

~~UNITED STATES~~
~~SECURITIES AND EXCHANGE COMMISSION~~
~~Washington, D.C. 20549~~

~~FORM 10-Q~~

x ~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF~~
~~THE SECURITIES EXCHANGE ACT OF 1934~~

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 ~~September 30, 2017~~March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OFTHE 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)



o ~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF~~
~~THE SECURITIES EXCHANGE ACT OF 1934~~Delaware

~~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)~~



~~DELAWARE~~	47-3339380
(State or Other Jurisdiction of Incorporation)	~~(I.R.S. Employer Identification Number)~~

~~850 EAST ANDERSON LANE~~
~~AUSTIN, TEXAS 78752-1602~~	~~(512) 836-1010~~
(~~Address of Principal Executive Offices)~~	~~(Telephone Number)~~IRS Employer Identification No.)



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: Yesx☒No o☐

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). : Yesx☒No o☐

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 o☒Accelerated filer x☐ Non-accelerated filer (Do not check if a smaller reporting company) o ☐Smaller reporting company o ☐Emerging growth company o☐

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. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐No x☒

As of ~~November 2, 2017~~,May 8, 2020, the number of shares of Registrant's common stock outstanding was: Class A – ~~3,436,166~~3,436,020 and Class B - 200,000.



TABLE OF CONTENTS
	Page

Part I. Financial Information:	3

Item 1. Financial Statements	3

Condensed Consolidated Balance Sheets ~~September 30, 2017~~March 31, 2020 (Unaudited) and December 31, ~~2016~~2019	3

Condensed Consolidated Statements of Earnings (Loss) For the Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (Unaudited)	5

Condensed Consolidated Statements of ~~Earnings~~Comprehensive Income (Loss) For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (Unaudited)	6

Condensed Consolidated Statements of ~~Comprehensive Income~~Changes in Stockholders' Equity ~~(Loss)~~ For the Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 (Unaudited)	7

Condensed Consolidated Statements of ~~Comprehensive Income~~Cash Flows ~~(Loss)~~ For the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016 (Unaudited)~~	8

~~Condensed Consolidated Statements of Changes in Stockholders' Equity~~ ~~For the Nine Months Ended September 30, 2017 and 2016~~2019 (Unaudited)	9

Notes to Condensed Consolidated Financial Statements ~~of Cash Flows~~(Unaudited) ~~For the Nine Months Ended September 30, 2017 and 2016 (Unaudited)~~	11

~~Notes to Condensed Consolidated~~Item 2. Management's Discussion and Analysis of Financial ~~Statements (Unaudited)~~Condition and Results of Operations	1352

~~Item 2. Management's Discussion and Analysis of~~ ~~Financial Condition and Results of Operations~~	50

Item 3. Quantitative and Qualitative Disclosures About Market Risk	8793

Item 4. Controls and Procedures	8793

Part II. Other Information:	8793

Item1. Legal Proceedings	8793

Item1A. Risk Factors	8793

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	8794

Item 4. Removed and Reserved	8895

Item 6. Exhibits	8895

Signatures	8996

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	(Unaudited)			(Unaudited)
ASSETS	September 30, 2017		December 31, 2016	March 31, 2020		December 31, 2019

Investments:
Securities held to maturity, at amortized cost (fair value: $7,498,922 and $7,337,611)	$	7,264,995	7,159,259
Securities available for sale, at fair value (cost: $2,942,594 and $2,991,042)	3,045,603		3,060,363
Mortgage loans, net of allowance for possible losses ($650 and $650)	188,623		174,534
Debt securities held to maturity, at amortized cost, net of allowance for credit losses ($6,039 and $0; fair value: $7,181,687 and $7,407,703)				$	6,990,041	7,106,245
Debt securities available for sale, at fair value (cost: $3,206,357 and $3,206,120)				3,174,260		3,356,945
Mortgage loans, net of allowance for credit losses ($1,885 and $675)				276,083		272,422
Policy loans	57,466		58,699	78,036		80,008
Derivatives, index options	163,536		120,644	24,335		157,588
Equity securities, at fair value (cost: $15,246 and $16,894)				15,984		23,594
Other long-term investments	48,933		53,954	66,152		62,090

Total investments	10,769,156		10,627,453	10,624,891		11,058,892

Cash and cash equivalents	170,560		51,247	352,215		253,525
Deferred policy acquisition costs	813,642		835,194	782,904		723,972
Deferred sales inducements	134,636		147,111	114,171		104,359
Value of business acquired				135,879		138,071
Accrued investment income	103,038		99,245	95,780		93,298
Federal income tax receivable	7,858		—	13,282		—
Other assets	139,401		134,731	165,300		181,330

Total assets	$	12,138,291	11,894,981	$	12,284,422	12,553,447

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	(Unaudited)			(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY	September 30, 2017		December 31, 2016	March 31, 2020			December 31, 2019

LIABILITIES:

Future policy benefits:
Universal life and annuity contracts	$	9,856,403	9,722,313
Universal life and annuity contracts (Note 1)				$	9,125,612		9,303,233
Traditional life reserves	135,366		136,782	842,551			838,738
Other policyholder liabilities	137,072		143,391	134,579			127,607
Deferred Federal income tax liability	56,016		64,990
Deferred Federal income tax liability (Note 1)				30,438			36,767
Federal income tax payable	—		789	—			3,748
Other liabilities	150,752		104,888	120,764			126,924

Total liabilities	10,335,609		10,173,153	10,253,944			10,437,017

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ EQUITY:

Common stock:
Class A - $.01 par value; 7,500,000 shares authorized; 3,436,166 issued and outstanding in 2017 and 2016	34		34
Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2017 and 2016	2		2
Class A - $.01 par value; 7,500,000 shares authorized; 3,436,020 issued and outstanding in 2020 and 2019				34			34
Class B - $.01 par value; 200,000 shares authorized, issued, and outstanding in 2020 and 2019				2			2
Additional paid-in capital	41,716		41,716	41,716			41,716
Accumulated other comprehensive income	20,572		10,552
Retained earnings	1,740,358		1,669,524
Accumulated other comprehensive income (loss)				(20,750		)	60,108
Retained earnings (Note 1)				2,009,476			2,014,570

Total stockholders’ equity	1,802,682		1,721,828	2,030,478			2,116,430

Total liabilities and stockholders' equity	$	12,138,291	11,894,981	$	12,284,422		12,553,447

Note: The Condensed Consolidated Balance Sheet at December 31, ~~2016~~2019 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 (LOSS)

For the Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019

(Unaudited)

(In thousands, except per share amounts)


	2017			2016			2020			2019

Premiums and other revenues:
Universal life and annuity contract charges	$	40,268		40,333			$	35,306		37,953
Traditional life premiums	5,285			4,631			23,522			17,583
Net investment income	151,691			126,981
Net investment income (loss)							(13,478		)	151,331
Other revenues	4,672			4,476			3,653			6,413
Net realized investment gains (losses):
Total other-than-temporary impairment (“OTTI”) gains (losses)	26			27			2			3
Portion of OTTI (gains) losses recognized in other comprehensive income	(26		)	(27		)	(2		)	(3		)
Net OTTI losses recognized in earnings	—			—			—			—
Other net investment gains (losses)	2,074			5,426			3,485			4,629
Total net realized investment gains (losses)	2,074			5,426			3,485			4,629

Total revenues	203,990			181,847			52,488			217,909

Benefits and expenses:
Life and other policy benefits	21,015			17,430			33,634			28,189
Amortization of deferred policy acquisition costs	18,722			24,395
Amortization of deferred policy acquisition costs and value of business acquired							30,037			32,164
Universal life and annuity contract interest	107,799			67,776			(28,026		)	80,916
Other operating expenses	22,596			23,595			19,822			26,049

Total benefits and expenses	170,132			133,196			55,467			167,318

Earnings before Federal income taxes	33,858			48,651
Earnings (loss) before Federal income taxes							(2,979		)	50,591

