pricing models, quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow.  In most cases, these estimates are determined based on independent third party valuation information, and the amounts are disclosed in Level 2 of the fair value hierarchy.  Generally, the Company obtains a single price or quote per instrument from independent third parties to assist in establishing the fair value of these investments.

Fair value measurements for investment securities where there exists limited or no observable data are calculated using the Company’s own estimates based on current interest rates, credit spreads, liquidity premium or discount, the economic and competitive environment, unique characteristics of the security and other pertinent factors. These estimates are derived a number of ways including, but not limited to, pricing provided by brokers where the price indicates reliability as to value, fair values of comparable securities incorporating a spread adjustment (for maturity differences, credit quality, liquidity, and collateralization), discounted cash flow models and margin spreads, bond yield curves, and observable market prices and exchange transaction information not provided by external pricing services. The resulting prices may not be realized in an actual sale or immediate settlement and there may be inherent weaknesses in any calculation technique. In addition, changes in underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.


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The following table presents, by pricing source and fair value hierarchy level, the Company’s assets that are measured at fair value on a recurring basis:

 
December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
 
 
 
 
 
 
 
 
Fixed maturities, available for sale:
 
 
 
 
 
 
 
Priced by third-party vendors
$
2,946,059

 
—

 
2,946,059

 
—

Priced internally
—

 
—

 
—

 
—

Subtotal
2,946,059

 
—

 
2,946,059

 
—

 
 
 
 
 
 
 
 
Equity securities:
 

 
 

 
 

 
 

Priced by third-party vendors
17,491

 
17,491

 
—

 
—

Priced internally
—

 
—

 
—

 
—

Subtotal
17,491

 
17,491

 
—

 
—

 
 
 
 
 
 
 
 
Derivatives, index options:
 

 
 

 
 

 
 

Priced by third-party vendors
14,684

 
—

 
—

 
14,684

Priced internally
—

 
—

 
—

 
—

Subtotal
14,684

 
—

 
—

 
14,684

 
 
 
 
 
 
 
 
Total
$
2,978,234

 
17,491

 
2,946,059

 
14,684

 
 
 
 
 
 
 
 
Percent of total
100.0
%
 
0.6
%
 
98.9
%
 
0.5
%



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The carrying amounts and fair values of the Company's financial instruments are as follows:
 
December 31, 2018
 
 
 
Fair Value Hierarchy Level
 
Carrying
Values
 
Fair
Values
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Debt securities held to maturity
$
7,285,254

 
7,228,268

 
—

 
7,226,362

 
1,906

Debt securities available for sale
2,946,059

 
2,946,059

 
—

 
2,946,059

 
—

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
131,976

 
131,976

 
131,976

 
—

 
—

Mortgage loans
203,180

 
202,762

 
—

 
—

 
202,762

Policy loans
54,724

 
90,802

 
—

 
—

 
90,802

Other loans
12,272

 
12,709

 
—

 
—

 
12,709

Derivatives, index options
14,684

 
14,684

 
—

 
—

 
14,684

Equity securities
17,491

 
17,491

 
17,491

 
—

 
—

Life interest in Libbie Shearn Moody Trust
8,692

 
12,775

 
—

 
—

 
12,775

 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
Deferred annuity contracts
$
7,455,642

 
6,403,007

 
—

 
—

 
6,403,007

Immediate annuity and supplemental contracts
407,413

 
415,726

 
—

 
—

 
415,726


 
December 31, 2017
 
 
 
Fair Value Hierarchy Level
 
Carrying
Values
 
Fair
Values
 
Level 1
 
Level 2
 
Level 3
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Investments in debt and equity securities:
 
 
 
 
 
 
 
 
 
Securities held to maturity
$
7,247,024

 
7,434,104

 
—

 
7,431,810

 
2,294

Securities available for sale
3,059,609

 
3,059,609

 
18,478

 
3,041,131

 
—

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
217,624

 
217,624

 
217,624

 
—

 
—

Mortgage loans
208,249

 
208,815

 
—

 
—

 
208,815

Policy loans
56,405

 
100,230

 
—

 
—

 
100,230

Other loans
5,431

 
5,603

 
—

 
—

 
5,603

Derivatives, index options
194,731

 
194,731

 
—

 
—

 
194,731

Life interest in Libbie Shearn Moody Trust
8,676

 
12,775

 
—

 
—

 
12,775

 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
Deferred annuity contracts
$
7,865,786

 
7,338,637

 
—

 
—

 
7,338,637

Immediate annuity and supplemental contracts
430,494

 
443,437

 
—

 
—

 
443,437



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Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument.  Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.


