Document

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

For the Quarterly Period Ended March 31, 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
(512) 836-1010
(Address of Principal Executive Offices) (Zip Code)
(Telephone Number, including area code)


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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definition of "accelerated filer." "large accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x  Accelerated filer  o   Non-accelerated filer (Do not check if a smaller reporting company)  o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x
As of May 8, 2018, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,166 and  Class B - 200,000.


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TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
March 31, 2018 (Unaudited) and December 31, 2017
 
 
For the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
For the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
For the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
For the Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
(Unaudited)
 
 
ASSETS
March 31,
2018
 
December 31,
2017
 
 
 
 
Investments:
 
 
 
Debt securities held to maturity, at amortized cost (fair value: $7,302,034 and $7,434,104)
$
7,280,200

 
7,247,024

Debt securities available for sale, at fair value (cost: $3,087,827 and $2,964,510)
3,084,789

 
3,041,131

Mortgage loans, net of allowance for possible losses ($650 and $650)
204,948

 
208,249

Policy loans
55,515

 
56,405

Derivatives, index options
116,356

 
194,731

Equity securities
18,173

 
18,478

Other long-term investments
51,733

 
51,828

 
 
 
 
Total investments
10,811,714

 
10,817,846

 
 
 
 
Cash and cash equivalents
82,924

 
217,624

Deferred policy acquisition costs
840,039

 
819,511

Deferred sales inducements
138,993

 
135,570

Accrued investment income
99,784

 
96,818

Federal income tax receivable
10,750

 
—

Other assets
142,114

 
137,725

 
 
 
 
Total assets
$
12,126,318

 
12,225,094


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

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
(Unaudited)
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
March 31,
2018
 
December 31,
2017
 
 
 
 
LIABILITIES:
 
 
 
 
 
 
 
Future policy benefits:
 
 
 
Universal life and annuity contracts
$
9,855,395

 
9,962,589

Traditional life reserves
136,804

 
135,895

Other policyholder liabilities
137,109

 
128,009

Deferred Federal income tax liability
29,082

 
25,408

Federal income tax payable
—

 
2,701

Other liabilities
139,697

 
138,318

 
 
 
 
Total liabilities
10,298,087

 
10,392,920

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

 
 
 
 
Common stock:
 

 
 

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

 
34

Class B - $.01 par value; 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
(20,951
)
 
14,281

Retained earnings
1,807,430

 
1,776,141

 
 
 
 
Total stockholders’ equity
1,828,231

 
1,832,174

 
 
 
 
Total liabilities and stockholders' equity
$
12,126,318

 
12,225,094


Note:  The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited Consolidated Financial Statements as of that date.

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


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Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands, except per share amounts)
 
2018
 
2017
 
 
 
 
Premiums and other revenues:
 
 
 
Universal life and annuity contract charges
$
38,520

 
41,364

Traditional life premiums
4,145

 
4,221

Net investment income
60,745

 
171,742

Other revenues
4,997

 
4,505

Net realized investment gains (losses):
 

 
 

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

 
20

Portion of OTTI (gains) losses recognized in other comprehensive income
(3
)
 
(20
)
Net OTTI losses recognized in earnings
—

 
—

Other net investment gains (losses)
611

 
2,585

Total net realized investment gains (losses)
611

 
2,585

 
 
 
 
Total revenues
109,018

 
224,417

 
 
 
 
Benefits and expenses:
 

 
 

Life and other policy benefits
21,401

 
19,757

Amortization of deferred policy acquisition costs
32,229

 
34,212

Universal life and annuity contract interest
(1,818
)
 
109,893

Other operating expenses
23,633

 
25,092

 
 
 
 
Total benefits and expenses
75,445

 
188,954

 
 
 
 
Earnings before Federal income taxes
33,573

 
35,463

 
 
 
 
Federal income taxes
6,698

 
11,925

 
 
 
 
Net earnings
$
26,875

 
23,538

 
 
 
 
Basic earnings per share:
 

 
 

Class A
$
7.60

 
$
6.66

Class B
$
3.80

 
$
3.33

 
 
 
 
Diluted earnings per share:
 

 
 

Class A
$
7.60

 
$
6.65

Class B
$
3.80

 
$
3.33


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



 
 
 
 


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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands)
 
2018
 
2017
 
 
 
 
Net earnings
$
26,875

 
23,538

 
 
 
 
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
(34,754
)
 