Federal income taxes	12,045			14,915			(917		)	10,393

Net earnings	$	21,813		33,736
Net earnings (loss)							$	(2,062	)	40,198

Basic earnings per share:
Basic earnings (loss) per share:
Class A	$	6.17		$	9.54		$	(0.58	)	$	11.37
Class B	$	3.08		$	4.77		$	(0.29	)	$	5.68

Diluted earnings per share:
Diluted earnings (loss) per share:
Class A	$	6.17		$	9.54		$	(0.58	)	$	11.37
Class B	$	3.08		$	4.77		$	(0.29	)	$	5.68

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS~~

~~For the Nine Months Ended September 30, 2017 and 2016~~

~~(Unaudited)~~

~~(In thousands, except per share amounts)~~

2017 2016

Premiums and other revenues:
Universal life and annuity contract charges $ 122,329
123,791
Traditional life premiums 13,639
13,721
Net investment income 466,045
335,732
Other revenues 13,714
14,050
Net realized investment gains (losses):

Total other-than-temporary impairment (“OTTI”) gains (losses) 69
80
Portion of OTTI (gains) losses recognized in other comprehensive income (69 ) (80 )
Net OTTI losses recognized in earnings —
—
Other net investment gains (losses) 10,906
10,589
Total net realized investment gains (losses) 10,906
10,589

Total revenues 626,633
497,883

Benefits and expenses:

Life and other policy benefits 58,626
48,571
Amortization of deferred policy acquisition costs 85,992
88,581
Universal life and annuity contract interest 299,862
179,592
Other operating expenses 74,031
66,306

Total benefits and expenses 518,511
383,050

Earnings before Federal income taxes 108,122
114,833

Federal income taxes 37,288
37,553

Net earnings $ 70,834
77,280

Basic earnings per share:

Class A $ 20.03
$ 21.85
Class B $ 10.02
$ 10.93

Diluted earnings per share:

Class A $ 20.03
$ 21.85
Class B $ 10.02
$ 10.93

~~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 ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019

(Unaudited)

(In thousands)


	2017			2016		2020			2019

Net earnings	$	21,813		33,736
Net earnings (loss)						$	(2,062	)	40,198

Other comprehensive income (loss), net of effects of deferred costs and taxes:
Unrealized gains (losses) on securities:
Net unrealized holding gains (losses) arising during period	2,212			2,824		(78,153		)	42,743
Net unrealized liquidity gains (losses)	9			9		1			1
Reclassification adjustment for net amounts included in net earnings	(988		)	(1,398	)	(601		)	(868	)

Net unrealized gains (losses) on securities	1,233			1,435		(78,753		)	41,876

Foreign currency translation adjustments	166			22		(39		)	553

Benefit plans:
Amortization of net prior service cost and net gain (loss)	(910		)	(283	)	(2,066		)	(504	)

Other comprehensive income (loss)	489			1,174		(80,858		)	41,925

Comprehensive income (loss)	$	22,302		34,910		$	(82,920	)	82,123

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~For the Nine Months Ended September 30, 2017 and 2016~~

~~(Unaudited)~~

~~(In thousands)~~

2017 2016

Net earnings $ 70,834
77,280

Other comprehensive income, net of effects of deferred costs and taxes:

Unrealized gains (losses) on securities:

Net unrealized holding gains (losses) arising during period 15,479
48,927
Net unrealized liquidity gains (losses) 22
27
Reclassification adjustment for net amounts included in net earnings (2,746 ) (1,971 )

Net unrealized gains (losses) on securities 12,755
46,983

Foreign currency translation adjustments (5 ) (81 )

Benefit plans:

Amortization of net prior service cost and net gain (loss) (2,730 ) (850 )

Other comprehensive income (loss) 10,020
46,052

Comprehensive income (loss) $ 80,854
123,332

NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2020 and 2019 (Unaudited) (In thousands)

	2020			2019

Common stock:
Balance at beginning of period	$	36		36
Shares exercised under stock option plan	—			—

Balance at end of period	36			36

Additional paid-in capital:
Balance at beginning of period	41,716			41,716
Shares exercised under stock option plan	—			—

Balance at end of period	41,716			41,716

Accumulated other comprehensive income (loss):
Unrealized gains (losses) on non-impaired securities:
Balance at beginning of period	70,665			(30,286	)
Change in unrealized gains (losses) during period, net of tax	(78,754		)	41,875

Balance at end of period	(8,089		)	11,589

Unrealized losses on impaired held to maturity securities:
Balance at beginning of period	(4		)	(7	)
Cumulative effect of change in accounting principle	—			—
Amortization	2			2
Other-than-temporary impairments, non-credit, net of tax	—			—
Additional credit loss on previously impaired securities	—			—
Change in shadow deferred policy acquisition costs	(1		)	(1	)

Balance at end of period	(3		)	(6	)

Unrealized losses on impaired available for sale securities:
Balance at beginning of period	(2		)	(2	)
Other-than-temporary impairments, non-credit, net of tax	—			—
Change in shadow deferred policy acquisition costs	—			—
Recoveries, net of tax	—			—

Balance at end of period	(2		)	(2	)

	Continued on Next Page

NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) For the Three Months Ended March 31, 2020 and 2019 (Unaudited) (In thousands)


	2020			2019

Foreign currency translation adjustments:
Balance at beginning of period	5,101			4,577
Change in translation adjustments during period	(39		)	553

Balance at end of period	5,062			5,130

Benefit plan liability adjustment:
Balance at beginning of period	(15,652		)	(11,297	)
Amortization of net prior service cost and net loss, net of tax	(2,066		)	(504	)

Balance at end of period	(17,718		)	(11,801	)

Accumulated other comprehensive income (loss) at end of period	(20,750		)	4,910

Retained earnings:
Balance at beginning of period	2,014,570			1,896,040
Cumulative effect of change in accounting principle, net of tax (Note 2)	(3,032		)	—
Net earnings (loss)	(2,062		)	40,198

Balance at end of period (Note 1)	2,009,476			1,936,238

Total stockholders' equity	$	2,030,478		1,982,900

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
2017 2016

Common stock:
Balance at beginning of period $ 36
36
Shares exercised under stock option plan —
—

       Balance at end of period 36
36

Additional paid-in capital:

Balance at beginning of period 41,716
41,716
Shares exercised under stock option plan —
—

       Balance at end of period 41,716
41,716

Accumulated other comprehensive income:

Unrealized gains on non-impaired securities:

Balance at beginning of period 22,813
12,347
Change in unrealized gains (losses) during period, net of tax 12,733
46,956

   Balance at end of period 35,546
59,303

Unrealized losses on impaired held to maturity securities:

Balance at beginning of period (203 ) (240 )
Amortization 45
52
Other-than-temporary impairments, non-credit, net of tax —
—
Additional credit loss on previously impaired securities —
—
Change in shadow deferred policy acquisition costs (23 ) (25 )

   Balance at end of period (181 ) (213 )

Unrealized losses on impaired available for sale securities:

Balance at beginning of period (1 ) (1 )
Other-than-temporary impairments, non-credit, net of tax —
—
Change in shadow deferred policy acquisition costs —
—
Recoveries, net of tax —
—

  Balance at end of period (1 ) (1 )

Continued on Next Page

NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2020 and 2019 (Unaudited) (In thousands)

	2020			2019

Cash flows from operating activities:
Net earnings (loss)	$	(2,062	)	40,198
Adjustments to reconcile net earnings to net cash from operating activities:
Universal life and annuity contract interest	(28,026		)	80,916
Surrender charges and other policy revenues	(7,450		)	(8,049	)
Realized (gains) losses on investments	(3,485		)	(4,629	)
Accretion/amortization of discounts and premiums, investments	850			490
Depreciation and amortization	2,885			4,455
Increase (decrease) in estimated credit losses on investments	3,411			—
(Increase) decrease in value of equity securities	5,816			(1,951	)
(Increase) decrease in value of derivatives	106,629			(42,003	)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired	16,681			20,342
(Increase) decrease in accrued investment income	(2,482		)	(3,195	)
(Increase) decrease in other assets	9,399			(1,790	)
Increase (decrease) in liabilities for future policy benefits	6,357			(776	)
Increase (decrease) in other policyholder liabilities	6,972			(753	)
Increase (decrease) in Federal income tax liability	(17,030		)	19,114
Increase (decrease) in deferred Federal income tax	15,971			(8,823	)
Increase (decrease) in other liabilities	(8,775		)	(4,142	)