(15)  DERIVATIVE INVESTMENTS

Fixed-index products provide traditional fixed annuities and universal life contracts with the option to have credited interest rates linked in part to an underlying equity index or a combination of equity indices. The equity return component of such policy contracts is identified separately and accounted for in future policy benefits as embedded derivatives on the Consolidated Balance Sheets. The remaining portions of these policy contracts are considered the host contracts and are recorded separately as fixed annuity or universal life contracts. The host contracts are accounted for under debt instrument type accounting in which future policy benefits are recorded as discounted debt instruments that are accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates.

The Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its fixed-index annuity and life products. The index options act as hedges to match closely the returns on the underlying index or indices. The amounts which may be credited to policyholders are linked, in part, to the returns of the underlying index or indices. As a result, changes to policyholders' liabilities are substantially offset by changes in the value of the options. Cash is exchanged upon purchase of the index options and no principal or interest payments are made by either party during the option periods. Upon maturity or expiration of the options, cash may be paid to the Company depending on the performance of the underlying index or indices and terms of the contract.

The Company does not elect hedge accounting relative to these derivative instruments. The index options are reported at fair value in the accompanying Consolidated Financial Statements. The changes in the values of the index options and the changes in the policyholder liabilities are both reflected in the Consolidated Statements of Earnings. Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Consolidated Statements of Earnings. Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in values, are reflected as net investment income in the Consolidated Statements of Earnings.

Although there is credit risk in the event of nonperformance by counterparties to the index options, the Company does not expect any of its counterparties to fail to meet their obligations, given their high credit ratings. In addition, credit support agreements are in place with all counterparties for option holdings in excess of specific limits, which may further reduce the Company's credit exposure.


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The tables below present the fair value of derivative instruments.

 
December 31, 2018
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Equity index options
Derivatives, Index Options
 
$
14,684

 
 
 
 
 
 
 
 
 
 
 
 
Fixed-index products
 
 
 

 
Universal Life and Annuity Contracts
 
$
44,781

 
 
 
 
 
 
 
 
Total
 
 
$
14,684

 
 
 
$
44,781


 
December 31, 2017
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
 
 
(In thousands)
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Equity index options
Derivatives, Index Options
 
$
194,731

 
 
 
 
 
 
 
 
 
 
 
 
Fixed-index products
 
 
 

 
Universal Life and Annuity Contracts
 
$
211,159

 
 
 
 
 
 
 
 
Total
 
 
$
194,731

 
 
 
$
211,159




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The table below presents the effect of derivative instruments in the Consolidated Statements of Earnings for the years ended December 31, 2018, 2017 and 2016.

 
 
 
 
Amount of Gain or (Loss) Recognized In Income on Derivatives
Derivatives Not Designated as Hedging Instruments
 
Location of Gain or (Loss) Recognized In Income on Derivatives
 
2018
 
2017
 
2016
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Equity index options
 
Net investment income
 
$
(80,004
)
 
222,875

 
28,364

 
 
 
 
 
 
 
 
 
Fixed-index products
 
Universal life and annuity contract interest
 
66,335

 
(237,281
)
 
(10,436
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(13,669
)
 
(14,406
)
 
17,928


The embedded derivative liability, the change of which is recorded in universal life and annuity contract interest in the Consolidated Statements of Earnings, includes projected interest credits that are offset by the expected collectability by the Company of asset management fees on fixed-index products. The anticipated asset management fees assumed to be collected increases or decreases based upon the most recent performance of index options and adds to or reduces the offset applied to the embedded derivative liability (increasing or decreasing contract interest expense). In the years ended December 31, 2018, 2017, and 2016, the change in the embedded derivative liability due to the expected collectability of asset management fees increased/(decreased) contract interest expense by $17.6 million, $6.9 million, and $(15.9) million, respectively.


(16)  RELATED PARTY TRANSACTIONS

Robert L. Moody, Jr. ("Mr. Moody, Jr.") is the brother of Ross R. Moody, NWLGI's Chairman, President and Chief Executive Officer, son of Robert L. Moody, Sr., Chairman Emeritus of the Board of Directors of NWLGI, the stepson of Ann M. Moody who serves as a director of NWLGI, brother of Russell S. Moody who serves as an advisory director of NWLGI, and a half-brother of Frances A. Moody-Dahlberg who serves as a director of NWLGI.

