INVESTMENTS

(A) Investment Income

The major components of net investment income are as follows:



	Years Ended December 31,
	2015			2014	2013
	(In thousands)

Gross investment income:
Debt and equity securities	$	416,633		410,809	410,790
Mortgage loans	10,274			9,847	9,256
Policy loans	3,938			4,252	4,503
Derivative gains (losses)	(61,750		)	68,616	225,899
Money market investments	197			401	252
Other investment income	10,939			12,591	10,759

Total investment income	380,231			506,516	661,459
Investment expenses	1,117			1,086	1,027

Net investment income	$	379,114		505,430	660,432

(B) Mortgage Loans and Real Estate

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

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

The Company requires a minimum specified yield on mortgage loan investments. The historically low interest rate environment of the past couple of years has resulted in fewer loan opportunities being available meeting the Company's required rate of return. Consequently, new mortgage loan origination activity has been less significant in this time frame with $38.5 million and $37.1 million in total loan originations for the years 2015 and 2014, respectively.

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

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

The Company held net investments in mortgage loans totaling $108.3 million and $149.5 million at December 31, 2015 and 2014, respectively. The diversification of the portfolio by geographic region, property type, and loan-to-value ratio was as follows:



	December 31, 2015					December 31, 2014
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Geographic Region:
West South Central	$	58,002		53.2		$	97,918		65.2
East North Central	18,477			17.0		10,714			7.1
New England	11,830			10.9		12,155			8.1
Pacific	10,101			9.3		10,282			6.9
East South Central	5,818			5.3		14,137			9.4
South Atlantic	3,047			2.8		—			—
Mountain	1,686			1.5		3,050			2.0
Middle Atlantic	—			—		1,897			1.3
Gross balance	108,961			100.0		150,153			100.0

Allowance for possible losses	(650		)	(0.6	)	(650		)	(0.4	)

Totals	$	108,311		99.4		$	149,503		99.6



	December 31, 2015					December 31, 2014
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Property Type:
Retail	$	66,237		60.8		$	130,544		86.9
Office	22,941			21.0		893			0.6
Land/Lots	4,445			4.1		3,333			2.2
Hotel/Motel	1,513			1.4		1,600			1.1
Apartments	—			—		7,333			4.9
All other	13,825			12.7		6,450			4.3
Gross balance	108,961			100.0		150,153			100.0

Allowance for possible losses	(650		)	(0.6	)	(650		)	(0.4	)

Totals	$	108,311		99.4		$	149,503		99.6



	December 31, 2015					December 31, 2014
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%	$	64,986		59.7		$	52,564		35.0
50% to 60%	9,714			8.9		50,553			33.7
60% to 70%	10,134			9.3		14,567			9.7
70% to 80%	4,843			4.4		12,656			8.4
80% to 90%	19,284			17.7		5,399			3.6
Greater than 90%	—			—		14,414			9.6
Gross balance	108,961			100.0		150,153			100.0

Allowance for possible losses	(650		)	(0.6	)	(650		)	(0.4	)

Totals	$	108,311		99.4		$	149,503		99.6

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

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

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

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

The Company recognized valuation losses of $0.0 million, $0.0 million and $0.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. The mortgage loan valuation write-down represents a general valuation allowance established for the Company's mortgage loan portfolio based upon the Company's loss experience over the past ten years and is not specifically identified to individual loans. Impairments are based on information which indicated that the Company may not collect all amounts in accordance with the mortgage agreement. While the Company closely monitors its mortgage loan portfolio, future changes in economic conditions can result in impairments beyond those currently identified.

The following table represents the mortgage loan allowance for the years ended December 31, 2015 and 2014:



	2015		2014
	(In thousands)

Balance, beginning of period	$	650	650
Provision	—		—
Releases	—		—

Balance, end of period	$	650	650

The Company does not recognize interest income on loans past due 90 days or more. The Company had no mortgage loan past due six months or more at December 31, 2015, 2014 and 2013. There was no interest income not recognized in 2015, 2014 and 2013.

