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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2023
☐ 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)
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Delaware | | | 47-3339380 |
(State or Other Jurisdiction of Incorporation) | | | (IRS Employer Identification No.) |
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10801 N. Mopac Expy Bldg 3 | | |
Austin, | Texas | | |
78759 | | (512) | 836-1010 |
(Address of Principal Executive Offices) (Zip Code) | | (Telephone Number, including area code) |
Securities registered pursuant to Section 12 (b) of the Act:
| | | | | | | | | | | | | | |
Title of each class to be so registered: | | Trading Symbol | | Name of each exchange on which each class is to be registered: |
Class A Common Stock, $0.01 par value | | NWLI | | The NASDAQ Stock Market LLC |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). : Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of "accelerated filer." "large accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated filer ☒ Non-accelerated filer (Do not check if a smaller reporting company) ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 7, 2023, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,020 and Class B - 200,000.

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TABLE OF CONTENTS |
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June 30, 2023 and December 31, 2022 (Unaudited) | |
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For the Three Months Ended June 30, 2023 and 2022 (Unaudited) | |
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For the Six Months Ended June 30, 2023 and 2022 (Unaudited) | |
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For the Three Months Ended June 30, 2023 and 2022 (Unaudited) | |
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For the Six Months Ended June 30, 2023 and 2022 (Unaudited) | |
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For the Three Months Ended June 30, 2023 and 2022 (Unaudited) | |
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For the Six Months Ended June 30, 2023 and 2022 (Unaudited) | |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| | | | | | | | | | | |
ASSETS | June 30, 2023 | | December 31, 2022 |
| | | |
Investments: | | | |
| | | |
Debt securities available-for-sale, at fair value (cost: $8,083,487 and $8,438,760) | $ | 7,324,100 | | | 7,611,633 | |
Debt securities trading, at fair value (cost: $1,254,993 and $1,269,597) | 1,069,625 | | | 1,065,993 | |
Mortgage loans, net of allowance for credit losses ($3,736 and $3,575), ($19,422 and $19,334 at fair value) | 495,411 | | | 505,730 | |
Policy loans | 69,123 | | | 70,495 | |
Derivatives, index options | 72,863 | | | 23,669 | |
Equity securities, at fair value (cost: $13,986 and $14,547) | 23,157 | | | 22,076 | |
Other long-term investments | 300,466 | | | 262,106 | |
Short-term investments | 7,821 | | | 3,937 | |
| | | |
Total investments | 9,362,566 | | | 9,565,639 | |
| | | |
Cash and cash equivalents | 291,820 | | | 295,270 | |
Deferred policy acquisition costs (Note 1) | 644,933 | | | 663,882 | |
Deferred sales inducements (Note 1) | 78,209 | | | 85,303 | |
Value of business acquired (Note 1) | 134,097 | | | 138,495 | |
Cost of reinsurance (Note 1) | 72,276 | | | 78,328 | |
Market risk benefits asset (Note 1) | 40,073 | | | 48,759 | |
Accrued investment income | 90,607 | | | 92,250 | |
Federal income tax receivable | 5,489 | | | 6,508 | |
Deferred Federal income tax asset (Note 1) | 13,822 | | | 9,032 | |
Amounts recoverable from reinsurer, net of allowance for credit losses ($800 and $450) (Note 1) | 1,611,143 | | | 1,688,788 | |
Other assets | 109,351 | | | 110,691 | |
| | | |
Total assets | $ | 12,454,386 | | | 12,782,945 | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | June 30, 2023 | | December 31, 2022 |
| | | |
LIABILITIES: | | | |
| | | |
Future policyholder obligations: | | | |
Liability for policyholder account balances (Note 1) | $ | 7,285,129 | | | 7,661,785 | |
Additional liability for benefits in excess of account balance (Note 1) | 151,787 | | | 148,708 | |
Liability for future policy benefits (Note 1) | 908,212 | | | 900,146 | |
Market risk benefits liability (Note 1) | 248,876 | | | 215,777 | |
Other policyholder liabilities | 148,113 | | | 175,089 | |
Funds withheld liability | 1,243,314 | | | 1,333,036 | |
| | | |
