Consolidation and Basis of Presentation

6 Months Ended

Jun. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

CONSOLIDATION AND BASIS OF PRESENTATION

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.

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.

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

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

	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

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	2,479,714
Net earnings (loss)	30,765		65,762	96,527
Balance at June 30, 2022	2,348,935		227,306	2,576,241
Balance at December 31, 2022	2,381,856		245,533	2,627,389
Accumulated Other Comprehensive Income (Loss):
Unrealized gains (losses) on non-impaired securities:
Balance at March 31, 2022	(53,121)		(20,918)	(74,039)
Other comprehensive income (loss), net of income tax	(234,309)		(135,861)	(370,170)
Balance at June 30, 2022	(287,430)		(156,779)	(444,209)
Balance at December 31, 2022	(419,965)		(233,466)	(653,431)
Change in LFPB due to discount rate changes:
Balance at March 31, 2022	—		19,911	19,911
Impact of discount rate changes during the period	—		76,256	76,256
Balance at June 30, 2022	—		96,167	96,167
Balance at December 31, 2022	—		170,701	170,701
Foreign currency translation adjustments:
Balance at March 31, 2022	5,413		930	6,343
Change in translation adjustments during period	(22)		2	(20)
Balance at June 30, 2022	5,391		932	6,323
Balance at December 31, 2022	5,507		943	6,450
Total Accumulated Other Comprehensive Income (Loss):
Balance at March 31, 2022	(61,941)		(77)	(62,018)
Change during period	(233,197)		(59,603)	(292,800)
Balance at June 30, 2022	(295,138)		(59,680)	(354,818)
Balance at December 31, 2022	(416,397)		(61,822)	(478,219)
Total stockholders' equity:
Balance at March 31, 2022	2,297,981		161,467	2,459,448
Balance at June 30, 2022	2,095,549		167,626	2,263,175
Balance at December 31, 2022	2,007,211		183,711	2,190,922

	Six Months Ended June 30, 2022
	As previously Reported		Effect of Change	As Currently Reported
	(In thousands)
Retained Earnings:
Balance at December 31, 2021	$	2,281,986	100,166	2,382,152
Net earnings	66,949		127,140	194,089
Balance at June 30, 2022	2,348,935		227,306	2,576,241
Balance at December 31, 2022	2,381,856		245,533	2,627,389
Accumulated Other Comprehensive Income (Loss):
Unrealized gains (losses) on non-impaired securities:
Balance at December 31, 2021	226,220		140,889	367,109
Other comprehensive income (loss), net of income tax	(513,650)		(297,668)	(811,318)
Balance at June 30, 2022	(287,430)		(156,779)	(444,209)
Balance at December 31, 2022	(419,965)		(233,466)	(653,431)
Change in LFPB due to discount rate changes:
Balance at December 31, 2021	—		(60,121)	(60,121)
Impact of discount rate changes during the period	—		156,288	156,288
Balance at June 30, 2022	—		96,167	96,167
Balance at December 31, 2022	—		170,701	170,701
Foreign currency translation adjustments:
Balance at December 31, 2021	5,100		928	6,028
Change in translation adjustments during period	291		4	295
Balance at June 30, 2022	5,391		932	6,323
Balance at December 31, 2022	5,507		943	6,450
Total Accumulated Other Comprehensive Income (Loss):
Balance at December 31, 2021	215,953		81,696	297,649
Change during period	(511,091)		(141,376)	(652,467)
Balance at June 30, 2022	(295,138)		(59,680)	(354,818)
Balance at December 31, 2022	(416,397)		(61,822)	(478,219)
Total stockholders' equity:
Balance at December 31, 2021	2,539,691		181,862	2,721,553
Balance at June 30, 2022	2,095,549		167,626	2,263,175
Balance at December 31, 2022	2,007,211		183,711	2,190,922

Interim Condensed Consolidated Statement of Cash Flows:

	Six Months Ended June 30, 2022
	As previously Reported		Effect of Change	As Currently Reported
	(In thousands)
Cash flows from operating activities:
Net earnings	$	66,949	127,140	194,089
Adjustments to reconcile net earnings to net cash from operating activities:
Universal life and annuity contract interest	(28,606)		(11,163)	(39,769)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired	24,380		(12,528)	11,852
(Increase) decrease in reinsurance recoverable	87,357		44,016	131,373
(Increase) decrease in other assets	434		9	443
Increase (decrease) in liabilities for future policy benefits	43,768		(59,422)	(15,654)
Increase (decrease) in market risk benefits liability	—		(123,075)	(123,075)
Increase (decrease) in deferred Federal income tax	13,449		33,796	47,245
Increase (decrease) in other liabilities	(12,479)		1	(12,478)
Net cash provided by (used in) operating activities	139,289		(1,226)	138,063
Cash flows from financing activities:
Deposits to account balances for universal life and annuity contracts	210,438		(4,663)	205,775
Return of account balances on universal life and annuity contracts	(437,626)		5,883	(431,743)
Net cash provided by (used in) financing activities	(227,357)		1,220	(226,137)
Effect of foreign exchange	368		6	374