The contractual maturities of mortgage loan principal balances at December 31, 2015 and 2014 were as follows:



	December 31, 2015			December 31, 2014
	Amount		%	Amount		%
	(In thousands)			(In thousands)
Principal Balance by Contractual Maturity:
Due in one year or less	$	7,950	7.3	$	16,390	10.9
Due after one year through five years	24,236		22.1	83,965		55.7
Due after five years through ten years	50,431		46.1	30,591		20.3
Due after ten years through fifteen years	7,500		6.9	—		—
Due after fifteen years	19,284		17.6	19,813		13.1

Totals	$	109,401	100.0	$	150,759	100.0

The Company's real estate investments totaled approximately $16.3 million at December 31, 2015 and $16.7 million at December 31, 2014, and consist primarily of income-producing properties which are being operated by a wholly-owned subsidiary of National Western. The Company’s real estate holdings are reflected in other long-term investments in the accompanying consolidated financial statements. The Company records real estate at the lower of cost or fair value less estimated cost to sell, which is determined on an individual asset basis. The Company recognized operating income on these properties of approximately $1.8 million, $1.7 million and $1.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company had real estate investments that were non-income producing for the preceding twelve months totaling $0.9 million, $0.9 million and $1.3 million at December 31, 2015, 2014 and 2013, respectively.

The Company monitors the conditions and market values of these properties on a regular basis and makes repairs and capital improvements to keep the properties in good condition. The Company recorded net realized investment gains on disposals of $0.0 million, $1.0 million and $0.3 million associated with these properties in the years ended December 31, 2015, 2014 and 2013, respectively. The realized gains in 2014 were due to several properties being sold: one was an impaired and foreclosed property located in Steubenville, Ohio, another property was located in Houston, Texas, and two were located in Freeport, Texas.

The table below presents amortized costs and fair values of securities held to maturity at December 31, 2015.



	Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
U.S. agencies	$	15,019	275	—		15,294
U.S. Treasury	1,927		317	—		2,244
States and political subdivisions	435,941		29,129	(662	)	464,408
Public utilities	1,044,063		42,271	(6,621	)	1,079,713
Corporate	4,160,628		114,920	(72,913	)	4,202,635
Residential mortgage-backed	1,503,021		59,013	(6,227	)	1,555,807
Home equity	11,047		1,701	—		12,748
Manufactured housing	2,321		266	—		2,587

Totals	$	7,173,967	247,892	(86,423	)	7,335,436

The table below presents amortized costs and fair values of securities available for sale at December 31, 2015.



	Securities Available for Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
States and political subdivisions	$	586	—	(34	)	552
Foreign governments	9,947		408	—		10,355
Public utilities	129,980		5,354	(775	)	134,559
Corporate	2,635,536		73,132	(54,503	)	2,654,165
Residential mortgage-backed	36,463		3,103	—		39,566
Home equity	20,123		825	(12	)	20,936
Manufactured housing	1,063		26	—		1,089
	2,833,698		82,848	(55,324	)	2,861,222

Equity securities	13,716		4,797	(152	)	18,361

Totals	$	2,847,414	87,645	(55,476	)	2,879,583

The table below presents amortized costs and fair values of securities held to maturity at December 31, 2014.



	Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
U.S. agencies	$	10,061	705	—		10,766
U.S. Treasury	1,920		409	—		2,329
States and political subdivisions	432,186		31,417	(336	)	463,267
Public utilities	978,847		67,836	(757	)	1,045,926
Corporate	3,754,222		183,650	(18,591	)	3,919,281
Residential mortgage-backed	1,640,582		68,726	(4,164	)	1,705,144
Home equity	18,886		4,734	(57	)	23,563
Manufactured housing	4,839		328	—		5,167

Totals	$	6,841,543	357,805	(23,905	)	7,175,443

The table below presents amortized costs and fair values of securities available for sale at December 31, 2014.



	Securities Available for Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses		Fair Value
	(In thousands)

Debt securities:
States and political subdivisions	$	589	—	(36	)	553
Foreign governments	9,939		386	—		10,325
Public utilities	169,179		10,163	(126	)	179,216
Corporate	2,334,700		128,280	(8,961	)	2,454,019
Residential mortgage-backed	48,674		4,116	—		52,790
Home equity	11,702		225	(9	)	11,918
Manufactured housing	2,492		64	—		2,556
	2,577,275		143,234	(9,132	)	2,711,377

Equity securities	12,799		4,849	(345	)	17,303

Totals	$	2,590,074	148,083	(9,477	)	2,728,680

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

In addition, the Company is exposed to credit risk which is continually monitored. Credit risk is the risk that an issuer of a security will not be able to fulfill their obligations relative to a security payment schedule. The Company reviewed pertinent information for all issuers in an unrealized loss position at December 31, 2015 including market pricing history, credit ratings, analyst reports, as well as data provided by the issuers themselves. The Company then made a determination on each specific issuer relating to other-than-temporary impairment. For the securities that have not been impaired at December 31, 2015, the Company intends to hold these securities until recovery in fair value and expects to receive all amounts due relative to principal and interest.