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Other liabilities | 190,755 | | | 157,482 | |
| | | |
Total liabilities | 10,176,186 | | | 10,592,023 | |
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COMMITMENTS AND CONTINGENCIES (Note 11) | | | |
| | | |
STOCKHOLDERS’ EQUITY: | | | |
| | | |
Common stock: | | | |
Class A - $0.01 par value; 7,500,000 shares authorized; 3,436,020 issued and outstanding in 2023 and 2022 | 34 | | | 34 | |
Class B - $0.01 par value; 200,000 shares authorized, issued, and outstanding in 2023 and 2022 | 2 | | | 2 | |
Additional paid-in capital | 41,716 | | | 41,716 | |
Accumulated other comprehensive income (loss) (Note 1) | (432,879) | | | (478,219) | |
Retained earnings (Note 1) | 2,669,327 | | | 2,627,389 | |
| | | |
Total stockholders’ equity | 2,278,200 | | | 2,190,922 | |
| | | |
Total liabilities and stockholders' equity | $ | 12,454,386 | | | 12,782,945 | |
Note: The Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited Consolidated Financial Statements as of that date.
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | |
| 2023 | | 2022 |
| | | |
Premiums and other revenues: | | | |
Universal life and annuity contract charges (Note 1) | $ | 37,124 | | | 32,821 | |
Traditional life and single premium immediate annuity with life contingency (SPIAWLC) premiums (Note 1) | 21,228 | | | 22,641 | |
Net investment income | 122,514 | | | 55,474 | |
Other revenues | 5,285 | | | 5,578 | |
Net realized investment gains | 26 | | | 1,766 | |
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Total revenues | 186,177 | | | 118,280 | |
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Benefits and expenses: | | | |
Life and other policy benefits (Note 1) | 32,688 | | | 26,201 | |
| | | |
Market risk benefits expense (Note 1) | (788) | | | (55,492) | |
Amortization of deferred transaction costs (Note 1) | 22,000 | | | 22,500 | |
Universal life and annuity contract interest (Note 1) | 32,947 | | | (26,198) | |
Other operating expenses | 62,443 | | | 30,322 | |
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Total benefits and expenses | 149,290 | | | (2,667) | |
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Earnings before Federal income taxes | 36,887 | | | 120,947 | |
| | | |
Federal income taxes | 7,253 | | | 24,420 | |
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Net earnings | $ | 29,634 | | | 96,527 | |
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Basic earnings per share: | | | |
Class A (Note 4) | $ | 8.38 | | | 27.30 | |
Class B (Note 4) | $ | 4.19 | | | 13.65 | |
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Diluted earnings per share: | | | |
Class A (Note 4) | $ | 8.38 | | | 27.30 | |
Class B (Note 4) | $ | 4.19 | | | 13.65 | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | |
| | | |
| 2023 | | 2022 |
| | | |
Premiums and other revenues: | | | |
Universal life and annuity contract charges (Note 1) | $ | 72,481 | | | 65,618 | |
Traditional life and single premium immediate annuity with life contingency (SPIAWLC) premiums (Note 1) | 42,804 | | | 48,782 | |
Net investment income | 212,423 | | | 125,198 | |
Other revenues | 10,990 | | | 11,375 | |
Net realized investment gains | 93 | | | 5,560 | |
| | | |
Total revenues | 338,791 | | | 256,533 | |
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Benefits and expenses: | | | |
Life and other policy benefits (Note 1) | 56,878 | | | 59,713 | |
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Market risk benefits expense (Note 1) | 36,172 | | | (116,498) | |
Amortization of deferred transaction costs (Note 1) | 43,274 | | | 45,936 | |
Universal life and annuity contract interest (Note 1) | 63,159 | | | (39,769) | |
Other operating expenses | 87,126 | | | 62,903 | |
| | | |
Total benefits and expenses | 286,609 | | | 12,285 | |
| | | |
Earnings before Federal income taxes | 52,182 | | | 244,248 | |
| | | |
Federal income taxes | 10,244 | | | 50,159 | |
| | | |
Net earnings | $ | 41,938 | | | 194,089 | |
| | | |
Basic earnings per share: | | | |
Class A (Note 4) | $ | 11.86 | | | $ | 54.89 | |
Class B (Note 4) | $ | 5.93 | | | $ | 27.44 | |
| | | |
Diluted earnings per share: | | | |
Class A (Note 4) | $ | 11.86 | | | $ | 54.89 | |
Class B (Note 4) | $ | 5.93 | | | $ | 27.44 | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| 2023 | | 2022 |
| | | |
Net earnings | $ | 29,634 | | | 96,527 | |
| | | |
Other comprehensive income (loss), net of effects of taxes: | | | |