5,479

Net unrealized liquidity gains (losses)
—

 
43

Reclassification adjustment for net amounts included in net earnings
(33
)
 
(690
)
 
 
 
 
Net unrealized gains (losses) on securities
(34,787
)
 
4,832

 
 
 
 
Foreign currency translation adjustments
1,168

 
(85
)
 
 
 
 
Benefit plans:
 

 
 

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

 
(887
)
 
 
 
 
Other comprehensive income (loss)
(30,818
)
 
3,860

 
 
 
 
Comprehensive income (loss)
$
(3,943
)
 
27,398


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



 
 
 
 









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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands)
 
2018
 
2017
 
 
 
 
Common stock:
 
 
 
Balance at beginning of period
$
36

 
36

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
36

 
36

 
 
 
 
Additional paid-in capital:
 

 
 

Balance at beginning of period
41,716

 
41,716

Shares exercised under stock option plan
—

 
—

 
 
 
 
       Balance at end of period
41,716

 
41,716

 
 
 
 
Accumulated other comprehensive income:
 

 
 

Unrealized gains on non-impaired securities:
 

 
 

Balance at beginning of period
33,664

 
22,813

Change in unrealized gains (losses) during period, net of tax
(34,787
)
 
4,789

Cumulative effect of change in accounting principle, net of tax (See Note 2)
(4,414
)
 
—

 
 
 
 
   Balance at end of period
(5,537
)
 
27,602

 
 
 
 
Unrealized losses on impaired held to maturity securities:
 

 
 

Balance at beginning of period
(10
)
 
(203
)
Amortization
2

 
85

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

 
—

Additional credit loss on previously impaired securities
—

 
—

Change in shadow deferred policy acquisition costs
(2
)
 
(42
)
 
 
 
 
   Balance at end of period
(10
)
 
(160
)
 
 
 
 
Unrealized losses on impaired available for sale securities:
 

 
 

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

 
—

Change in shadow deferred policy acquisition costs
—

 
—

Recoveries, net of tax
—

 
—

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

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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (continued)
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands)
 
 
 
 
 
2018
 
2017
 
 
 
 
Foreign currency translation adjustments:
 

 
 

Balance at beginning of period
3,223

 
2,661

Change in translation adjustments during period
1,168

 
(85
)
 
 
 
 
  Balance at end of period
4,391

 
2,576

 
 
 
 
Benefit plan liability adjustment:
 

 
 

Balance at beginning of period
(22,595
)
 
(14,718
)
Amortization of net prior service cost and net loss, net of tax
2,801

 
(887
)
 
 
 
 
  Balance at end of period
(19,794
)
 
(15,605
)
 
 
 
 
Accumulated other comprehensive income at end of period
(20,951
)
 
14,412

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

 
1,669,524

Cumulative effect of change in accounting principle, net of tax (See Note 2)
4,414

 
—

   Net earnings
26,875

 
23,538

   Stockholder dividends
—

 
—

 
 
 
 
   Balance at end of period
1,807,430

 
1,693,062

 
 
 
 
Total stockholders' equity
$
1,828,231

 
$
1,749,226


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



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NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands)
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net earnings
$
26,875

 
23,538

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

 
 

Universal life and annuity contract interest
(1,818
)
 
109,893

Surrender charges and other policy revenues
(8,988
)
 
(12,268
)
Realized (gains) losses on investments
(611
)
 
(2,585
)
Accretion/amortization of discounts and premiums, investments
123

 
116

Depreciation and amortization
3,021

 
2,474

(Increase) decrease in value of equity securities
541

 
—

(Increase) decrease in value of derivatives
44,394

 
(61,206
)
(Increase) decrease in deferred policy acquisition and sales inducement costs
11,673

 
11,003

(Increase) decrease in accrued investment income
(2,966
)
 
(2,737
)
(Increase) decrease in other assets
(7,635
)
 
(2,390
)
Increase (decrease) in liabilities for future policy benefits
2,594

 
4,171

Increase (decrease) in other policyholder liabilities
9,101

 
9,284

Increase (decrease) in Federal income taxes liability
(13,451
)
 
17,504

Increase (decrease) in deferred Federal income tax
11,864

 
(11,019
)
Increase (decrease) in other liabilities
(1,844
)
 
6,654

 
 
 
 
Net cash provided by operating activities
72,873

 
92,432

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of:
 

 
 

Securities held to maturity
—

 
—

Securities available for sale
—

 
22,184

Other investments
—

 
—

Proceeds from maturities and redemptions of:
 