The Company held below investment grade debt securities totaling $160.8 million and $147.1 million at December 31, 2015 and 2014, respectively. These amounts represent 1.6% and 1.5% of total invested assets for December 31, 2015 and 2014, respectively. Below investment grade holdings are the result of downgrades subsequent to purchase, as the Company only invests in high quality securities with ratings quoted as investment grade. Below investment grade securities generally have greater default risk than higher rated corporate debt. The issuers of these securities are usually more sensitive to adverse industry or economic conditions than are investment grade issuers.

For the year ended December 31, 2015, the Company recorded net realized gains totaling $7.2 million related to the disposition of investment securities. The net realized gains included $0.3 million of losses for other-than-temporary impairment write-downs on investments in equity securities. For the years ended December 2014 and 2013, the Company recorded net realized gains totaling $11.6 million and $8.7 million, respectively, related to disposition of securities.

The following table shows the gross unrealized losses and fair values of the Company's held to maturity investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2015.



	Held to Maturity
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
State and political subdivisions	$	16,763	(387	)	8,723	(275	)	25,486	(662	)
Public utilities	298,962		(5,953	)	17,840	(668	)	316,802	(6,621	)
Corporate	1,522,544		(54,295	)	323,567	(18,618	)	1,846,111	(72,913	)
Residential mortgage-backed	148,712		(2,726	)	95,443	(3,501	)	244,155	(6,227	)
Home equity	—		—		—	—		—	—

Total temporarily impaired securities	$	1,986,981	(63,361	)	445,573	(23,062	)	2,432,554	(86,423	)

The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2015.



	Available For Sale
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
State and political subdivisions	$	—	—		552	(34	)	552	(34	)
Public utilities	42,093		(775	)	—	—		42,093	(775	)
Corporate	843,679		(32,500	)	151,319	(22,003	)	994,998	(54,503	)
Home equity	—		—		4,823	(12	)	4,823	(12	)
	885,772		(33,275	)	156,694	(22,049	)	1,042,466	(55,324	)

Equity securities	649		(124	)	102	(28	)	751	(152	)

Total temporarily impaired securities	$	886,421	(33,399	)	156,796	(22,077	)	1,043,217	(55,476	)

The Company does not consider securities to be other-than-temporarily impaired where the market decline is attributable to factors such as market volatility, liquidity, spread widening and credit quality where we anticipate a recovery of all amounts due under the contractual terms of the security and have the intent and ability to hold until recovery or maturity. Based on review in concert with the Company’s ability and intent to hold these securities until maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2015. The Company will monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified.

Debt securities. The gross unrealized losses for debt securities are made up of 396 individual issues, or 29.7% of the total debt securities held by the Company. The market value of these bonds as a percent of amortized cost averages 96.1%. Of the 396 securities, 86, or approximately 21.7%, fall in the 12 months or greater aging category; and 387 were rated investment grade at December 31, 2015.

Equity securities. The gross unrealized losses for equity securities are made up of 21 individual issues. These holdings are reviewed quarterly for impairment. Twelve of the equity securities were other-than-temporarily impaired at December 31, 2015, in accordance with Company policy.



	Held to Maturity
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
State and political subdivisions	$	—	—		23,076	(336	)	23,076	(336	)
Public utilities	7,078		(13	)	48,198	(744	)	55,276	(757	)
Corporate	156,839		(2,997	)	698,316	(15,594	)	855,155	(18,591	)
Residential mortgage-backed	17,698		(240	)	181,694	(3,924	)	199,392	(4,164	)
Home equity	2,206		(57	)	—	—		2,206	(57	)

Total temporarily impaired securities	$	183,821	(3,307	)	951,284	(20,598	)	1,135,105	(23,905	)

The following table shows the gross unrealized losses and fair values of the Company's available for sale investments by investment category, and length of time the individual securities have been in a continuous unrealized loss position at December 31, 2014.