Unrealized gains (losses) on debt securities available-for-sale: | | | |
Net unrealized holding gains (losses) arising during period (Note 1) | (71,596) | | | (368,775) | |
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Reclassification adjustment for net amounts included in net earnings | (36) | | | (1,395) | |
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Net unrealized gains (losses) on securities | (71,632) | | | (370,170) | |
| | | |
| | | |
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Effect of discount rate changes on liability for future policy benefits (Note 1) | 14,344 | | | 76,256 | |
| | | |
Foreign currency translation adjustments (Note 1) | 22 | | | (20) | |
| | | |
Benefit plans: | | | |
Amortization of net prior service cost and net gain (loss) | (399) | | | 1,134 | |
| | | |
Other comprehensive income (loss) | (57,665) | | | (292,800) | |
| | | |
Comprehensive income (loss) | $ | (28,031) | | | (196,273) | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| | | |
| 2023 | | 2022 |
| | | |
Net earnings | $ | 41,938 | | | 194,089 | |
| | | |
Other comprehensive income (loss), net of effects of taxes: | | | |
Unrealized gains (losses) on available-for-sale securities: | | | |
Net unrealized holding gains (losses) arising during period (Note 1) | 53,605 | | | (807,191) | |
| | | |
Reclassification adjustment for net amounts included in net earnings | (89) | | | (4,127) | |
| | | |
| | | |
Net unrealized gains (losses) on securities | 53,516 | | | (811,318) | |
| | | |
Effect of discount rate changes on liability for future policy benefits (Note 1) | (7,370) | | | 156,288 | |
| | | |
Foreign currency translation adjustments (Note 1) | (8) | | | 295 | |
| | | |
Benefit plans: | | | |
Amortization of net prior service cost and net gain (loss) | (798) | | | 2,268 | |
| | | |
Other comprehensive income (loss) | 45,340 | | | (652,467) | |
| | | |
Comprehensive income (loss) | $ | 87,278 | | | (458,378) | |
See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| 2023 | | 2022 |
| | | |
Common stock: | | | |
Balance at beginning of period | $ | 36 | | | 36 | |
| | | |
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Balance at end of period | 36 | | | 36 | |
| | | |
Additional paid-in capital: | | | |
Balance at beginning of period | 41,716 | | | 41,716 | |
| | | |
| | | |
Balance at end of period | 41,716 | | | 41,716 | |
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Accumulated other comprehensive income (loss): | | | |
Unrealized gains (losses) on debt securities available-for-sale: (Note 1) | | | |
Balance at beginning of period | (528,283) | | | (74,039) | |
Change in unrealized gains (losses) during period, net of tax | (71,632) | | | (370,170) | |
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Balance at end of period | (599,915) | | | (444,209) | |
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Changes in the Liability for future policy benefits related to changing discount rates (Note 1) | | | |
Balance at beginning of period | 148,987 | | | 19,911 | |
Change in liability for future policy benefits during period, net of tax | 14,344 | | | 76,256 | |
| | | |
Balance at end of period | 163,331 | | | 96,167 | |
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NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) For the Three Months Ended June 30, 2023 and 2022 (Unaudited) (In thousands) |
| | | |
| 2023 | | 2022 |
| | | |
Foreign currency translation adjustments: (Note 1) | | | |
Balance at beginning of period | 6,420 | | | 6,343 | |
Change in translation adjustments during period | 22 | | | (20) | |
| | | |
Balance at end of period | 6,442 | | | 6,323 | |
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Benefit plan liability adjustment: | | | |
Balance at beginning of period | (2,338) | | | (14,233) | |
Amortization of net prior service cost and net gain (loss), net of tax | (399) | | | 1,134 | |
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Balance at end of period | (2,737) | | | (13,099) | |
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Accumulated other comprehensive income (loss) at end of period | (432,879) | | | (354,818) | |
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Retained earnings: | | | |
Balance at beginning of period (Note 1) | 2,639,693 | | | 2,479,714 | |
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Net earnings (Note 1) | 29,634 | | | 96,527 | |
