

	Years Ended December 31,
	2018			2017	2016
	(In thousands)

Gross investment income:
Debt and equity securities	$	399,645		409,401	416,638
Mortgage loans	12,066			11,045	7,964
Policy loans	3,185			3,485	3,700
Derivative gains (losses)	(80,004		)	222,875	28,364
Short term investments	2,249			1,012	668
Other investment income	13,289			13,137	11,432

Total investment income	350,430			660,955	468,766
Less investment expenses	1,353			1,270	1,092

Net investment income	$	349,077		659,685	467,674

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

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

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

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

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



	December 31, 2018					December 31, 2017
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Geographic Region:
West South Central	$	116,205		57.0		$	119,794		57.3
East North Central	20,944			10.3		30,876			14.8
South Atlantic	29,829			14.6		19,155			9.2
East South Central	13,801			6.8		14,273			6.8
West North Central	12,751			6.3		12,967			6.2
Pacific	6,626			3.2		8,014			3.8
Middle Atlantic	2,138			1.0		2,215			1.1
Mountain	1,561			0.8		1,605			0.8
Gross balance	203,855			100.0		208,899			100.0

Allowance for possible losses	(675		)	(0.3	)	(650		)	(0.3	)

Totals	$	203,180		99.7		$	208,249		99.7



	December 31, 2018					December 31, 2017
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Property Type:
Retail	$	96,075		47.1		$	87,805		42.0
Office	71,194			34.9		74,301			35.6
Hotel	14,454			7.1		13,782			6.6
Land/Lots	3,498			1.7		10,563			5.1
All other	18,634			9.2		22,448			10.7
Gross balance	203,855			100.0		208,899			100.0

Allowance for possible losses	(675		)	(0.3	)	(650		)	(0.3	)

Totals	$	203,180		99.7		$	208,249		99.7



	December 31, 2018					December 31, 2017
	Amount			%		Amount			%
	(In thousands)					(In thousands)
Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%	$	66,371		32.6		$	82,224		39.4
50% to 60%	22,610			11.1		27,395			13.1
60% to 70%	102,857			50.4		86,849			41.6
70% to 80%	6,642			3.3		—			—
80% to 90%	5,375			2.6		6,929			3.3
Greater than 90%	—			—		5,502			2.6
Gross balance	203,855			100.0		208,899			100.0

Allowance for possible losses	(675		)	(0.3	)	(650		)	(0.3	)

Totals	$	203,180		99.7		$	208,249		99.7

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

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

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



	December 31, 2018			December 31, 2017
	Amount		%	Amount		%
	(In thousands)			(In thousands)
Principal Balance by Contractual Maturity:
Due in one year or less	$	23,839	11.7	$	22,966	11.0
Due after one year through five years	39,391		19.3	41,248		19.7
Due after five years through ten years	134,574		65.8	119,966		57.2
Due after ten years through fifteen years	6,642		3.2	25,429		12.1

Totals	$	204,446	100.0	$	209,609	100.0

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

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



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

Debt securities:
U.S. Treasury	$	1,341	116	—		1,457
States and political subdivisions	457,404		9,764	(2,376	)	464,792
Public utilities	930,629		5,928	(12,944	)	923,613
Corporate	4,715,775		27,652	(87,043	)	4,656,384
Residential mortgage-backed	1,176,216		13,771	(11,932	)	1,178,055
Home equity	3,193		47	(10	)	3,230
Manufactured housing	696		41	—		737

Totals	$	7,285,254	57,319	(114,305	)	7,228,268

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



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

Debt securities:
States and political subdivisions	$	570	—	(4	)	566
Foreign governments	9,974		30	—		10,004
Public utilities	82,943		1,045	(517	)	83,471
Corporate	2,893,221		15,473	(79,638	)	2,829,056
Residential mortgage-backed	15,947		937	(84	)	16,800
Home equity	5,969		193	—		6,162
Manufactured housing	—		—	—		—

	$	3,008,624	17,678	(80,243	)	2,946,059



	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



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

Debt securities:
States and political subdivisions	$	575	—	(29	)	546
Foreign governments	9,964		326	—		10,290
Public utilities	83,466		3,640	—		87,106
Corporate	2,842,381		81,737	(10,744	)	2,913,374
Residential mortgage-backed	20,246		1,376	(52	)	21,570
Home equity	7,878		367	—		8,245
Manufactured housing	—		—	—		—
	2,964,510		87,446	(10,825	)	3,041,131