Net cash provided by operating activities	105,661			89,404

Cash flows from investing activities:
Proceeds from sales of:
Debt securities available for sale	—			73,257
Other investments	9,565			13,193
Proceeds from maturities and redemptions of:
Debt securities held to maturity	187,973			137,732
Debt securities available for sale	93,326			55,569
Derivatives, index options	52,973			3,047
Purchases of:
Debt securities held to maturity	(75,836		)	(20,690	)
Debt securities available for sale	(92,963		)	(20,474	)
Equity securities	(488		)	(262	)
Derivatives, index options	(22,403		)	(18,264	)
Other investments	(11,446		)	(6,908	)
Property and equipment	(58		)	(77	)
Payment to acquire businesses, net of cash acquired	—			(189,120	)

	Continued on Next Page

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(continued)
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
2017 2016

Foreign currency translation adjustments:

Balance at beginning of period 2,661
2,825
Change in translation adjustments during period (5 ) (81 )

  Balance at end of period 2,656
2,744

Benefit plan liability adjustment:

Balance at beginning of period (14,718 ) (14,602 )
Amortization of net prior service cost and net loss, net of tax (2,730 ) (850 )

  Balance at end of period (17,448 ) (15,452 )

Accumulated other comprehensive income at end of period 20,572
46,381

Retained earnings:
   Balance at beginning of period 1,669,524
1,569,905
   Net earnings 70,834
77,280
   Stockholder dividends —
—

   Balance at end of period 1,740,358
1,647,185

Total stockholders' equity $ 1,802,682
$ 1,735,318

NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the Three Months Ended March 31, 2020 and 2019 (Unaudited) (In thousands)

	2020			2019


Principal payments on mortgage loans	2,149			15,171
Cost of mortgage loans acquired	(6,996		)	(17,271	)
Decrease (increase) in policy loans	1,972			1,690

Net cash provided by (used in) investing activities	137,768			26,593

Cash flows from financing activities:
Deposits to account balances for universal life and annuity contracts	117,682			92,153
Return of account balances on universal life and annuity contracts	(262,371		)	(248,890	)
Borrowings under line of credit agreement	—			75,000
Principal payments on line of credit borrowings	—			(75,000	)

Net cash provided by (used in) financing activities	(144,689		)	(156,737	)

Effect of foreign exchange	(50		)	700

Net increase (decrease) in cash, cash equivalents, and restricted cash	98,690			(40,040	)
Cash, cash equivalents, and restricted cash at beginning of period	253,525			131,976

Cash, cash equivalents and restricted cash at end of period	$	352,215		91,936

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid (received) during the period for:
Interest	$	19		19
Income taxes	$	1		1

Noncash operating activities:
Net deferral and amortization of sales inducements	$	(3,360	)	(4,105	)

Noncash investing and financing activities:
Contingent consideration to acquire businesses	$	—		3,700

See accompanying notes to Condensed Consolidated Financial Statements (unaudited).

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
2017 2016

Cash flows from operating activities:
Net earnings $ 70,834
77,280
Adjustments to reconcile net earnings to net cash from operating activities:

Universal life and annuity contract interest 299,862
179,592
Surrender charges and other policy revenues (33,682 ) (34,955 )
Realized (gains) losses on investments (10,905 ) (10,589 )
Accretion/amortization of discounts and premiums, investments 308
51
Depreciation and amortization 7,379
5,823
(Increase) decrease in value of derivatives (138,552 ) (8,307 )
(Increase) decrease in deferred policy acquisition and sales inducement costs 19,895
10,799
(Increase) decrease in accrued investment income (3,793 ) (1,618 )
(Increase) decrease in other assets (7,762 ) (3,683 )
Increase (decrease) in liabilities for future policy benefits 6,616
3,408
Increase (decrease) in other policyholder liabilities (6,319 ) (5,175 )
Increase (decrease) in Federal income taxes liability (8,647 ) 21,661
Increase (decrease) in deferred Federal income tax (14,370 ) 10,587
Increase (decrease) in other liabilities 12,530
1,352

Net cash provided by operating activities 193,394
246,226

Cash flows from investing activities:

Proceeds from sales of:

Securities held to maturity —
—
Securities available for sale 22,184
16,087
Other investments 4,943
3,947
Proceeds from maturities and redemptions of:

Securities held to maturity 303,081
304,190
Securities available for sale 222,841
134,208
Derivatives, index options 151,298
13,273
Property and equipment 2,731
—
Purchases of:

Securities held to maturity (377,821 ) (231,804 )
Securities available for sale (192,670 ) (229,932 )
Derivatives, index options (55,780 ) (57,224 )
Other investments (329 ) (27,525 )
Property and equipment (1,697 ) —
Net change in short-term investments —
(14,972 )

Continued on Next Page

NATIONAL WESTERN LIFE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(In thousands)
2017 2016

Principal payments on mortgage loans 24,199
17,295
Cost of mortgage loans acquired (38,166 ) (55,796 )
Decrease (increase) in policy loans 1,233
2,739

Net cash provided by/(used in) investing activities 66,047
(125,514 )

Cash flows from financing activities:

Deposits to account balances for universal life and annuity contracts 546,966
626,083
Return of account balances on universal life and annuity contracts (687,087 ) (675,389 )

Net cash provided by (used in) financing activities (140,121 ) (49,306 )

Effect of foreign exchange (7 ) (125 )

Net increase (decrease) in cash and cash equivalents 119,313
71,281
Cash and cash equivalents at beginning of period 51,247
106,007

Cash and cash equivalents at end of period $ 170,560
$ 177,288

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid (received) during the period for:

Interest $ 30
33
Income taxes $ 60,304
5,032

Noncash operating activities:
Deferral of sales inducements $ (9,696 ) (7,146 )

~~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 annual financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (“Company”) as of ~~September 30, 2017~~March 31, 2020, and the results of its operations and its cash flows for the three ~~and nine~~ months ended~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016.~~March 31, 2019. Such adjustments are of a normal recurring nature. The results of operations for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 are not necessarily indicative of the results to be expected for the full year. It is recommended that these Condensed Consolidated Financial Statements 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, ~~2016~~2019 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. The Condensed Consolidated Balance Sheet at December 31, ~~2016~~2019 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 ~~Investments,~~Services, Inc., and ~~NWL~~N.I.S. Financial Services, Inc. ("NIS"). National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., ~~and~~ Braker P III, ~~LLC. Where comments or disclosures are made specifically in reference~~LLC, and Ozark National Life Insurance Company ("Ozark National"). The results of operations for Ozark National and NIS include their respective business activity subsequent to ~~the insurance operations of National Western, the "company" is used in order to distinguish such comments from the consolidated entity.~~their acquisition effective January 31, 2019. 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 benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs ("DPAC"), deferred sales inducements ("DSI") and the value of business acquired ("VOBA"), (4) valuation allowances for deferred tax assets, (5) goodwill, (6) allowances for credit losses and other-than-temporary impairment losses on debt securities, ~~(6)~~(7) commitments and contingencies, and ~~(7)~~(8) credit loss and valuation allowances for mortgage loans and real estate. During the first quarter of 2019, the Company incorporated accounting estimates for business combinations, value of business acquired, and fair value measurement as a result of its acquisition of Ozark National and NIS.