 
 

Securities held to maturity
113,157

 
120,507

Securities available for sale
7,156

 
70,603

Equity securities
140

 
—

Derivatives, index options
59,321

 
48,856

Property and equipment
9

 
10

Purchases of:
 

 
 

Securities held to maturity
(142,867
)
 
(217,275
)
Securities available for sale
(126,544
)
 
(44,817
)
Equity securities
(376
)
 
—

Derivatives, index options
(22,556
)
 
(17,649
)
Other investments
(96
)
 
—

Property and equipment
(2,553
)
 
(44
)
 
 
 
 
 
Continued on Next Page
 
 
 
 
 
 
 
 
 

9
Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
(In thousands)
 
2018
 
2017
 
 
 
 
Principal payments on mortgage loans
3,365

 
18,999

Cost of mortgage loans acquired
(24
)
 
(8,323
)
Decrease (increase) in policy loans
890

 
930

 
 
 
 
Net cash provided by/(used in) investing activities
(110,978
)
 
(6,019
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Deposits to account balances for universal life and annuity contracts
154,914

 
181,856

Return of account balances on universal life and annuity contracts
(252,988
)
 
(231,899
)
 
 
 
 
Net cash provided by (used in) financing activities
(98,074
)
 
(50,043
)
 
 
 
 
Effect of foreign exchange
1,479

 
(131
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(134,700
)
 
36,239

Cash and cash equivalents at beginning of period
217,624

 
51,247

 
 
 
 
Cash and cash equivalents at end of period
$
82,924

 
$
87,486

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

 
 
 
 
Cash paid (received) during the period for:
 

 
 

Interest
$
10

 
10

Income taxes
$
8,283

 
5,440

 
 
 
 
Noncash operating activities:
 
 
 
   Deferral of sales inducements
$
(3,007
)
 
(1,515
)

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



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


(1)
 CONSOLIDATION AND BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (“Company”) as of March 31, 2018, and the results of its operations and its cash flows for the three months ended March 31, 2018 and March 31, 2017. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year. It is recommended that these Condensed Consolidated Financial Statements be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 which is accessible free of charge through the Company's internet site at www.nwlgi.com or the Securities and Exchange Commission internet site at www.sec.gov. The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited consolidated financial statements as of that date.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NWLGI and its wholly owned subsidiaries: National Western Life Insurance Company ("NWLIC" or "National Western"), Regent Care San Marcos Holdings, LLC, NWL Investments, Inc., and NWL Services, Inc. National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., and Braker P III, LLC. Where comments or disclosures are made specifically in reference to the insurance operations of National Western, the "company" is used in order to distinguish such comments from the consolidated entity. All significant intercorporate transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying Condensed Consolidated Financial Statements include: (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs, (4) valuation allowances for deferred tax assets, (5) other-than-temporary impairment losses on debt securities, (6) commitments and contingencies, and (7) valuation allowances for mortgage loans and real estate.

The table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three months ended March 31, 2018 and March 31, 2017.

Affected Line Item in the
Statements of Earnings
 
Amount Reclassified From Accumulated Other Comprehensive Income
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(In thousands)
 
 
 
 
 
Other net investment gains (losses)
 
$
40

 
1,061

Net OTTI losses recognized in earnings
 
—

 
—

Earnings before Federal income taxes
 
40

 
1,061

Federal income taxes
 
7

 
371

 
 
 
 
 
Net earnings
 
$
33

 
690



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

(2)
 NEW ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements not yet adopted

In June 2016, the FASB released Accounting Standards Update ("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.

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. The Company does not expect a material effect on the results of operations or financial position with the adoption of this ASU.
Recent 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.


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

In February 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's accounting policy for the release of stranded tax effects in AOCI is on an aggregate portfolio basis. 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 Changes in 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, approximately 2% of total revenues for the year ended December 31, 2017. The guidance was effective for reporting periods beginning after December 15, 2017. 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.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The adoption of this ASU did not have a material effect on the results of operations or financial position of the Company.
  
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.


13
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


(3)
 STOCKHOLDERS' EQUITY

NWLIC is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance.  The restrictions are based on the lesser of statutory earnings from operations, excluding capital gains, from the prior calendar year or 10% of statutory surplus of the company as of the previous calendar year-end.  The maximum dividend payment which may be made without prior approval in 2018 is $127.3 million. As the sole owner of NWLIC, all dividends declared by National Western are payable entirely to NWLGI and are eliminated in consolidation.