Mr. Moody, Jr. wholly owns an insurance marketing organization that maintains agency contracts with National Western pursuant to which agency commissions are paid in accordance with the company's standard commission schedules. Mr. Moody, Jr. also maintains an independent agent contract with National Western for policies personally sold under which commissions are paid in accordance with standard commission schedules. In 2018, commissions paid under these agency contracts aggregated approximately $123,675.  

During 2018, management fees totaling $680,034 were paid to Regent Management Services, Limited Partnership ("RMS") for services provided to downstream nursing home subsidiaries of NWLGI.  RMS is 1% owned by general partner RCC Management Services, Inc. ("RCC"), and 99% owned by limited partner, Three R Trusts.  RCC is 100% owned by the Three R Trusts.  The Three R Trusts are four Texas trusts for the benefit of the children of Robert L. Moody, Sr. (Robert L. Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody-Dahlberg).  

National Western holds an investment totaling approximately 9.5% of the issued and outstanding shares of Moody Bancshares, Inc. at December 31, 2018.  Moody Bancshares, Inc. owns 100% of the outstanding shares of Moody Bank Holding Company, Inc., which owns approximately 98% of the outstanding shares of The Moody National Bank of Galveston ("MNB"). National Western utilizes MNB for certain bank custodian services as well as for certain administrative services with respect to the company's defined benefit and contribution plans.  During 2018, fees totaling $602,564 were paid to MNB with respect to these services. In 2018, the Company entered into an office space lease with MNB, with payments totaling $10,700 during the year. The ultimate controlling person of MNB is the Three R Trusts.


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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



During 2018, the Company paid American National Insurance Company (“ANICO”) $699,950 in premiums for certain company sponsored benefit plans and $2,886,920 in reimbursements for claim costs for which ANICO provides third party administrative services. ANICO paid the Company $3,007,209 in premiums for its company sponsored benefit plans. The Company maintains an investment agreement with American National Registered Investment Advisory, Inc., a subsidiary of ANICO, under which $45,540 was paid for services. Robert L. Moody, Sr., serves as Chairman Emeritus and Ross R. Moody serves as Chairman of the Board of ANICO. The Company executed a 2 year agreement in April, 2014 with an automatic 1 year renewal with ANICO for a disaster recovery site and incurred expenses of $18,000 during 2018 associated with this agreement.

During 2017, MNB sold a 50.0% undivided participation in a mortgage loan to The Westcap Corporation for $7.2 million, and a 50.0% participation in a mortgage loan to National Western, for $5.5 million. The Westcap Corporation and National Western will receive 50.0% of all future cash receipts which will be recognized over the life of the loan. The mortgage loan investment for The Westcap Corporation was paid in full during 2018 and the National Western investment had a balance of $5.0 million as of December 31, 2018.

During 2015, ANICO sold a 24.93% undivided participation in a mortgage loan to The Westcap Corporation for $20.0 million. The Westcap Corporation will receive 24.93% of all future cash receipts, which will be recognized over the life of the loan. This mortgage loan investment had a balance of $19.4 million as of December 31, 2018 which is reflected in the Consolidated Balance Sheets.


(17)  UNAUDITED QUARTERLY FINANCIAL DATA

Quarterly results of operations for 2018 are summarized as follows:

 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
(In thousands except per share data)
 
 
 
 
 
 
 
 
2018:
 
 
 
 
 
 
 
Revenues
$
109,018

 
174,658

 
225,435

 
42,486

 
 
 
 
 
 
 
 
Earnings (loss)
$
26,875

 
32,466

 
35,641

 
21,776

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Class A
$
7.60

 
9.18

 
10.08

 
6.16

Class B
$
3.80

 
4.59

 
5.04

 
3.08

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Class A
$
7.60

 
9.18

 
10.08

 
6.16

Class B
$
3.80

 
4.59

 
5.04

 
3.08



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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Quarterly results of operations for 2017 are summarized as follows:

 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
(In thousands except per share data)
 
 
 
 
 
 
 
 
2017:
 
 
 
 
 
 
 
Revenues
$
224,417

 
198,226

 
203,990

 
247,815

 
 
 
 
 
 
 
 