Revision of Prior Period Consolidated Financial Statements

During the first quarter of 2020, management identified an understatement of an excess benefit reserve on a specific block of policies that dated back to the first quarter of 2004 with the adoption of the Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). Management concluded that this error was not material to previously issued consolidated financial statements and would be corrected through a revision to the comparative consolidated balance sheet presented for the year ended December 31, 2019. The impact of this revision as of December 31, 2019 was an increase to the future policy benefits liability of $15.0 million, a decrease to deferred federal income tax liability of $3.2 million, and a decrease to retained earnings of $11.8 million.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below shows the unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016.~~March 31, 2019.



Affected Line Item in the Statements of Earnings	Amount Reclassified From Accumulated Other Comprehensive Income
	Three Months Ended March 31,
	2020		2019
	(In thousands)

Other net investment gains (losses)	$	761	1,099
Net OTTI losses recognized in earnings	—		—
Earnings before Federal income taxes	761		1,099
Federal income taxes	160		231

Net earnings	$	601	868

Affected Line Item in the
Statements of Earnings
Amount Reclassified From Accumulated Other Comprehensive Income
Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Other net investment gains (losses) $ 1,519
2,151
4,224
3,033
Net OTTI losses recognized in earnings —
—
—
—
Earnings before Federal income taxes 1,519
2,151
4,224
3,033
Federal income taxes 532
753
1,478
1,062

Net earnings $ 987
1,398
2,746
1,971

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(2)	NEW ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements not yet adopted

In ~~January 2016,~~August 2018, the FASB ~~released~~issued ASU 2018-12 Financial Services-Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts. This update is aimed at improving the Codification as it relates to long-duration contracts which will improve the timeliness of recognizing changes in the liability for future policy benefits, simplify accounting ~~standards~~for certain market-based options, simplify the amortization of deferred acquisition costs, and improve the effectiveness of required disclosures. Amendments include the following:

A. Require insurance entity to (1) review and update ~~(ASU) 2016-01,~~ ~~Recognition~~assumptions used to measure cash flows at least annually (with changes recognized in net income) and ~~Measurement~~(2) update discount rate assumption at each reporting date (with changes recognized in other comprehensive income).

B. Require insurance entity to measure all market risk benefits associated with deposit (i.e. account balance) contracts at fair value, with change in fair value attributable to change in instrument-specific credit risk recognized in other comprehensive income.

C. Simplify amortization of ~~Financial Assets~~deferred acquisition costs and ~~Liabilities. The main provisions~~other balances amortized in proportion to premiums, gross profits, or gross margins and require those balances be amortized on constant level basis over expected term of related contract. Deferred acquisition costs are required to be written off for unexpected contract terminations but are not subject to impairment test.

D. Require insurance entity to add disclosures of disaggregated rollforwards of beginning to ending balances of the ~~update are to eliminate the available~~liability for ~~sale classification of accounting for equity securities~~future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheetdeferred acquisition costs. Insurance entity must also disclose information about significant inputs, judgments, assumptions, and ~~any periodic~~methods used in measurement, including changes in ~~value will~~those inputs, judgments, and assumptions, and the effect of those changes on measurement.

These updates are required to be ~~adjustments~~applied retrospectively to the ~~income statement. The provisions of this update become effective~~earliest period presented in the financial statements for ~~interim and annual~~ periods beginning after December 15, ~~2017.~~2021, with early adoption permitted. The Company has performed a preliminary gap analysis and created a roadmap for implementation of this standard by the effective date and is evaluating the impact of the new guidance on its Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12 Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which simplifies various aspects of the income tax accounting guidance and will be applied using different approaches depending on the specific amendment. The amendments will be effective for fiscal periods beginning after December 15, 2020. Early adoption is permitted. The Company does not expect ~~the requirements of~~ this ~~update~~guidance to have a material impact on the ~~Company’s financial position, results of operations or cash flows.~~Consolidated Financial Statements and related disclosures upon adoption.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Accounting pronouncements adopted

In June 2016, the FASB released ASU 2016-13, Financial ~~Instruments - Credit~~Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The new guidance replaces the existing incurred loss recognition model with an expected loss recognition ~~model.~~model (“CECL”). The objective of the ~~expected credit loss~~CECL model is for the reporting entity to recognize its estimate of current expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this Update add clarification and correction to ASU 2016-13 around accrued interest, transfers between classifications or categories for loans and debt securities, consideration of recoveries in estimating allowances, reinsurance recoveries, consideration of prepayments and estimated costs to sell when foreclosure is probable. In November, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The amendments in this Update add clarification and correction to ASU 2016-13 around expected recoveries for purchased financial assets with credit deterioration, transition relief for troubled debt restructurings, disclosures related to accrued interest receivables, and financial assets secured by collateral maintenance provisions. The guidance isfor these pronouncements was effective for interim and annual periods beginning after December 15, 2019, and for most affected instruments must be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to beginning retained ~~income. The~~earnings. Effective January 1, 2020, the Company ~~is currently evaluating this guidance.~~

~~In March 2017,~~adopted the ~~FASB issued ASU 2017-08,~~ ~~Receivables - Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable~~expected loss recognition model related to mortgage loans, debt securities held ~~at a premium.~~to maturity and reinsurance recoverable. The ~~amortization period~~change in accounting, net of tax, of $3.0 million was recorded to retained earnings in the first quarter of 2020 to set up an initial allowance for ~~premiums is being shortened~~estimated credit losses of $1.2 million on mortgage loans and $3.3 million on debt securities held to maturity. The estimated credit losses for the reinsurance recoverable were immaterial to the ~~earliest call date. This guidance is effective~~financial statements, but will be monitored on a quarterly basis for ~~fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently evaluating this guidance.~~

~~In May 2017,~~any changes. Refer to Note (9) Investments for more information. Certain disclosures required by ASU 2016-13 are not included in the ~~FASB released ASU 2017-09,~~ ~~Compensation - Stock Compensation~~. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Accounting Standards Codification (ASC) Topic 718. An entity shall account for the effects of a modification described in ASC paragraphs 718-20-35-3 through 35-9, unless all the following are met: (1) The fair value of the modified award is the sameconsolidated financial statements as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The provisionsimpact of this ~~update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company does~~standard was not ~~expect a material effect on the results of operations or financial position with the adoption of this ASU.~~material.

~~In July 2017, the FASB released ASU 2017-11,~~ ~~Earnings Per Share; Distinguishing Liabilities from Equity; and, Derivatives and Hedging~~. This update includes: (I) Accounting for Certain Financial Instruments with Down Round Features, and (II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. Part I of this update changes the classification analysis of certain equity-linked financial instruments with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Part II of this update recharacterizes the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. The Company does not expect a material effect on the results of operations or financial position with the adoption of this ASU.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~In September 2017, the FASB released ASU 2017-13,~~ ~~Revenue Recognition (Topic 605), Revenue from contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)~~. This update adds SEC paragraphs pursuant to the SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting to provide effective dates that differ for (1) public business entities and certain other specified entities and (2) all other entities. The Company does not expect an effect on the results of operations or financial position with the adoption of this ASU. The Company will adopt Topic 606 and 842 within the required effective dates set by the SEC. Amendment to Topic 605 does not affect the Company since management fees amongst affiliates are eliminated upon consolidation. Amendment to Topic 840 does not affect the Company since the Company does not have any Third-Party Value Guarantees embedded within its lease agreements that will have a material effect on the results of operations or financial position.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future ~~consolidated financial statements.~~Consolidated Financial Statements.


(3)	STOCKHOLDERS' EQUITY

~~NWLIC~~The Robert L. Moody Revocable Trust beneficially owns 99.0% of the total outstanding shares of the Company's Class B common stock as of March 31, 2020. Holders of the Company's Class A common stock elect one-third of the Board of Directors of the Company, and holders of the Class B common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock are to be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. In the event of liquidation of the Company, the Class A stockholders will receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B stock based upon the number of shares held.