In the first quarter of 2018, National Western declared and paid a $3.0 million dividend to NWLGI. No dividends were declared or paid by National Western in the quarter ended March 31, 2017.

NWLGI did not declare or pay cash dividends on its common shares during the three months ended March 31, 2018 and 2017.


(4)
 EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net income available to each class of common stockholders on an as if distributed basis by the weighted-average number of common shares outstanding for the period. Diluted earnings per share, by definition, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock, that then shared in the distributed earnings of each class of common stock. U.S. GAAP requires a two-class presentation for the Company's two classes of common stock. However, settlement of stock option exercises in cash or by issuance of shares is at the discretion of the Company's option holders and such exercises have been predominantly in cash. Consequently, the Company's stock options outstanding are not considered potentially dilutive under accounting guidance.


14
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Net income for the periods shown below is allocated between Class A shares and Class B shares based upon (1) the proportionate number of shares issued and outstanding as of the end of the period, and (2) the per share dividend rights of the two classes under the Company's Restated Certificate of Incorporation (the Class B dividend per share is equal to one-half the Class A dividend per share).
 
Three Months Ended March 31,
 
2018
 
2017
 
Class A
 
Class B
 
Class A
 
Class B
 
(In thousands except per share amounts)
 
 
 
 
 
 
 
 
Numerator for Basic and Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net income
$
26,875

 
 
 
23,538

 
 
Dividends - Class A shares
—

 
 
 
—

 
 
Dividends - Class B shares
—

 
 
 
—

 
 
 
 
 
 
 
 
 
 
Undistributed income
$
26,875

 
 
 
23,538

 
 
 
 
 
 
 
 
 
 
Allocation of net income:
 

 
 
 
 

 
 
Dividends
$
—

 
—

 
—

 
—

Allocation of undistributed income
26,115

 
760

 
22,872

 
666

 
 
 
 
 
 
 
 
Net income
$
26,115

 
760

 
22,872

 
666

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

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

 
200

 
3,436

 
200

Effect of dilutive stock options
—

 
—

 
4

 
—

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

 
200

 
3,440

 
200

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
7.60

 
3.80

 
6.66

 
3.33

 
 
 
 
 
 
 
 
Diluted Earnings Per Share
$
7.60

 
3.80

 
6.65

 
3.33

 
 
 
 
 
 
 
 


15
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(5)
 PENSION AND OTHER POSTRETIREMENT PLANS

(A)
Defined Benefit Pension Plans

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

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Service cost
$
28

 
27

Interest cost
225

 
239

Expected return on plan assets
(325
)
 
(307
)
Amortization of prior service cost
—

 
—

Amortization of net loss
131

 
159

 
 
 
 
Net periodic benefit cost
$
59

 
118


The service cost shown above for each period represents plan expenses expected to be paid out of plan assets. Under the clarified rules of the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The company's minimum required contribution for the 2018 plan year is $0.1 million. There was no remaining contribution payable for the 2017 plan year as of March 31, 2018. As of March 31, 2018, the company had no contributions to the plan for the 2018 plan year.

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


16
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

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

The following table summarizes the components of net periodic benefit costs for the nonqualified defined benefit plans.

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Service cost
$
90

 
204

Interest cost
213

 
347

Amortization of prior service cost
15

 
15

Amortization of net loss
176

 
818

 
 
 
 
Net periodic benefit cost
$
494

 
1,384


The company expects to contribute $2.0 million to these plans in 2018.  As of March 31, 2018, the company has contributed $0.4 million to the plans.

(B)
Postretirement Employment Plans Other Than Pension

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

 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Interest cost
$
40

 
30

Amortization of prior service cost
26

 
26

Amortization of net loss
37

 
—

 
 
 
 
Net periodic benefit cost
$
103

 
56


The company expects to contribute minimal amounts to the plan in 2018.



17
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(6)
SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas.  A summary of segment information as of March 31, 2018 and December 31, 2017 for the Condensed Consolidated Balance Sheet items and for the three months ended March 31, 2018 and March 31, 2017 for the Condensed Consolidated Statement of Earnings is provided below.