Earnings (loss)
$
23,538

 
25,483

 
21,813

 
39,587

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 

 
 

 
 

 
 

Class A
$
6.66

 
7.21

 
6.17

 
11.19

Class B
$
3.33

 
3.60

 
3.08

 
5.60

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 

 
 

 
 

 
 

Class A
$
6.65

 
7.21

 
6.17

 
11.19

Class B
$
3.33

 
3.60

 
3.08

 
5.60


 

(18)  SUBSEQUENT EVENTS

Effective January 31, 2019, the Company's wholly owned subsidiary, National Western, completed its previously announced acquisition of Ozark National Life Insurance Company ("Ozark National") and N.I.S. Financial Services, Inc. ("NIS") following the receipt of regulatory approvals. NWLGI and National Western paid cash in an aggregate amount of approximately $205.5 million in exchange for all of the outstanding stock of Ozark National (wholly owned by National Western) and NIS (wholly owned by NWLGI). As Ozark National has not previously prepared financial statements in accordance with GAAP, the Company is unable to include the initial business combination disclosures required under ASC 805 Business Combinations as of the date of this filing.

The Company entered into separate transactions selling its two nursing home operations subsequent to December 31, 2018. Effective February 1, 2019, the Company completed the sale of its nursing home operations in Reno, Nevada for a purchase price of $13.6 million. On February 15, 2019, the Company entered into a Purchase and Sale Agreement to sell its other nursing home operation in San Marcos, Texas for a purchase price of $7.6 million. The amount of each transaction did not meet the threshold of a Material Definitive Agreement for purposes of filing a Current Report on Form 8-K. At December 31, 2018, the assets of the Reno and San Marcos entities were included in Other Assets on the Consolidated Balance Sheets as held for sale at their combined book values which was lower than the aggregate purchase price for the two facilities.

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



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NATIONAL WESTERN LIFE GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2018
(In thousands)


Type of Investment
 
(1)
Cost
 
Fair Value
 
Balance Sheet Amount
Fixed maturity bonds:
 
 
 
 
 
 
Securities held to maturity:
 
 
 
 
 
 
United States government and government agencies and authorities
 
$
1,341

 
1,457

 
1,341

States, municipalities, and political subdivisions
 
457,404

 
464,792

 
457,404

Public utilities
 
930,629

 
923,613

 
930,629

Corporate
 
4,715,775

 
4,656,384

 
4,715,775

Residential mortgage-backed
 
1,176,216

 
1,178,055

 
1,176,216

Asset-backed
 
3,889

 
3,967

 
3,889

Total securities held to maturity
 
7,285,254

 
7,228,268

 
7,285,254

 
 
 
 
 
 
 
Securities available for sale:
 
 

 
 

 
 

States, municipalities, and political subdivisions
 
570

 
566

 
566

Foreign governments
 
9,974

 
10,004

 
10,004

Public utilities
 
82,943

 
83,471

 
83,471

Corporate
 
2,893,221

 
2,829,056

 
2,829,056

Residential mortgage-backed
 
15,947

 
16,800

 
16,800

Asset-backed
 
5,969

 
6,162

 
6,162

Total securities available for sale
 
3,008,624

 
2,946,059

 
2,946,059

Total fixed maturity bonds
 
10,293,878

 
10,174,327

 
10,231,313

 
 
 
 
 
 
 
Equity securities:
 
 

 
 

 
 

Common stocks:
 
 

 
 

 
 

Public utilities
 
568

 
945

 
945

Banks, trust and insurance companies
 
1,516

 
2,480

 
2,480

Corporate
 
5,812

 
7,964

 
7,964

Preferred stocks
 
6,433

 
6,102

 
6,102

Total equity securities
 
14,329

 
17,491

 
17,491

 
 
 
 
 
 
 
Derivatives, index options
 
14,684

 
 
 
14,684

Mortgage loans
 
203,180

 
 
 
203,180

Policy loans
 
54,724

 
 
 
54,724

Other long-term investments (2)
 
56,851

 
 
 
56,851

Total investments other than investments in related parties
 
$
10,637,646

 


 
10,578,243


Notes:
(1) Bonds and mortgages are shown at amortized cost reduced by repayments and impairments due to other than temporary declines or allowances for possible losses. Real estate is stated at costs net of accumulated depreciation. Derivatives are shown at fair value. (2) There was no real estate acquired by foreclosure included in other long-term investments.