National Western is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on the lesser of statutory earnings from operations, excluding capital gains, ~~from the prior calendar year~~ or 10% of statutory surplus of ~~the company~~National Western as of the previous ~~calendar~~ year-end. ~~The~~Under these guidelines the maximum dividend payment which may be made without prior approval in ~~2017~~2020 is $~~86.0~~152.8 million. As the sole owner of NWLIC, all dividends declared by National Western are payable entirely to NWLGI and are eliminated in consolidation.

InOzark National is similarly restricted under the ~~second quarter~~state insurance laws of ~~2017 National Western declared and~~Missouri as to dividend amounts which may be paid ~~a $4.0 million~~to stockholders without prior approval to the greater of 10.0% of the statutory surplus of the company from the preceding year-end or the company's net gain from operations, excluding capital gains, from the prior calendar year. Based upon this restriction, the maximum dividend ~~to NWLGI. During the third quarter of 2017 National Western declared a $3.0 million dividend payable to NWLGI~~payment which was subsequently paid on October 16, 2017. In the nine months ended September 30, 2016, National Western declared a cash dividend of $3.0 million payable to NWLGI which was subsequently paid on October 3, 2016.may be made in 2020 without prior approval is $17.2 million.

~~NWLGI did not declare or pay cash dividends on its common shares during the nine months ended September 30, 2017 and 2016.~~

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As part of the Stock Purchase Agreement dated October 3, 2018, by and between NWLIC and Ozark National's previous owner, the Missouri Department of Commerce and Insurance granted approval for an extraordinary dividend of $102.7 million to be paid to the prior owner concurrent with the closing of the transaction effective January 31, 2019. All dividends declared by Ozark National thereafter are payable entirely to NWLIC as the sole owner and are eliminated in consolidation.

National Western did not declare or pay cash dividends to NWLGI in the first quarter of 2020. In the first quarter of 2019, National Western declared and paid a $32.0 million dividend to NWLGI, the proceeds of which were used as part of the cash purchase of NIS. Ozark National did not declare or pay cash dividends on its shares during the first quarter of 2020 or in the two-month period ended March 31, 2019.

NIS declared and paid a $0.9 million dividend to NWLGI in the first quarter of 2020. As the sole owner of NIS, all dividends declared by NIS are payable entirely to NWLGI and are eliminated in consolidation. NIS did not declare or pay cash dividends on its shares during the two-month period ended March 31, 2019.

NWLGI did 0t declare or pay cash dividends on its common shares during the three months ended March 31, 2020 and 2019.


(4)	EARNINGS PER SHARE

Basic earnings (loss) per share of common stock are computed by dividing net ~~income~~earnings (loss) available to each class of common stockholders on an as if distributed basis by the weighted-average ~~basic~~number of common shares outstanding ~~during~~for the period. Diluted earnings (loss) per share, by definition, ~~assumes~~reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common ~~shares applicable to~~ stock, ~~options~~that then shared in the ~~denominator. However, settlement~~distributed earnings (loss) of ~~stock option exercises in cash or by issuance~~each class of ~~shares is at discretion of~~common stock. U.S. GAAP requires a two-class presentation for the Company's ~~optionholders and such exercises have predominantly been in cash. Consequently, the Company's stock options~~two classes of common stock. The Company currently has no share-based compensation awards outstanding ~~are not considered potentially dilutive under accounting guidance.~~that could be redeemed for shares of common stock.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Net ~~income~~earnings (loss) for the periods shown below is allocated between Class A shares and Class B shares based upon (1) the proportionate number of shares issued and outstanding as of the end of the period, and (2) the per share dividend rights of the two classes under the Company's Restated Certificate of Incorporation (the Class B dividend per share is equal to one-half the Class A dividend per share).

Three Months Ended September 30,
2017 2016
Class A Class B Class A Class B
(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings Per Share:
Net income $ 21,813
33,736

Dividends - Class A shares —
—

Dividends - Class B shares —
—

Undistributed income $ 21,813
33,736

Allocation of net income:

Dividends $ —
—
—
—
Allocation of undistributed income 21,196
617
32,782
954

Net income $ 21,196
617
32,782
954

Denominator:

Basic earnings per share - weighted-average shares 3,436
200
3,436
200
Effect of dilutive stock options —
—
—
—

Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,436
200
3,436
200

Basic Earnings Per Share $ 6.17
3.08
9.54
4.77

Diluted Earnings Per Share $ 6.17
3.08
9.54
4.77



	Three Months Ended March 31,
	2020					2019
	Class A			Class B		Class A	Class B
	(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings (Loss) Per Share:
Net earnings (loss)	$	(2,062	)			40,198
Dividends - Class A shares	—					—
Dividends - Class B shares	—					—

Undistributed earnings (loss)	$	(2,062	)			40,198

Allocation of net earnings (loss):
Dividends	$	—		—		—	—
Allocation of undistributed earnings (loss)	(2,004		)	(58	)	39,061	1,137

Net earnings (loss)	$	(2,004	)	(58	)	39,061	1,137

Denominator:
Basic earnings (loss) per share - weighted-average shares	3,436			200		3,436	200
Effect of dilutive stock options	—			—		—	—

Diluted earnings (loss) per share - adjusted weighted-average shares for assumed conversions	3,436			200		3,436	200

Basic earnings (loss) per share	$	(0.58	)	(0.29	)	11.37	5.68

Diluted earnings (loss) per share	$	(0.58	)	(0.29	)	11.37	5.68

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Nine Months Ended September 30,
2017 2016
Class A Class B Class A Class B
(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings Per Share:
Net income $ 70,834
77,280

Dividends - Class A shares —
—

Dividends - Class B shares —
—

Undistributed income $ 70,834
77,280

Allocation of net income:

Dividends $ —
—
—
—
Allocation of undistributed income 68,831
2,003
75,095
2,185

Net income $ 68,831
2,003
75,095
2,185

Denominator:

Basic earnings per share - weighted-average shares 3,436
200
3,436
200
Effect of dilutive stock options —
—
—
—

Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,436
200
3,436
200

Basic Earnings Per Share $ 20.03
10.02
21.85
10.93

Diluted Earnings Per Share $ 20.03
10.02
21.85
10.93

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~


(5)	PENSION AND OTHER POSTRETIREMENT PLANS


(A)	Defined Benefit Pension Plans

National Western sponsors a qualified defined benefit pension plan covering employees enrolled prior to 2008. The plan provides benefits based on the participants' years of service and compensation. The ~~company~~Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). On October 19, 2007, National Western's Board of Directors approved an amendment to freeze the pension plan as of December 31, 2007. The freeze ceased future benefit accruals to all participants and closed the plan to any new participants. In addition, all participants became immediately 100% vested in their accrued benefits as of that date. As participants are no longer earning a credit for service, future qualified defined benefit plan expense is projected to be minimal. Fair values of plan assets and liabilities are measured as of the prior December 31 for each ~~respective~~ year. The following table summarizes the components of net periodic benefit cost.



	Three Months Ended
	March 31,
	2020			2019
	(In thousands)

Service cost	$	27		24
Interest cost	168			210
Expected return on plan assets	(315		)	(272	)
Amortization of net loss	145			165

Net periodic benefit cost	$	25		127

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(In thousands)

Service cost $ 27
26
81
79
Interest cost 240
250
718
750
Expected return on plan assets (306 ) (304 ) (920 ) (912 )
Amortization of prior service cost —
—
—
—
Amortization of net loss 159
193
477
579

Net periodic benefit cost $ 120
165
356
496

The service cost shown above for each period represents plan expenses expected to be paid out of plan assets. Under the clarified rules of the Pension Protection Act, plan expenses paid from plan assets are to be included in the plan's service cost component.

The ~~company's~~Company's minimum required contribution for the ~~2017~~2020 plan year is ~~$0.2~~$0.0 million. There was no$0.8 million in planned contributions remaining ~~contribution payable~~ for the ~~2016~~2019 plan year as of ~~September 30, 2017.~~March 31, 2020. As of ~~September 30, 2017,~~March 31, 2020, the ~~company~~Company had ~~contributed a total of $0.0~~made $0.1 million in contributions to the plan for the ~~2017~~2020 plan year.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).