Condensed Consolidated Balance Sheet Items:

 
March 31, 2018
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs and sales inducements
$
106,029

 
251,225

 
621,778

 
—

 
979,032

Total segment assets
1,125,889

 
1,231,846

 
9,155,547

 
395,648

 
11,908,930

Future policy benefits
964,219

 
906,855

 
8,121,125

 
—

 
9,992,199

Other policyholder liabilities
14,909

 
18,380

 
103,820

 
—

 
137,109


 
December 31, 2017
 
Domestic
Life
Insurance
 
International
Life
Insurance
 
Annuities
 
All
Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



18
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Condensed Consolidated Statement of Earnings:


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

 
27,917

 
5,147

 
—

 
42,665

Net investment income
663

 
1,971

 
53,543

 
4,568

 
60,745

Other revenues
—

 
30

 
19

 
4,948

 
4,997

 
 
 
 
 
 
 
 
 
 
Total revenues
10,264

 
29,918

 
58,709

 
9,516

 
108,407

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,809

 
5,728

 
10,864

 
—

 
21,401

Amortization of deferred policy acquisition costs
2,675

 
7,380

 
22,174

 
—

 
32,229

Universal life and annuity contract interest
(2,861
)
 
(1,150
)
 
2,193

 
—

 
(1,818
)
Other operating expenses
5,147

 
5,381

 
7,935

 
5,170

 
23,633

Federal income taxes (benefit)
98

 
2,507

 
3,098

 
867

 
6,570

 
 
 
 
 
 
 
 
 
 
Total expenses
9,868

 
19,846

 
46,264

 
6,037

 
82,015

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
396

 
10,072

 
12,445

 
3,479

 
26,392

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Three Months Ended March 31, 2017
 
Domestic
Life
Insurance
 
International
 Life
Insurance
 
Annuities
 
All
 Others
 
Totals
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and contract revenues
$
8,849

 
31,500

 
5,236

 
—

 
45,585

Net investment income
19,590

 
18,619

 
126,434

 
7,099

 
171,742

Other revenues
13

 
26

 
26

 
4,440

 
4,505

 
 
 
 
 
 
 
 
 
 
Total revenues
28,452

 
50,145

 
131,696

 
11,539

 
221,832

 
 
 
 
 
 
 
 
 
 
Life and other policy benefits
4,919

 
6,285

 
8,553

 
—

 
19,757

Amortization of deferred acquisition costs
2,789

 
7,406

 
24,017

 
—

 
34,212

Universal life and annuity contract interest
16,247

 
16,382

 
77,264

 
—

 
109,893

Other operating expenses
4,732

 
5,978

 
10,060

 
4,322

 
25,092

Federal income taxes (benefit)
(79
)
 
4,724

 
3,956

 
2,419

 
11,020

 
 
 
 
 
 
 
 
 
 
Total expenses
28,608

 
40,775

 
123,850

 
6,741

 
199,974

 
 
 
 
 
 
 
 
 
 
Segment earnings (loss)
$
(156
)
 
9,370

 
7,846

 
4,798

 
21,858


19
Table of Contents

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

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

 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Premiums and Other Revenues:
 
 
 
Premiums and contract revenues
$
42,665

 
45,585

Net investment income
60,745

 
171,742

Other revenues
4,997

 
4,505

Realized gains (losses) on investments
611

 
2,585

 
 
 
 
Total condensed consolidated premiums and other revenues
$
109,018

 
224,417


 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Federal Income Taxes:
 
 
 
Total segment Federal income taxes
$
6,570

 
11,020

Taxes on realized gains (losses) on investments
128

 
905

 
 
 
 
Total condensed consolidated Federal income taxes
$
6,698

 
11,925


 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Net Earnings:
 
 
 
Total segment earnings
$
26,392

 
21,858

Realized gains (losses) on investments, net of taxes
483

 
1,680

 
 
 
 
Total condensed consolidated net earnings
$
26,875

 
23,538




20
Table of Contents

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

 
March 31,
 
December 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Assets:
 
 
 
Total segment assets
$
11,908,930

 
12,011,696

Other unallocated assets
217,388

 
213,398

 
 
 
 
Total condensed consolidated assets
$
12,126,318

 
12,225,094



(7)
  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 ("SARs"), 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 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 the Incentive Plan, which is a stock and incentive plan essentially similar to the 2008 Plan. 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. All current stock options outstanding were granted under the 1995 Plan and 2008 Plan. Employee stock options and SARs granted vest 20% annually following three years of service following the grant date. Directors' stock options and SARs 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.