Equity securities	12,890		5,708	(120	)	18,478

Totals	$	2,977,400	93,154	(10,945	)	3,059,609

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

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

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

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



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

Debt securities:
State and political subdivisions	$	88,253	(2,124	)	10,645	(252	)	98,898	(2,376	)
Public utilities	396,980		(8,371	)	98,632	(4,573	)	495,612	(12,944	)
Corporate	2,144,969		(55,125	)	650,401	(31,918	)	2,795,370	(87,043	)
Residential mortgage-backed	202,986		(2,032	)	311,374	(9,900	)	514,360	(11,932	)
Home equity	—		—		1,976	(10	)	1,976	(10	)

Total	$	2,833,188	(67,652	)	1,073,028	(46,653	)	3,906,216	(114,305	)



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

Debt securities:
State and political subdivisions	$	566	(4	)	—	—		566	(4	)
Public utilities	38,903		(517	)	—	—		38,903	(517	)
Corporate	1,468,953		(44,575	)	442,798	(35,063	)	1,911,751	(79,638	)
Residential mortgage-backed	—		—		878	(84	)	878	(84	)

Total	$	1,508,422	(45,096	)	443,676	(35,147	)	1,952,098	(80,243	)

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

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



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

Debt securities:
State and political subdivisions	$	6,308	(14	)	4,869	(86	)	11,177	(100	)
Public utilities	68,368		(407	)	34,091	(487	)	102,459	(894	)
Corporate	248,844		(1,296	)	431,591	(6,580	)	680,435	(7,876	)
Residential mortgage-backed	130,015		(738	)	192,399	(5,478	)	322,414	(6,216	)
Home equity	2,830		(4	)	—	—		2,830	(4	)

Total	$	456,365	(2,459	)	662,950	(12,631	)	1,119,315	(15,090	)



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

Debt securities:
State and political subdivisions	$	546	(29	)	—	—		546	(29	)
Corporate	201,575		(1,134	)	296,845	(9,610	)	498,420	(10,744	)
Residential mortgage-backed	1,325		(14	)	1,085	(38	)	2,410	(52	)
Home equity	1,653		—		—	—		1,653	—
	205,099		(1,177	)	297,930	(9,648	)	503,029	(10,825	)

Equity securities	1,246		(77	)	289	(43	)	1,535	(120	)

Total	$	206,345	(1,254	)	298,219	(9,691	)	504,564	(10,945	)

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

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



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

Due in 1 year or less	$	159,967	162,279	371,423	375,021

Due after 1 year through 5 years	1,076,437		1,073,423	2,885,587	2,889,770

Due after 5 years through 10 years	1,697,093		1,636,466	2,486,014	2,418,209

Due after 10 years	53,211		50,929	362,125	363,246
	2,986,708		2,923,097	6,105,149	6,046,246

Mortgage and asset-backed securities	21,916		22,962	1,180,105	1,182,022

Total	$	3,008,624	2,946,059	7,285,254	7,228,268



	Years Ended December 31,
	2018			2017		2016
	(In thousands)

Available for sale debt securities:
Realized gains on disposal	$	3,447		5,208		2,644
Realized losses on disposal	(6		)	(7	)	(29	)
Held to maturity debt securities:
Realized gains on redemption	3,208			6,944		6,940
Realized losses on redemption	—			(74	)	(137	)
Equity securities realized gains	—			147		702
Real estate	1,799			2,657		2,950
Mortgage loans	(25		)	—		—
Other	—			—		—

Totals	$	8,423		14,875		13,070



	Years Ended December 31,
	2018			2017		2016
	(In thousands)

Total other-than-temporary impairment recoveries (losses) on debt securities	$	12		599		110
Portion recognized in comprehensive income	(12		)	(599	)	(110	)

Net impairment losses on debt securities recognized in earnings	—			—		—
Equity securities impairments	—			(112	)	—

Totals	$	—		(112	)	—

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



	Year Ended		Year Ended
	December 31, 2018		December 31, 2017
	(In thousands)

Beginning balance, cumulative credit losses related to other-than-temporary impairments	$	627	1,440
Reductions for securities disposed during current period	—		(813	)
Additions for OTTI where credit losses have been previously recognized	—		—

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



	December 31,
	2018			2017
	(In thousands)

Gross unrealized gains	$	17,678		93,034
Gross unrealized losses	(80,263		)	(10,856	)
Adjustments for:
Deferred policy acquisition costs and sales inducements	24,237			(39,579	)
Deferred Federal income tax expense	8,053			(8,946	)
	(30,295		)	33,653

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

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