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Balance at end of period | 2,669,327 | | | 2,576,241 | |
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Total stockholders' equity | $ | 2,278,200 | | | 2,263,175 | |
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 Six Months Ended June 30, 2023 and 2022 (Unaudited) (In thousands) |
| | | |
| 2023 | | 2022 |
| | | |
Common stock: | | | |
Balance at beginning of period | $ | 36 | | | 36 | |
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Balance at end of period | 36 | | | 36 | |
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Additional paid-in capital: | | | |
Balance at beginning of period | 41,716 | | | 41,716 | |
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Balance at end of period | 41,716 | | | 41,716 | |
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Accumulated other comprehensive income (loss): | | | |
Unrealized gains (losses) on debt securities available-for-sale: (Note 1) | | | |
Balance at beginning of period | (653,431) | | | 367,109 | |
Change in unrealized gains (losses) during period, net of tax | 53,516 | | | (811,318) | |
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Balance at end of period | (599,915) | | | (444,209) | |
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Changes in the Liability for future policy benefits related to changing discount rates (Note 1) | | | |
Balance at beginning of period | 170,701 | | | (60,121) | |
Change in liability for future policy benefits during period, net of tax | (7,370) | | | 156,288 | |
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Balance at end of period | 163,331 | | | 96,167 | |
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Foreign currency translation adjustments: (Note 1) | | | |
Balance at beginning of period | 6,450 | | | 6,028 | |
Change in translation adjustments during period | (8) | | | 295 | |
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Balance at end of period | 6,442 | | | 6,323 | |
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NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) For the Six Months Ended June 30, 2023 and 2022 (Unaudited) (In thousands) |
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| 2023 | | 2022 |
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Benefit plan liability adjustment: | | | |
Balance at beginning of period | (1,939) | | | (15,367) | |
Amortization of net prior service cost and net gain (loss), net of tax | (798) | | | 2,268 | |
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Balance at end of period | (2,737) | | | (13,099) | |
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Accumulated other comprehensive income (loss) at end of period | (432,879) | | | (354,818) | |
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Retained earnings: | | | |
Balance at beginning of period (Note 1) | 2,627,389 | | | 2,382,152 | |
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Net earnings (Note 1) | 41,938 | | | 194,089 | |
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Balance at end of period | 2,669,327 | | | 2,576,241 | |
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Total stockholders' equity | $ | 2,278,200 | | | 2,263,175 | |
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See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
(In thousands)
| | | | | | | | | | | |
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| 2023 | | 2022 |
| | | |
Cash flows from operating activities: | | | |
Net earnings | $ | 41,938 | | | 194,089 | |
Adjustments to reconcile net earnings to net cash from operating activities: | | | |
Universal life and annuity contract interest (Note 1) | 63,159 | | | (39,769) | |
Surrender charges and other policy revenues | (12,506) | | | (9,761) | |
Realized (gains) losses on investments | (93) | | | (5,560) | |
Accretion/amortization of discounts and premiums, investments | (1,756) | | | (1,734) | |
Depreciation and amortization | 5,107 | | | 6,896 | |
Increase (decrease) in estimated credit losses on investments | 161 | | | (413) | |
(Increase) decrease in value of debt securities trading | (18,236) | | | 156,791 | |
(Increase) decrease in value of equity securities | (2,357) | | | 4,600 | |
(Increase) decrease in value of derivative options | (23,854) | | | 76,624 | |
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired (Note 1) | 30,441 | | | 11,852 | |
(Increase) decrease in accrued investment income | 1,643 | | | (526) | |