The Incentive Plan allows for certain other share or unit awards which are solely paid out in cash based on the value of the Company's shares, or changes therein, as well as the financial performance of the Company under pre-determined target performance metrics. Certain awards, such as restricted stock units ("RSUs") provide solely for cash settlement based upon the market price of the Company's Class A common shares, often referred to as "phantom stock-based awards". 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 shares at that time.

21
Table of Contents

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

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. 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 shares at that time.

The following table shows all grants issued to officers and directors for the three months ended March 31, 2018 and 2017. These grants were made based upon closing market price per Class A common share at the time of the grant.

 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
Officer
 
Director
 
Officer
 
Director
 
 
 
 
 
 
 
 
SARs
—


—

 
11,512


—

RSUs
—


—

 
2,674


1,660

PSUs
—


—

 
4,425


—

 
 
 
 
 
 
 
 
The Company uses the current fair value method to measure compensation cost for awards granted under the share-based plans. As of March 31, 2018 and 2017, the liability balance was $13.2 million and $12.7 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
—

 
(15,018
)
 
$
248.86

Forfeited
—

 
—

 
$
—

Expired
—

 
—

 
$
—

Stock options granted
—

 
—

 
$
—

 
 
 
 
 
 
Balance at March 31, 2018
291,000

 
3,000

 
$
208.05



22
Table of Contents

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

 
Liability Awards
 
SAR
 
RSU
 
PSU
 
 
 
 
 
 
Other Share/Unit Awards:
 
 
 
 
 
Balance at January 1, 2018
92,667

 
11,721

 
14,052

Exercised
(975
)
 
(1,494
)
 
—

Forfeited
(907
)
 
(325
)
 
—

Granted
—

 
—

 
—

 
 
 
 
 
 
Balance at March 31, 2018
90,785

 
9,902

 
14,052


Stock options, SARs, and RSUs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants prior to their termination from the Company. Forfeited stock options, if any, are not shown as being added back to the "Shares Available For Grant" balance as they were awarded under the 1995 Plan which was terminated during calendar year 2010.

The total intrinsic value of shared-based compensation exercised was $1.5 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively. The total share-based compensation paid during the period was $1.5 million and $0.1 million for the three months ended March 31, 2018 and 2017, respectively. The total fair value of stock options and SARs vested during the three months ended March 31, 2018 and 2017 was $0.8 million and $0.5 million, respectively. For the three months ended March 31, 2018 and 2017, no cash was received from the exercise of stock options under the Plans.

The following table summarizes information about stock options and SARs outstanding at March 31, 2018.

 
 
Options/SARs Outstanding
 
 
Number
Outstanding
 
Weighted-
Average
Remaining
Contractual Life
 
Number
Exercisable
 
 
 
 
 
 
 
Exercise prices:
 
 
 
 
 
 208.05 (options)
 
3,000

 
0.2 years
 
3,000

 114.64 (SARs)
 
10,900

 
0.9 years
 
10,900

 132.56 (SARs)
 
20,018

 
3.7 years
 
16,115

 210.22 (SARs)
 
26,550

 
5.7 years
 
11,750

 216.48 (SARs)
 
12,036

 
7.9 years
 
7,847

 311.16 (SARs)
 
10,814

 
8.8 years
 
3,645

 310.55 (SARs)
 
203

 
9.1 years
 
—

 334.34 (SARs)
 
10,264

 
9.7 years
 
—

 
 
 
 
 
 
 
Totals
 
93,785

 
 
 
53,257

 
 

 
 
 
 

Aggregate intrinsic value (in thousands)
$
9,391

 
 
 
$
6,947


The aggregate intrinsic value in the table above is based on the closing Class A stock price of $304.88 per share on March 31, 2018.


23
Table of Contents

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

The stock options shown above with exercise price of $208.05 have a remaining contractual life of less than one year. The option holders for this grant have until the end of the contractual life of June 20, 2018 to exercise these holdings or otherwise forfeit the option grants held.

In estimating the fair value of the share-based awards outstanding at March 31, 2018 and December 31, 2017, the Company employed the Black-Scholes option pricing model with assumptions detailed below.

 
March 31,
2018
 
December 31,
2017
 
 
 
 
Expected term of options
0.2 to 9.7 years

 
0.3 to 10.0 years

Expected volatility weighted-average
21.69
%
 
21.55
%
Expected dividend yield
0.12
%
 
0.11
%
Risk-free rate weighted-average
2.19
%
 
1.82
%

The Company reviewed the contractual term relative to the options 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 cost/(benefit) recognized in the financial statements related to these plans was $(0.5) million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively. The related tax expense/(benefit) recognized was $0.1 million and $(0.3) million for the three months ended March 31, 2018 and 2017, respectively.

