Business Combinations

12 Months Ended

Dec. 31, 2020

BUSINESS COMBINATIONS

Effective January 31, 2019, the Company acquired Ozark National and NIS following the receipt of regulatory approvals. NWLGI and National Western paid cash in an aggregate amount of approximately $205.4 million in exchange for all of the outstanding stock of Ozark National (wholly owned by National Western) and NIS (wholly owned by NWLGI). In addition to the cash price paid, National Western recorded a contingent liability for an "earn-out payment" based upon the subsequent persistency of Ozark National's acquired in force business achieving thresholds as specified in the Stock Purchase Agreement ("Agreement"). The earn-out payment to the seller per the Agreement had a maximum limit of $5.0 million. Using a probabilistic method for valuing contingent consideration, the Company at January 31, 2019 recorded a liability of $3.7 million representing the estimated fair value of the additional consideration estimated to be paid as part of the acquisition. The contingent consideration was revalued during the earn-out term using the same probabilistic method and had a fair value of $4.1 million as of December 31, 2019. Changes in fair value during the year ended December 31, 2019 were recorded through Other operating expenses.

During 2020, the Company and the Seller executed an agreement under which the parties agreed that the Company had fulfilled its payment obligation under the Stock Purchase Agreement executed October 3, 2018. As a result, the Company reversed the contingent earn-out liability balance of $4.2 million recorded at that time and reflected this amount in Other revenues.

In addition to the purchase price, the Company incurred $3.3 million of acquisition-related costs in 2019, and an additional $1.0 million in acquisition-related costs during the year ended December 31, 2018. In accordance with GAAP, these costs are included in Other operating expenses in the Consolidated Statements of Earnings and are not considered a part of the purchase price.

The acquisition has been accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Purchase accounting, as defined by ASC 805, requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values shown below were determined based on management’s best estimates, employing fair valuation methodologies commonly utilized in preparing financial statements in accordance with GAAP, and are subject to revision for one year following the acquisition date. The excess of the purchase price paid above net tangible assets acquired has been assigned to identifiable intangible assets and goodwill. During the year ended December 31, 2020, the cash value of certain acquired reserves was increased which resulted in a commensurate increase in both the traditional life reserve liability and the related VOBA balance reported on the Consolidated Balance Sheets. The following table presents the fair values of the net assets acquired as of January 31, 2019.


	January 31, 2019
Assets	Fair value
	(In thousands)

Debt securities held to maturity	$	261,059
Debt securities available for sale	400,719
Policy loans	28,128
Real estate	4,600
Cash and cash equivalents	16,275
Accrued investment income	6,116
Value of business acquired	145,768
Reinsurance recoverables	21,895
Other intangible assets	9,600
Other assets acquired	12,075

Total assets acquired	906,235

Liabilities
Traditional life reserves	691,297
Other policyholder liabilities	13,867
Other liabilities acquired	5,840

	711,004

Net identifiable assets acquired	195,231
Goodwill	13,864

Net assets acquired	$	209,095

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented in the acquisition above.

Debt securities - The fair value of debt securities acquired was calculated using a market approach that utilizes prices and other relevant information generated by market transactions involving identical or comparable securities as provided by third party pricing services.

Policy loans - The fair value of policy loans acquired was calculated using a present value calculation of discounted cash flow model applied to groups of similar policy loans determined by the nature of the underlying insurance liabilities. Cash flows were discounted using current risk-free interest rates consistent with fair value calculations used for National Western’s policy loans.

Real estate - The fair value of the investment real estate acquired was determined using the sales comparison approach which compares market information for similar properties based on relevant, market-derived elements of comparison.

Cash and cash equivalents - The fair value of cash and cash equivalents acquired approximated their carrying values at the time of acquisition.

Other assets acquired - The fair value of certain receivables, guaranty assessment assets, and reinsurance recoverable were determined to approximate their carrying values at the time of acquisition. The fair value of tangible home office property acquired was determined using mostly a sales comparison approach which compares market information for similar properties based on relevant, market-derived elements of comparison.

Goodwill and Specifically Identifiable Intangible Assets

Goodwill

The changes in the carrying amount of goodwill (in thousands) were as follows:


	Year Ended December 31,
	2020		2019
	(In thousands)

Gross goodwill as of beginning of year	$	13,864	—
Goodwill resulting from business acquisition	—		13,864
Gross goodwill, before impairments	13,864		13,864
Accumulated impairment as of beginning of year	—		—
Current year impairments	—		—

Net goodwill as of end of year	$	13,864	13,864

Due to the severe change in economic climate during 2020 as a result of the COVID-19 pandemic, the Company periodically evaluated the goodwill balance for potential impairment and determined that there was sufficient evidence to support not impairing the balance.

Identifiable Intangible Assets

The following table presents the fair value of identifiable intangible assets acquired at January 31, 2019:


	Fair Value		Weighted-Average Amortization Period
	(In thousands)

Trademarks / trade names	$	2,800	15
Internally developed software	3,800		7
Insurance licenses	3,000		NA

Total identifiable intangible assets	$	9,600

The gross carrying amounts and accumulated amortization for each specifically identifiable intangible asset were as follows.


	December 31, 2020				December 31, 2019
	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization
		(In thousands)

Trademarks/trade names	15	$	2,800	(358)	2,800	(171)
Internally developed software	7	3,800		(1,040)	3,800	(498)
Insurance licenses	N/A	3,000		—	3,000	—

		$	9,600	(1,398)	9,600	(669)

The value of trademarks was estimated using the relief from royalty method, based on the assumption that in lieu of ownership, an organization would be willing to pay a royalty in order to receive the related benefits of using the brand. The value of insurance licenses was estimated using the market approach to value, based on values paid for licenses in recent shell company transactions. The value of internally developed software was estimated using the replacement cost method. Trademarks, trade names and internally developed software are amortized using a straight-line method over their estimated useful lives. These intangibles assets will be evaluated for impairment if indicators of impairment arise. Insurance licenses were determined to have an indefinite useful life. The Company evaluates the useful life of the insurance licenses at each reporting period to determine whether the useful life remains indefinite.

As of December 31, 2020, expected amortization expenses relating to purchased intangible assets for each of the next 5 years and thereafter is as follows:


	Expected
	Amortization
	(In thousands)

2021	$	730
2022	730
2023	730
2024	730
2025	730
Thereafter	1,552

	$	5,202

Financial Information

For the year ended December 31, 2019, Ozark National and NIS combined total revenues of $106.2 million and net earnings of $17.1 million for the eleven months subsequent to January 31, 2019 were included in the Consolidated Statements of Earnings. These results for segment reporting purposes are combined in the Acquired Businesses segment.

The following unaudited comparative pro forma total revenues and net earnings represent Consolidated Results of Operations for the Company which assume amounts estimated had the acquisition of Ozark National and NIS been effective January 1, 2018. Pro forma results of operations include estimated revenue and net earnings of the acquired businesses for each period, as well as the amortization of identifiable intangible assets and fair value adjustments of acquired invested assets and traditional life insurance reserves as proxy to illustrate comparative yearly performance. The proxy was determined by using the ratio of the 2019 results of operations and the number of months since acquisition.


	Years Ended December 31,
	2019		2018
	(In thousands)

Total revenues	$	828,846	667,392

Net earnings	$	133,175	134,858