(Increase) decrease in reinsurance recoverable (Note 1) | 77,645 | | | 131,373 | |
(Increase) decrease in cost of reinsurance | 6,052 | | | 5,511 | |
(Increase) decrease in other assets (Note 1) | (14,493) | | | 443 | |
Increase (decrease) in liabilities for future policy benefits (Note 1) | 21,730 | | | (15,654) | |
Increase (decrease) in market risk benefits liability (Note 1) | 41,785 | | | (123,075) | |
Increase (decrease) in other policyholder liabilities | (26,966) | | | 7,843 | |
Increase (decrease) in Federal income tax liability | 1,019 | | | (19,186) | |
Increase (decrease) in deferred Federal income tax (Note 1) | (16,844) | | | 47,245 | |
Increase (decrease) in funds withheld liability | (89,722) | | | (277,048) | |
Increase (decrease) in other liabilities (Note 1) | 34,486 | | | (12,478) | |
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Net cash provided by operating activities | 118,339 | | | 138,063 | |
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Cash flows from investing activities: | | | |
Proceeds from sales of: | | | |
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Debt securities available-for-sale | 22,307 | | | 39,254 | |
Debt securities trading | 38,725 | | | 17,183 | |
Other investments | 1,287 | | | 2,804 | |
Proceeds from maturities, redemptions, and prepayments of: | | | |
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Debt securities available-for-sale | 437,489 | | | 565,415 | |
Debt securities trading | 33,996 | | | 69,983 | |
Other investments | 15,264 | | | 16,138 | |
Derivatives, index options | 270 | | | 46,412 | |
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Purchases of: | | | |
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Debt securities available-for-sale | (104,253) | | | (690,390) | |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the Six Months Ended June 30, 2023 and 2022 (Unaudited) (In thousands) |
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| 2023 | | 2022 |
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Debt securities trading | (63,624) | | | (75,581) | |
Equity securities | (12) | | | (890) | |
Derivatives, index options | (25,925) | | | (26,377) | |
Other investments | (41,016) | | | (33,704) | |
Property, equipment, and other productive assets | (1,593) | | | (764) | |
Net change in short-term investments | (3,884) | | | — | |
Principal payments on mortgage loans | 12,141 | | | 18,872 | |
Cost of mortgage loans acquired | (1,800) | | | (44,139) | |
Decrease (increase) in policy loans | 1,004 | | | (157) | |
Other (increases) decreases to funds withheld | 5,247 | | | (424) | |
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Net cash provided by (used in) investing activities | 325,623 | | | (96,365) | |
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Cash flows from financing activities: | | | |
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Deposits to account balances for universal life and annuity contracts (Note 1) | 52,142 | | | 205,775 | |
Return of account balances on universal life and annuity contracts (Note 1) | (499,374) | | | (431,743) | |
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Principal payments under finance lease obligation | (170) | | | (169) | |
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Net cash provided by (used in) financing activities | (447,402) | | | (226,137) | |
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Effect of foreign exchange (Note 1) | (10) | | | 374 | |
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Net increase (decrease) in cash, cash equivalents, and restricted cash | (3,450) | | | (184,065) | |
Cash, cash equivalents, and restricted cash at beginning of period | 295,270 | | | 714,624 | |
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Cash, cash equivalents and restricted cash at end of period | $ | 291,820 | | | 530,559 | |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
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Cash paid during the period for: | | | |
Interest | $ | 38 | | | 37 | |
Income taxes | 26,052 | | | 22,138 | |
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Noncash operating activities: | | | |
Net deferral and amortization of sales inducements (Note 1) | $ | (7,094) | | | (523) | |
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See accompanying notes to Condensed Consolidated Financial Statements (unaudited).