See accompanying report of Independent Registered Public Accounting Firm.


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National Western Life Group, Inc.
Schedule II
Condensed Financial Information of Registrant
Condensed Statements of Financial Position as of December 31, 2018 and 2017
(Parent Company Only)
(in thousands)


 
2018
 
2017
 
 
 
 
ASSETS
 
 
 
Investment in subsidiaries
$
1,896,669

 
1,830,893

Cash and cash equivalents
1,443

 
1,303

Federal income tax receivable
4,185

 
3,019

Deferred Federal income tax asset
—

 
51

Other assets
353

 
383

 
 
 
 
Total assets
$
1,902,650

 
1,835,649

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Due to subsidiaries
$
—

 
—

Deferred Federal income tax liability
397

 
—

Other liabilities
1,476

 
3,475

 
 
 
 
Total liabilities
1,873

 
3,475

 
 
 
 
Stockholders' Equity:
 
 
 
Common Stock:
 
 
 
Class A - $.01 par value in 2018 and 2017; 7,500,000 shares authorized; 3,436,020 shares issued and outstanding in 2018 and 3,436,166 shares issued and outstanding in 2017
34


34

Class B - $.01 par value in 2018 and 2017; 200,000 shares authorized, issued, and outstanding in 2018 and 2017
2


2

Additional paid-in capital
41,716

 
41,716

Accumulated other comprehensive income (loss)
(37,015
)
 
14,281

Retained earnings
1,896,040

 
1,776,141

 
 
 
 
Total stockholders’ equity
1,900,777

 
1,832,174

 
 
 
 
Total liabilities and stockholders' equity
$
1,902,650

 
1,835,649

 
 
 
 


See Notes to Condensed Financial Information of Registrant


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National Western Life Group, Inc.
Schedule II
Condensed Financial Information of Registrant
Condensed Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
(Parent Company Only)
(in thousands)


 
2018
 
2017
 
2016
 
 
 
 
 
 
Revenues:
 
 
 
 
 
Dividend income from subsidiaries
$
5,957

 
7,000

 
3,000

 
 
 
 
 
 
Total revenues
5,957

 
7,000

 
3,000

 
 
 
 
 
 
Expenses:
 
 
 
 
 
Other operating expenses
2,617

 
4,199

 
4,493

 
 
 
 
 
 
Total expenses
2,617

 
4,199

 
4,493

 
 
 
 
 
 
Earnings/(loss) before Federal income taxes
3,340

 
2,801

 
(1,493
)
Federal income taxes/(benefit)
(717
)
 
(1,495
)
 
(1,539
)
 
 
 
 
 
 
Earnings before equity/(loss) in earnings of affiliates
4,057

 
4,296

 
46

Equity/(loss) in earnings of affiliates
112,701

 
106,125

 
100,846

 
 
 
 
 
 
Net earnings/(loss)
$
116,758

 
110,421

 
100,892




See Notes to Condensed Financial Information of Registrant


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National Western Life Group, Inc.
Schedule II
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
(Parent Company Only)
(in thousands)


 
2018
 
2017
 
2016
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net earnings/(loss)
$
116,758

 
110,421

 
100,892

Adjustments to reconcile net earnings/(loss) to cash provided by operating activities:
 
 
 
 
 
     Equity in earnings/(loss) of affiliates
(112,701
)
 
(106,125
)
 
(100,846
)
Depreciation and amortization
30

 
30

 
30

Change in:
 
 
 
 
 
   Federal income tax, net
(1,166
)
 
(1,843
)
 
(1,008
)
   Deferred Federal income tax
448

 
348

 
(530
)
Due to subsidiaries, net
—

 
(608
)
 
608

Other, net
(1,956
)
 
(917
)
 
1,896

 
 
 
 
 
 
Net cash provided by operating activities
1,413

 
1,306

 
1,042

 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Dividends on common stock
(1,273
)
 
(1,273
)
 
(1,273
)
 
 
 
 
 
 
Net cash provided by (used in) financing activities
(1,273
)
 
(1,273
)
 
(1,273
)
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
140

 
33

 
(231
)
Cash and cash equivalents at the beginning of year
1,303

 
1,270

 
1,501

 
 
 
 
 
 
Cash and cash equivalents at the end of year
$
1,443

 
1,303

 
1,270

 
 
 
 
 
 


See Notes to Condensed Financial Information of Registrant


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National Western Life Group, Inc.
Schedule II
Notes to the Condensed Financial Information of Registrant
(Parent Company Only)


1.    Basis of Presentation

The accompanying condensed financial statements of the Parent Company Only should be read in conjunction with the consolidated financial statements and notes thereto of National Western Life Group, Inc. ("NWLGI").