National Western also sponsors ~~a nonqualified~~3 non-qualified defined benefit pension plans. The first plan ~~primarily for~~covers certain senior ~~officers. The plan~~officers and provides benefits based on the participants' years of service and compensation. The primary pension obligations and administrative responsibilities of the plan are maintained by a pension administration firm, which is a subsidiary of American National Insurance Company ("ANICO")., a related party. ANICO has guaranteed the payment of pension obligations under the plan. However, the company has a contingent liability with respect to the plan should these entities be unable to meet their obligations under the existing agreements. Also, the ~~company~~Company has a contingent liability with respect to the plan in the event that a plan participant continues employment with National Western beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, the ~~company~~Company would be responsible for any additional pension obligations resulting from these items. Amendments were made to the plan to allow an additional employee to participate and to change the benefit formula for the then Chairman of the ~~company.~~Company. As previously mentioned, these additional obligations are a liability to the ~~company.~~Company. Effective December 31, 2004, this plan was frozen with respect to the continued accrual of benefits of the then Chairman and the then President of the ~~company~~Company in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Effective July 1, 2005, National Western established a second non-qualified defined benefit plan for the benefit of the then Chairman of the ~~company.~~Company. This plan is intended to provide for post-2004 benefit accruals that mirror and supplement the pre-2005 benefit accruals under the previously discussed non-qualified plan, while complying with the requirements of the Act.

Effective November 1, 2005, National Western established a third non-qualified defined benefit plan for the benefit of the then President of the ~~company.~~Company. This plan is intended to provide for post-2004 benefit accruals that supplement the pre-2005 benefit accruals under the first non-qualified plan as previously discussed, while complying with the requirements of the Act.

The following table summarizes the components of net periodic benefit costs for the ~~nonqualified~~non-qualified defined benefit plans.



	Three Months Ended
	March 31,
	2020		2019
	(In thousands)

Service cost	$	302	125
Interest cost	338		256
Amortization of prior service cost	15		15
Amortization of net loss	1,445		348

Net periodic benefit cost	$	2,100	744

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(In thousands)

Service cost $ 204
109
612
327
Interest cost 347
265
1,041
794
Amortization of prior service cost 15
15
45
45
Amortization of net loss 818
501
2,455
1,503

Net periodic benefit cost $ 1,384
890
4,153
2,669

As the plans are not funded, there is no expected return on plan assets shown in the net periodic benefit cost table above. The ~~company~~Company expects to contribute $2.0 million to these plans in ~~2017~~2020. As of ~~September 30, 2017~~March 31, 2020, the ~~company~~Company has contributed $~~1.6~~0.4 million to the plans.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).

Ozark National and NIS have no defined benefit plans.


(B)	~~Defined Benefit~~ Postretirement ~~Healthcare~~Employment Plans Other Than Pension

National Western sponsors ~~two~~2 healthcare plans that were amended in 2004 to provide postretirement benefits to certain fully-vested individuals. The plans are unfunded. The following table summarizes the components of net periodic benefit costs.



	Three Months Ended
	March 31,
	2020		2019
	(In thousands)

Interest cost	$	41	49
Amortization of prior service cost	—		13
Amortization of net loss	40		61

Net periodic benefit cost	$	81	123

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(In thousands)

Interest cost $ 35
30
104
90
Amortization of prior service cost 25
26
77
78
Amortization of net loss 10
—
31
—

Net periodic benefit cost $ 70
56
212
168

~~The company expects to contribute~~ ~~minimal~~ ~~amounts to the plan in~~ ~~2017~~.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As the plans are not funded, there is no expected return on plan assets shown in the net periodic benefit cost table above. The Company expects to contribute minimal amounts to the plans in 2020. Ozark National and NIS do not offer postemployment benefits.

The components of net periodic benefit cost including service cost are reported in the line item “Other operating expenses” in the Condensed Consolidated Statements of Earnings (Loss).


(6)	SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, annuities, and ~~annuities.~~acquired businesses. These segments are organized based on product types, ~~and~~ geographic marketing ~~areas.~~ areas, and business groupings. Ozark National and NIS have been combined into the segment "Acquired Businesses" given its inter-related marketing and sales approach which consists of a coordinated sale of a non-participating whole life insurance product (Ozark National) and a mutual fund investment product (NIS). A fifth category "All Others" primarily includes investments and earnings of non-operating subsidiaries as well as other remaining investments and assets not otherwise supporting specific segment operations.

A summary of segment information as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019 for the Condensed Consolidated Balance Sheet items and for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016~~March 31, 2019 for the Condensed Consolidated ~~Statement~~Statements of Earnings (Loss) is provided below.

Condensed Consolidated Balance Sheet Items:


	September 30, 2017						March 31, 2020
	Domestic Life Insurance		International Life Insurance	Annuities	All Others	Totals	Domestic Life Insurance		International Life Insurance	Annuities	Acquired Businesses	All Others	Totals
				(In thousands)			(In thousands)

Deferred policy acquisition costs and sales inducements	$	95,894	254,150	598,234	—	948,278
Deferred policy acquisition costs, sales inducements, and value of business acquired							$	140,151	217,805	533,788	141,210	—	1,032,954
Total segment assets	1,071,664		1,238,990	9,306,527	309,197	11,926,378	1,369,973		1,105,816	7,912,799	972,601	355,373	11,716,562
Future policy benefits	909,407		904,097	8,178,265	—	9,991,769	1,196,180		840,215	7,220,704	711,064	—	9,968,163
Other policyholder liabilities	14,441		14,635	107,996	—	137,072	15,873		14,229	89,572	14,905	—	134,579


	December 31, 2016						December 31, 2019
	Domestic Life Insurance		International Life Insurance	Annuities	All Others	Totals	Domestic Life Insurance		International Life Insurance	Annuities	Acquired Businesses	All Others	Totals
				(In thousands)			(In thousands)

Deferred policy acquisition costs and sales inducements	$	90,485	243,106	648,714	—	982,305
Deferred policy acquisition costs, sales inducements, and value of business acquired							$	127,557	209,858	486,553	142,434	—	966,402
Total segment assets	971,990		1,232,648	9,193,980	298,481	11,697,099	1,399,818		1,153,105	8,198,730	978,243	362,900	12,092,796
Future policy benefits(1)	830,460		919,380	8,109,255	—	9,859,095	1,198,103		870,461	7,366,894	706,513	—	10,141,971
Other policyholder liabilities	13,998		10,528	118,865	—	143,391	18,016		14,903	80,002	14,686	—	127,607

(1) Revised to correct for an adjustment related to an understatement of reserve liabilities of $15.0 million. Refer to Note 1.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Condensed Consolidated ~~Statement~~Statements of ~~Earnings:~~Earnings (Loss):


	Three Months Ended September 30, 2017								Three Months Ended March 31, 2020
	Domestic Life Insurance		International Life Insurance		Annuities		All Others	Totals	Domestic Life Insurance			International Life Insurance		Annuities		Acquired Businesses	All Others		Totals
					(In thousands)				(In thousands)

Premiums and contract revenues	$	9,907	30,353		5,293		—	45,553	$	11,228		22,867		4,650		20,083	—		58,828
Net investment income	17,385		15,711		114,123		4,472	151,691
Net investment income (loss)									(19,383		)	(9,000	)	10,632		6,301	(2,028	)	(13,478	)
Other revenues	11		26		26		4,609	4,672	29			54		4		2,422	1,144		3,653

Total revenues	27,303		46,090		119,442		9,081	201,916	(8,126		)	13,921		15,286		28,806	(884	)	49,003