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 complete annual financial statements. Except for the retroactive adoption of a required change in accounting standard as discussed below and as further described in Note (2) New Accounting Pronouncements, in the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position and results of operations of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (collectively, the “Company”), on a basis consistent with the prior audited consolidated financial statements, as of June 30, 2023, and for the three and six months ended June 30, 2023 and June 30, 2022. Certain reclasses of prior year balances have been made for comparison. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year. It is recommended that these Condensed Consolidated Financial Statements, excluding balances affected by the adoption of Accounting Standards Update (ASU) 2018-12 noted below, 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, 2022 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. Except for balances affected by the adoption of ASU 2018-12 noted below, the Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from the audited consolidated financial statements as of that date.
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NWLGI and its wholly owned subsidiaries: National Western Life Insurance Company ("NWLIC" or "National Western"), Regent Care San Marcos Holdings, LLC, NWL Services, Inc., and N.I.S. Financial Services, Inc. ("NIS"). National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., Braker P III, LLC, and Ozark National Life Insurance Company ("Ozark National"). 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 obligations and market risk benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs ("DPAC"), deferred sales inducements ("DSI"), the value of business acquired ("VOBA"), and the cost of reinsurance ("COR"), (4) valuation allowances for deferred tax assets, (5) goodwill, (6) allowances for credit losses on available-for-sale debt securities, (7) allowance for credit losses for mortgage loans and reinsurance recoverables, and (8) commitments and contingencies.
As a result of executing a funds withheld coinsurance agreement at December 31, 2020, the Company implemented accounting policies related to trading debt securities and the embedded derivative on reinsurance in its financial statements. Trading securities represent debt securities that are included in the fund assets withheld as part of the funds withheld coinsurance agreements to support the policyholder liability obligations ceded to the reinsurer. Trading debt securities are reported in the accompanying Condensed Consolidated Financial Statements at their fair values with changes in their fair values reflected as a component of Net investment income in the Condensed Consolidated Statements of Earnings. Since these trading debt securities pertain to investment activities related to coinsurance agreements rather than as an income strategy based on active trading, they are classified as investing activities in the Condensed Consolidated Statements of Cash Flows. Under the terms of a coinsurance funds withheld agreement, while the assets are withheld, the associated interest and credit risk of these assets are transferred to the reinsurer creating an embedded derivative on reinsurance in the funds withheld liability. Accordingly, the Company is required to bifurcate the embedded derivative from the host contract in accordance with ASC 815-15. The bifurcated embedded derivative on reinsurance is computed as the fair value unrealized gain (loss) on the underlying funds withheld assets. This amount is included as a component of the funds withheld liability balance reported on the Condensed Consolidated Balance Sheets, with changes in the embedded derivative on reinsurance reported in Net investment income in the Condensed Consolidated Statements of Earnings.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 27, 2022, National Western entered into a Funds Withheld Coinsurance Agreement with Aspida Life Re Ltd. (“Aspida"), a reinsurer organized under the Laws of Bermuda. Pursuant to this agreement, the Company agreed to cede, on a coinsurance with funds withheld basis, a specified quota share of certain liabilities pertaining to an in-force block of annuity contracts issued by the Company before July 1, 2022. The initial amount of statutory reserve liabilities ceded by the Company to Aspida under the agreement approximated $250.0 million. In addition, pursuant to the agreement, the Company agreed to cede, on a coinsurance with funds withheld basis, a specified quota share of certain annuity contracts issued or to be issued by the Company on or after July 1, 2022.