	Available For Sale
	Less than 12 Months				12 Months or Greater			Total
	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
	(In thousands)

Debt securities:
State and political subdivisions	$	—	—		553	(36	)	553	(36	)
Public utilities	—		—		14,827	(126	)	14,827	(126	)
Corporate	100,373		(2,990	)	187,699	(5,971	)	288,072	(8,961	)
Residential mortgage-backed	—		—		—	—		—	—
Home equity	—		—		4,826	(9	)	4,826	(9	)
	100,373		(2,990	)	207,905	(6,142	)	308,278	(9,132	)

Equity securities	305		(52	)	3,801	(293	)	4,106	(345	)

Total temporarily impaired securities	$	100,678	(3,042	)	211,706	(6,435	)	312,384	(9,477	)

Unrealized losses increased in 2015 from 2014 levels due to a rise in interest rate levels during the period (which serves to decrease market values of debt securities) and as a result of valuation declines in the oil and gas (energy) sector in conjunction with the drop in oil prices. The Company does not consider these investments to be other-than-temporarily impaired because the Company does not intend to sell these securities until recovery in fair value and expects to receive all amounts due relative to principal and interest.

The amortized cost and fair value of investments in debt securities at December 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Debt Securities Available for Sale			Debt Securities Held to Maturity
	Amortized Cost		Fair Value	Amortized Cost	Fair Value
	(In thousands)

Due in 1 year or less	$	131,110	132,759	152,369	155,910

Due after 1 year through 5 years	830,945		878,847	1,534,855	1,641,932

Due after 5 years through 10 years	1,774,539		1,749,470	3,663,415	3,650,811

Due after 10 years	60,641		60,580	320,307	330,976
	2,797,235		2,821,656	5,670,946	5,779,629

Mortgage and asset-backed securities	36,463		39,566	1,503,021	1,555,807

Total	$	2,833,698	2,861,222	7,173,967	7,335,436

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



	Years Ended December 31,
	2015			2014		2013
	(In thousands)

Available for sale debt securities:
Realized gains on disposal	$	3,378		7,795		4,418
Realized losses on disposal	(74		)	(22	)	(6	)
Held to maturity debt securities:
Realized gains on redemption	4,027			3,453		3,845
Realized losses on redemption	(25		)	(17	)	(72	)
Equity securities realized gains	155			69		511
Real estate	—			955		262
Mortgage loans	—			—		—
Other	—			(478	)	—

Totals	$	7,461		11,755		8,958

Due to significant credit deterioration, one bond from the held to maturity portfolio was sold in 2013. The sale in 2013 resulted in an insignificant realized gain. No sales were made out of the held to maturity portfolio in 2015 and 2014.

Except for the total U.S. government agency mortgage-backed securities held, the Company had no other investments in any entity in excess of 10% of stockholders' equity at December 31, 2015 or 2014.

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



	Years Ended
	2015			2014		2013
	(In thousands)

Total other-than-temporary impairment recoveries (losses) on debt securities	$	3,053		125		909
Portion recognized in comprehensive income	(3,053		)	(132	)	(1,151	)

Net impairment losses on debt securities recognized in earnings	—			(7	)	(242	)
Equity securities impairments	(252		)	(143	)	(63	)

Totals	$	(252	)	(150	)	(305	)

For the years ended December 31, 2015 and December 31, 2014, the Company recovered $3.1 million and $0.1 million, respectively, on previously impaired asset-backed securities. The credit component of the asset-backed securities impairment was determined as the difference between amortized cost and the present value of the cash flows expected to be received, discounted at the original yield. The significant inputs used to project cash flows on asset-backed securities are estimated future prepayment rates, default rates and default loss severity.

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



	Year Ended			Year Ended
	December 31, 2015			December 31, 2014
	(In thousands)

Beginning balance, cumulative credit losses related to other-than-temporary impairments	$	2,298		2,472
Reductions for securities disposed during current period	(20		)	(181	)
Additions for OTTI where credit losses have been previously recognized	—			7

Ending balance, cumulative credit losses related to other-than-temporary impairments	$	2,278		2,298

(D) Net Unrealized Gains (Losses)

Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 2015 and 2014, are as follows:



	December 31,
	2015			2014
	(In thousands)

Gross unrealized gains	$	87,493		157,304
Gross unrealized losses	(56,064		)	(12,926	)
Adjustments for:
Deferred policy acquisition costs and sales inducements	(12,804		)	(62,856	)
Deferred Federal income tax expense	(6,519		)	(28,556	)
	12,106			52,966

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

Net unrealized gains on investment securities	$	12,106		52,966

(E) Transfer of Securities

For the year ended December 31, 2015, the Company transferred one security with an amortized value of $9.1 million from the held to maturity portfolio to the available for sale portfolio. The security had been downgraded by S&P to a CCC rating in the period transferred and was at risk for transitioning to a D rating due to certain credit-related events. There were no transfers in 2014 between held to maturity and available for sale.