As of March 31, 2018, the total compensation cost related to non-vested share based awards not yet recognized was $5.8 million.  This amount is expected to be recognized over a weighted-average period of 1.3 years.  The Company recognizes compensation cost over the graded vesting periods.


(8)
COMMITMENTS AND CONTINGENCIES

(A)  Legal Proceedings

In the normal course of business, the Company is involved or may become involved in various legal actions in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. In recent years, carriers offering life insurance and annuity products have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices, and similar claims. 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.



24
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NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 Plaintiff’s 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 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.
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 Condensed Consolidated Balance Sheets.


25
Table of Contents

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

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 $16.2 million commitments to fund new loans and $1.2 million in commitments to extend credit relating to existing loans at March 31, 2018. The Company evaluates each customer's creditworthiness on a case-by-case basis.


(9)
INVESTMENTS

(A)
Investment Gains and Losses

The table below presents realized investment gains and losses, excluding impairment losses, for the periods indicated.

 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
 
 
 
 
Available for sale debt securities:
 
 
 
Realized gains on disposal
$
40

 
973

Realized losses on disposal
—

 
—

Held to maturity debt securities:
 
 
 
Realized gains on disposal
571

 
1,557

Realized losses on disposal
—

 
(34
)
Equity securities realized gains (losses)
—

 
89

 
 
 
 
Totals
$
611

 
2,585


Disposals in the held to maturity category during the periods shown primarily represent calls initiated by the credit issuer of the debt security. It is the Company's policy to initiate disposals of debt securities in the held to maturity category only in instances in which the credit status of the issuer comes into question and the realization of all or a significant portion of the investment principal of the holding is deemed to be in jeopardy.


26
Table of Contents

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

The Company uses the specific identification method in computing realized gains and losses. For the three months ended March 31, 2018 and 2017 the percentage of gains on bonds due to the call of securities was 99.0% and 63.0%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities.

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

 
 
Three Months Ended
 
 
March 31,
 
 
2018
 
2017
 
 
(In thousands)
 
 
 
 
 
Total other-than-temporary impairment gains (losses) on debt securities
 
$
3

 
20

Portion of loss (gain) recognized in comprehensive income
 
(3
)
 
(20
)
 
 
 
 
 
Net impairment losses on debt securities recognized in earnings
 
—

 
—

Equity securities impairments
 
—

 
—

 
 
 
 
 
Totals
 
$
—

 
—


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.

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

 
1,440

Reductions for securities sold during current period
—

 
(813
)
Additions for credit losses not previously recognized in other-than-temporary impairments
—

 
—

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

 
627



27
Table of Contents

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

(B)
Debt Securities

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

 
Debt Securities Held to Maturity
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Treasury
$
1,338

 
150

 
—

 
1,488

States and political subdivisions
462,708

 
14,097

 
(1,580
)
 
475,225

Public utilities
1,038,226

 
14,664

 
(8,408
)
 
1,044,482

Corporate
4,521,036

 
52,589

 
(49,835
)
 
4,523,790

Residential mortgage-backed
1,251,971

 
15,936

 
(15,895
)
 
1,252,012

Home equity
3,994

 
56

 
(8
)
 
4,042

Manufactured housing
927

 
68

 
—

 
995

 
 
 
 
 
 
 
 
Totals
$
7,280,200

 
97,560

 
(75,726
)
 
7,302,034


The table below presents amortized costs and fair values of debt securities available for sale at March 31, 2018. As indicated in Note (2) New Accounting Pronouncements, effective January 1, 2018, equity securities are no longer included in the Securities Available for Sale category.

 
Debt Securities Available for Sale
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
States and political subdivisions
$
574

 
—

 
(25
)
 
549

Foreign governments
9,967

 
88

 
—

 
10,055

Public utilities
83,461

 
2,342

 
(128
)
 
85,675

Corporate
2,967,125

 
36,520

 
(43,336
)
 
2,960,309

Residential mortgage-backed
19,248

 
1,191

 
(36
)
 
20,403

Home equity
7,452

 
346

 
—

 
7,798

 
 
 
 
 
 
 
 
Totals
$
3,087,827

 
40,487

 
(43,525
)
 
3,084,789



28
Table of Contents

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

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


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