As consideration for Aspida’s agreement to provide reinsurance pursuant to the agreement, the Company transferred into a funds withheld account permitted assets approximating the initial statutory reserve liabilities ceded to Aspida. In accordance with the agreement and in order to provide additional security for Aspida’s obligations under the agreement, the parties established a trust account for the benefit of the Company in which Aspida maintains certain assets and grants the Company a first priority security interest in such assets.
The table below shows the net unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2023 and June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Affected Line Item in the Condensed Consolidated Statements of Earnings | | Amount Reclassified From Accumulated Other Comprehensive Income (Loss) |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (In thousands) |
| | | | | | | | |
Other net investment gains | | $ | 46 | | | 1,766 | | | 113 | | | 5,224 | |
| | | | | | | | |
Earnings before Federal income taxes | | 46 | | | 1,766 | | | 113 | | | 5,224 | |
Federal income taxes | | 10 | | | 371 | | | 24 | | | 1,097 | |
| | | | | | | | |
Net earnings | | $ | 36 | | | 1,395 | | | 89 | | | 4,127 | |
Restatement of prior period consolidated financial statements as a result of adopting ASU 2018-12
As a result of the adoption of Accounting Standards Update 2018-12 Financial Services - Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts ("LDTI" or "ASU 2018-12), the results and related disclosures for the comparative 2022 periods presented in this Form 10-Q were recast to be presented as if the requirements of LDTI had been in effect during those periods. Implementation of LDTI affected various line items in each condensed consolidated financial statement. Refer to Note (2) New Accounting Policies for more details about the new guidance and a summary of the restated balances.
The Company adopted ASU 2018-12 guidance effective January 1, 2023 using the modified retrospective transaction method, where permitted, for changes in the liability for future policy benefits and deferred policy acquisition costs and related balances, and the retrospective transition method for market risk benefits. The transition date for restatement was January 1, 2021 and amounts previously reported were retroactively restated, including those amounts shown for the three and six months ended June 30, 2022, and as of December 31, 2022.
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present amounts as previously reported, the effect of adoption of the guidance under ASU 2018-12, and the resulting adjusted amounts reported in interim Condensed Consolidated Financial Statements included herein. The tables include only those line items impacted by restatement.
Restated Lines of Condensed Consolidated Balance Sheet:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| As previously Reported | | Effect of Change | | As Currently Reported |
| | | | | |
| (In thousands) |
| | | | | |
Assets: | | | | | |
Deferred policy acquisition costs | $ | 909,786 | | | (245,904) | | | 663,882 | |
Deferred sales inducements | 114,399 | | | (29,096) | | | 85,303 | |
Value of business acquired | 146,494 | | | (7,999) | | | 138,495 | |
Market risk benefits asset | — | | | 48,759 | | | 48,759 | |
Deferred federal income tax asset | 57,867 | | | (48,835) | | | 9,032 | |
Amounts recoverable from reinsurer, net of allowance for credit losses | 1,723,347 | | | (34,559) | | | 1,688,788 | |
Other assets | 110,339 | | | 352 | | | 110,691 | |
Total Assets | 13,100,227 | | | (317,282) | | | 12,782,945 | |
| | | | | |
Liabilities: | | | | | |
Future policy benefits: | | | | | |
Universal life and annuity contracts | 8,498,684 | | | (8,498,684) | | | — | |
Traditional life reserves | 919,650 | | | (919,650) | | | — | |
Liability for policyholder account balances | — | | | 7,661,785 | | | 7,661,785 | |