As discussed in Note 1(A) Principles of Consolidation of the consolidated financial statements, on October 1, 2015, National Western Life Insurance Company ("National Western" or "NWLIC") completed its previously announced holding company reorganization and became a wholly owned subsidiary of NWLGI. As a result of the reorganization, NWLGI replaced National Western as the publicly held company. Also in 2015, the Board of Directors of National Western declared a $15.5 million property dividend of its wholly owned subsidiaries, NWL Investments, Inc., NWL Services, Inc., and Regent Care San Marcos Holdings, LLC., which were transferred to NWLGI on December 18, 2015.

In the Parent Company Only condensed financial statements, NWLGI's investments in subsidiaries are stated at cost plus equity in undistributed income (losses) of subsidiaries since the date of acquisition. The subsidiary information presented is eliminated in the consolidated financial statements. NWLGI and its subsidiaries pay service fees to NWLIC which are included in expenses and equity earnings. These service fees are also eliminated in the consolidated financial statements.

2. Dividend Payments

In the years ended December 31, 2018, 2017 and 2016, dividends of $6.0 million, $7.0 million and $3.0 million were declared and paid by NWLIC to NWLGI, respectively. These are in addition to the property dividends noted above. These dividend payments are eliminated in the consolidated financial statements.


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NATIONAL WESTERN LIFE GROUP, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2018, 2017 and 2016
(In thousands)


Description
 
Balance at Beginning of Period
 
(1)
Charged to Costs and Expenses
 
Reductions
 
Transfers
 
Balance at End of Period
 
 
 
 
 
 
 
 
 
 
 
Valuation accounts deducted from applicable assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for possible losses on mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
$
650

 
25

 
—

 
—

 
675

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
$
650

 
—

 
—

 
—

 
650

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
$
650

 
—

 
—

 
—

 
650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for possible losses on real estate:
 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
$
611

 
—

 
—

 
—

 
611

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
$
611

 
—

 
—

 
—

 
611

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
$
1,629

 
—

 
(1,018
)
 
—

 
611


Notes:
(1) Amounts were recorded to realized (gains) losses on investments.

See accompanying report of Independent Registered Public Accounting Firm.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NATIONAL WESTERN LIFE GROUP, INC.
(Registrant)

Date:
March 1, 2019
/S/Ross R. Moody
 
 
By: Ross R. Moody, Chairman of the Board, President and
 
 
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
 
Title (Capacity)
 
Date
 
 
 
 
 
 
 
Chairman Emeritus
 
March 1, 2019
Robert L. Moody, Sr.
 
 
 
 
 
 
 
 
 
/S/Ross R. Moody
 
Chairman of the Board, President
 
March 1, 2019
Ross R. Moody
 
and Chief Executive Officer
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
/S/Brian M. Pribyl
 
Senior Vice President - Chief Financial Officer,
 
March 1, 2019
Brian M. Pribyl
 
 and Treasurer
 
 
 
 
(Principal Financial Officer)
 
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
/S/Thomas A. Blackwell
 
Director
 
March 1, 2019
Thomas A. Blackwell
 
 
 
 
 
 
 
 
 
/S/David S. Boone
 
Director
 
March 1, 2019
David S. Boone
 
 
 
 
 
 
 
 
 
/S/Stephen E. Glasgow
 
Director
 
March 1, 2019
Stephen E. Glasgow
 
 
 
 
 
 
 
 
 
/S/E. Douglas McLeod
 
Director
 
March 1, 2019
E. Douglas McLeod
 
 
 
 
 
 
 
 
 
/S/Charles D. Milos
 
Director
 
March 1, 2019
Charles D. Milos
 
 
 
 
 
 
 
 
 
 
 
Director
 
March 1, 2019
Ann M. Moody
 
 
 
 
 
 
 
 
 
/S/Frances A. Moody-Dahlberg
 
Director
 
March 1, 2019
Frances A. Moody-Dahlberg
 
 
 
 
 
 
 
 
 
/S/E.J. Pederson
 
Director
 
March 1, 2019
E.J. Pederson
 
 
 
 


168