Life and other policy benefits	3,483		8,437		9,095		—	21,015	5,877			3,331		8,189		16,237	—		33,634
Amortization of deferred policy acquisition costs	2,517		(21,585	)	37,790		—	18,722
Amortization of deferred policy acquisition costs and value of business acquired									2,573			6,052		19,021		2,391	—		30,037
Universal life and annuity contract interest	14,119		9,112		84,568		—	107,799	(21,693		)	(10,837	)	4,504		—	—		(28,026	)
Other operating expenses	4,086		5,661		8,714		4,135	22,596	4,295			3,096		6,867		4,069	1,495		19,822
Federal income taxes (benefit)	1,061		15,473		(7,007	)	1,792	11,319	188			2,804		(5,319	)	1,222	(544	)	(1,649	)

Total expenses	25,266		17,098		133,160		5,927	181,451	(8,760		)	4,446		33,262		23,919	951		53,818

Segment earnings (loss)	$	2,037	28,992		(13,718	)	3,154	20,465	$	634		9,475		(17,976	)	4,887	(1,835	)	(4,815	)

Nine Months Ended September 30, 2017

Domestic
Life
Insurance

International
Life
Insurance
Annuities
All
Others
Totals
(In thousands)

Premiums and contract revenues $ 27,822
91,563
16,583
—
135,968
Net investment income 51,998
48,581
346,031
19,435
466,045
Other revenues 30
73
90
13,521
13,714

Total revenues 79,850
140,217
362,704
32,956
615,727

Life and other policy benefits 13,850
19,399
25,377
—
58,626
Amortization of deferred acquisition costs 8,300
(7,874 ) 85,566
—
85,992
Universal life and annuity contract interest 41,576
36,871
221,415
—
299,862
Other operating expenses 13,975
18,846
28,588
12,622
74,031
Federal income taxes (benefit) 740
25,125
605
7,001
33,471

Total expenses 78,441
92,367
361,551
19,623
551,982

Segment earnings (loss) $ 1,409
47,850
1,153
13,333
63,745

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Three Months Ended September 30, 2016							Three Months Ended March 31, 2019
	Domestic Life Insurance			International Life Insurance	Annuities	All Others	Totals	Domestic Life Insurance		International Life Insurance	Annuities	Acquired Businesses	All Others	Totals
					(In thousands)			(In thousands)

Premiums and contract revenues	$	8,507		31,066	5,391	—	44,964	$	10,804	26,063	4,868	13,801	—	55,536
Net investment income	12,294			12,763	97,384	4,540	126,981	23,499		14,017	103,154	3,976	6,685	151,331
Other revenues	7			10	139	4,320	4,476	44		21	8	1,441	4,899	6,413

Total revenues	20,808			43,839	102,914	8,860	176,421	34,347		40,101	108,030	19,218	11,584	213,280

Life and other policy benefits	5,338			5,038	7,054	—	17,430	3,922		2,162	11,430	10,675	—	28,189
Amortization of deferred acquisition costs	(4,331		)	7,296	21,430	—	24,395
Amortization of deferred acquisition costs and value of business acquired								3,410		7,294	19,712	1,748	—	32,164
Universal life and annuity contract interest	9,795			11,287	46,694	—	67,776	21,441		11,993	47,482	—	—	80,916
Other operating expenses	4,847			6,691	7,526	4,531	23,595	4,123		4,264	7,508	3,085	7,069	26,049
Federal income taxes (benefit)	1,667			3,591	6,549	1,209	13,016	324		3,208	4,883	747	259	9,421

Total expenses	17,316			33,903	89,253	5,740	146,212	33,220		28,921	91,015	16,255	7,328	176,739

Segment earnings (loss)	$	3,492		9,936	13,661	3,120	30,209	$	1,127	11,180	17,015	2,963	4,256	36,541

Nine Months Ended September 30, 2016

Domestic
Life
Insurance

International
Life
Insurance
Annuities
All
Others
Totals
(In thousands)

Premiums and contract revenues $ 24,814
95,291
17,407
—
137,512
Net investment income 28,011
30,203
261,579
15,939
335,732
Other revenues 37
50
145
13,818
14,050

Total revenues 52,862
125,544
279,131
29,757
487,294

Life and other policy benefits 13,629
14,789
20,153
—
48,571
Amortization of deferred acquisition costs 989
11,720
75,872
—
88,581
Universal life and annuity contract interest 20,855
19,643
139,094
—
179,592
Other operating expenses 11,745
17,867
23,044
13,650
66,306
Federal income taxes (benefit) 1,833
19,977
6,808
5,229
33,847

Total expenses 49,051
83,996
264,971
18,879
416,897

Segment earnings (loss) $ 3,811
41,548
14,160
10,878
70,397

Reconciliations of segment information to the Company's Condensed Consolidated Financial Statements are provided below.



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Premiums and Other Revenues:
Premiums and contract revenues	$	58,828		55,536
Net investment income (loss)	(13,478		)	151,331
Other revenues	3,653			6,413
Realized gains (losses) on investments	3,485			4,629

Total condensed consolidated premiums and other revenues	$	52,488		217,909

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~Reconciliations of segment information to the Company's Condensed Consolidated Financial Statements are provided below.~~



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Federal Income Taxes:
Total segment Federal income taxes	$	(1,649	)	9,421
Taxes on realized gains (losses) on investments	732			972

Total condensed consolidated Federal income taxes	$	(917	)	10,393

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Premiums and Other Revenues:

Premiums and contract revenues $ 45,553
44,964
135,968
137,512
Net investment income 151,691
126,981
466,045
335,732
Other revenues 4,672
4,476
13,714
14,050
Realized gains (losses) on investments 2,074
5,426
10,906
10,589

Total condensed consolidated premiums and other revenues $ 203,990
181,847
626,633
497,883



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Net Earnings (Loss):
Total segment earnings (loss)	$	(4,815	)	36,541
Realized gains (losses) on investments, net of taxes	2,753			3,657

Total condensed consolidated net earnings (loss)	$	(2,062	)	40,198

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Federal Income Taxes:

Total segment Federal income taxes $ 11,319
13,016
33,471
33,847
Taxes on realized gains (losses) on investments 726
1,899
3,817
3,706

Total condensed consolidated Federal income taxes $ 12,045
14,915
37,288
37,553



	March 31,		December 31,
	2020		2019
	(In thousands)

Assets:
Total segment assets	$	11,716,562	12,092,796
Other unallocated assets	567,860		460,651

Total condensed consolidated assets	$	12,284,422	$	12,553,447

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Net Earnings:

Total segment earnings $ 20,465
30,209
63,745
70,397
Realized gains (losses) on investments, net of taxes 1,348
3,527
7,089
6,883

Total condensed consolidated net earnings $ 21,813
33,736
70,834
77,280

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

September 30, December 31,
2017 2016
(In thousands)

Assets:

Total segment assets $ 11,926,378
11,697,099
Other unallocated assets 211,913
197,882

Total condensed consolidated assets $ 12,138,291
11,894,981


(7)	SHARE-BASED PAYMENTS

~~The Company had~~Effective June 20, 2008, the Company's shareholders approved a ~~stock and incentive plan ("1995 Plan"~~2008 Incentive Plan (“2008 Plan”) which provided for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and nonqualified stock options; (2) stock appreciation rights ("SARs"), in tandem with stock options or freestanding; (3) restricted stock or restricted stock units; and, (4) performance awards. The ~~1995 Plan began on April 21, 1995, and was amended on June 25, 2004 to extend the termination date to April 20, 2010. The~~ number of shares of Class A, $1.00 par value, common stock which were allowed to be issued under the 1995 Plan, or as to which ~~stock appreciation rights ("SARs")~~SARs or other awards were allowed to be granted, could not exceed 300,000. Effective June 20, 2008, the Company's shareholders approved a 2008 Incentive Plan (“2008 Plan”). The 2008 Plan is substantially similar to the 1995 Plan and authorized an additional number of Class A common stock shares eligible for issue not to exceed ~~300,000. These plans were~~This plan was assumed by NWLGI from National Western pursuant to the terms of the holding company reorganization in 2015. On June 15, 2016, stockholders of NWLGI approved an amended and restated 2008 Plan ("Incentive Plan"), which extended the ~~Incentive Plan, which is a stock and incentive plan essentially similar to~~term of the 2008 ~~Plan.~~Plan for ten years from the date of stockholder approval. The Incentive Plan includes additional provisions, most notably regarding the definition of performance objectives which could be used in the issuance of the fourth type of award noted above (performance awards).