Additional liability for benefits in excess of account balance | — | | | 148,708 | | | 148,708 | |
Liability for future policy benefits | — | | | 900,146 | | | 900,146 | |
Market risk benefits liability | — | | | 215,777 | | | 215,777 | |
Other liabilities | 166,557 | | | (9,075) | | | 157,482 | |
Total liabilities | 11,093,016 | | | (500,993) | | | 10,592,023 | |
| | | | | |
Stockholders' Equity: | | | | | |
Accumulated other comprehensive income (loss) | (416,397) | | | (61,822) | | | (478,219) | |
Retained earnings | 2,381,856 | | | 245,533 | | | 2,627,389 | |
Total stockholders' equity | 2,007,211 | | | 183,711 | | | 2,190,922 | |
| | | | | |
Total liabilities and stockholders' equity | 13,100,227 | | | (317,282) | | | 12,782,945 | |
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interim Condensed Consolidated Statements of Earnings:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| As previously Reported | | Effect of Change | | As Currently Reported |
| | | | | |
| (In thousands, except per share amounts) |
| | | | | |
Premiums and other revenues: | | | | | |
Universal life and annuity contract charges | $ | 32,692 | | | 129 | | | 32,821 | |
Traditional life and SPIAWLC premiums | 21,647 | | | 994 | | | 22,641 | |
| | | | | |
Total Revenues | 117,157 | | | 1,123 | | | 118,280 | |
| | | | | |
Benefits and Expenses: | | | | | |
Life and other policy benefits | 35,177 | | | (8,976) | | | 26,201 | |
Market risk benefits expense | — | | | (55,492) | | | (55,492) | |
Amortization of deferred transaction costs | 27,756 | | | (5,256) | | | 22,500 | |
Universal life and annuity contract interest | (13,801) | | | (12,397) | | | (26,198) | |
Total benefit and expenses | 79,453 | | | (82,120) | | | (2,667) | |
| | | | | |
Federal income taxes | 6,939 | | | 17,481 | | | 24,420 | |
| | | | | |
Net earnings | 30,765 | | | 65,762 | | | 96,527 | |
| | | | | |
Basic earnings per share: | | | | | |
Class A (Note 4) | 8.70 | | | 18.60 | | | 27.30 | |
Class B (Note 4) | 4.35 | | | 9.30 | | | 13.65 | |
| | | | | |
Diluted earnings per share: | | | | | |
Class A (Note 4) | 8.70 | | | 18.60 | | | 27.30 | |
Class B (Note 4) | 4.35 | | | 9.30 | | | 13.65 | |
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| As previously Reported | | Effect of Change | | As Currently Reported |
| | | | | |
| (In thousands, except per share amounts) |
| | | | | |
Premiums and other revenues: | | | | | |
Universal life and annuity contract charges | $ | 65,343 | | | 275 | | | 65,618 | |
Traditional life and SPIAWLC premiums | 43,980 | | | 4,802 | | | 48,782 | |
| | | | | |
Total Revenues | 251,456 | | | 5,077 | | | 256,533 | |
| | | | | |
Benefits and Expenses: | | | | | |
Life and other policy benefits | 77,076 | | | (17,363) | | | 59,713 | |
Market risk benefits expense | — | | | (116,498) | | | (116,498) | |
Amortization of deferred transaction costs | 56,772 | | | (10,836) | | | 45,936 | |
Universal life and annuity contract interest | (28,606) | | | (11,163) | | | (39,769) | |
Total benefit and expenses | 168,145 | | | (155,860) | | | 12,285 | |
| | | | | |
Federal income taxes | 16,362 | | | 33,797 | | | 50,159 | |
| | | | | |
Net earnings | 66,949 | | | 127,140 | | | 194,089 | |
| | | | | |
Basic earnings per share: | | | | | |
Class A (Note 4) | 18.93 | | | 35.96 | | | 54.89 | |
Class B (Note 4) | 9.47 | | | 17.97 | | | 27.44 | |
| | | | | |
Diluted earnings per share: | | | | | |
Class A (Note 4) | 18.93 | | | 35.96 | | | 54.89 | |
Class B (Note 4) | 9.47 | | | 17.97 | | | 27.44 | |
NATIONAL WESTERN LIFE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interim Condensed Consolidated Statement of Changes in Stockholders' Equity:
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| As previously Reported | | Effect of Change | | As Currently Reported |
| | | | | |
| (In thousands) |
| | | | | |
Retained Earnings: | | | | | |
Balance at March 31, 2022 | $ | 2,318,170 | | | 161,544 | | | |