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

All of the employees of the Company and its subsidiaries are eligible to participate in the current Incentive Plan. In addition, directors of the Company are eligible to receive the same types of awards as employees except that they are not eligible to receive incentive stock options. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. ~~All current~~At the end of 2018, all stock options ~~outstanding were~~ granted under the ~~1995~~2008 Plan ~~and 2008 Plan. Employee stock option and~~had been exercised, forfeited, or expired. SARs granted prior to 2016 vest 20% annually following three years of service following the grant date. Employee SARs granted 2016 forward vest 33.3% annually following one year of service from the date of the grant. Directors' ~~stock option and SAR~~SARs grants vest 20% annually following one year of service from the date of grant.

Effective during ~~March 2006,~~August 2008, the Company adopted and implemented a limited stock buy-back program with respect to the ~~1995~~2008 Plan which ~~provides~~provided stock option holders the additional alternative of selling shares acquired through the exercise of options directly back to the Company. Option holders ~~may~~could elect to sell such acquired shares back to the Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. The buy-back program did not alter the terms and conditions of the 1995 Plan; however, the program necessitated a change in accounting from the equity classification to the liability classification. In August 2008, the Company implemented another limited stock buy-back program, substantially similar to the 2006 program, for shares issued under the 2008 Plan. ~~These~~This plans ~~were~~was assumed as well by NWLGI from National Western pursuant to the terms of the holding company reorganization. There are currently no stock options issued and outstanding.

The Incentive Plan allows for certain other share or unit awards which are solely paid out in cash based on the value of the Company's shares, or changes therein, as well as the financial performance of the Company under pre-determined target performance metrics. Certain awards, such as restricted stock units ~~(RSUs)~~("RSUs") provide solely for cash settlement based upon the market price of the Company's Class A ~~commons~~common shares, often referred to as "phantom stock-based awards". in equity compensation plans. Unlike share-settled awards, which have a fixed grant-date fair value, the fair value of unsettled or unvested liability awards is remeasured at the end of each reporting period based on the change in fair value of a share. The liability and corresponding expense are adjusted accordingly until the award is settled. For employees, the vesting period for RSUs is 100% at the end of three years from the grant date. ~~The~~ RSUs granted prior to 2019 are payable in cash at the vesting date equal to the closing price of the Company's Class A common share on the three years anniversary date. RSUs granted in 2019 are payable in cash at the three years vesting date equal to the 20-day moving average closing price of the Company’s Class A common share at that time.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Other awards may involve performance share units ~~(PSUs)~~("PSUs") which are units granted at a specified dollar amount per unit, typically linked to the Company's Class A common share price, that are subsequently multiplied by an attained performance factor to derive the number of PSUs to be paid as cash compensation at the vesting date. PSUs also vest three years from the date of grant. For PSUs, the performance period begins the first day of the calendar year infor which the PSUs are granted and runs three calendar years. At that time, the three-year performance outcome will be measured against the pre-defined target amounts to determine the number of PSUs earned as compensation. PSUs granted prior to 2019 are paid at the closing price of the Company's Class A common share on the vesting date. PSUs granted in 2019 are payable at the 20-day moving average closing price of the Company’s Class A common share at the vesting date.

PSU awards covering the three year measurement period ended December 31, 2018 were paid out in the first quarter of 2019. The performance factor during the measurement period used to determine compensation payouts was 93.86% of the pre-defined metric target.

PSU awards covering the three year measurement period ended December 31, 2019 were paid out in the first quarter of 2020. The performance factor during the measurement period used to determine compensation payouts was 101.19% of the pre-defined metric target.

Directors of the Company are eligible to receive RSUs under the Incentive Plan. As shown in the table below, during the nine months ended September 30, 2017 and 2016, the Company granted RSUs to directors based upon the closing market price per Class A common share at the time of the grant. Unlike RSUs granted to officers, the RSUs granted to directors vest one year from the date of grant. ~~They~~RSUs granted prior to 2019 are payable in cash at the vesting date equal to the closing price of the Company's Class A common share at that time.

~~The following table shows all grants issued~~ RSUs granted in 2019 are payable in cash at the vesting date equal to ~~officers and directors for~~ the ~~three and nine months ended September 30, 2017 and 2016. These grants were made based upon~~20-day moving average closing ~~market~~ price ~~per~~of the Company’s Class A common share at that time.

No awards were granted to officers and directors during the ~~grant date.~~three months ended March 31, 2020 and 2019.



	~~Three Months Ended~~
	~~September 30, 2017~~		~~September 30, 2016~~
	~~Officer~~	~~Director~~	~~Officer~~	~~Director~~

~~SARs~~	—	—	—	—
~~RSUs~~	—	—	—	—
~~PSUs~~	—	—	—	—

Nine Months Ended
September 30, 2017 September 30, 2016
Officer Director Officer Director

SARs 11,715
—
14,643
—
RSUs 2,725
1,660
3,661
2,563
PSUs 4,526
—
5,727
—
The Company uses the current fair value method to measure compensation costs for awards granted under the share-based plans.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~The Company uses the current fair value method to measure compensation cost for awards granted under the share-based plans.~~ As of ~~September 30, 2017~~March 31, 2020 and ~~2016,~~December 31, 2019, the liability balance was ~~$16.6~~$3.1 million and ~~$6.4~~$11.2 million, respectively. A summary of ~~shares available for grant~~awards by type and related activity is detailed below.



		Options Outstanding
	Shares Available For Grant	Shares	Weighted- Average Exercise Price

Stock Options:
Balance at January 1, 2020	291,000	—	$	—
Exercised	—	—	$	—
Forfeited	—	—	$	—
Expired	—	—	$	—
Stock options granted	—	—	$	—

Balance at March 31, 2020	291,000	—	$	—

Options Outstanding

Shares
Available
For Grant
Shares
Weighted-
Average
Exercise
Price

Stock Options:
Balance at January 1, 2017 291,000
19,268
$ 240.47
Exercised —
(250 ) $ 255.13
Forfeited —
—
$ —
Expired —
—
$ —
Stock options granted —
—
$ —

Balance at September 30, 2017 291,000
19,018
$ 240.28



	Liability Awards
	SAR		RSU		PSU

Other Share/Unit Awards:
Balance at January 1, 2020	107,517		14,352		19,108
Exercised	(1,372	)	(2,306	)	(4,049	)
Forfeited	(872	)	—		—
Granted	—		—		—

Balance at March 31, 2020	105,273		12,046		15,059

Liability Awards
SAR RSU PSU

Balance at January 1, 2017 77,178
6,029
5,426
Exercised (1,862 ) (2,563 ) —
Forfeited (400 ) (238 ) —
Granted 11,715
4,385
4,526

Balance at September 30, 2017 86,631
7,613
9,952

~~Stock options,~~ SARs, RSUs, and ~~RSUs~~PSUs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants ~~prior to~~upon their termination from the ~~Company. Forfeited stock options, if any, are not shown as being added back to~~Company in accordance with the ~~"Shares Available For Grant" balance as they were awarded under~~expiration provisions of the ~~1995 Plan which was terminated during calendar year 2010.~~awards.

The total intrinsic value of ~~shared-based~~share-based compensation exercised was $~~1.0~~1.9 million and $~~0.1~~2.5 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, respectively. The total share-based compensation paid ~~during the period~~ was $~~1.0~~1.9 million and $~~0.1~~2.5 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, respectively. The total fair value of ~~stock options~~SARs, RSUs, and ~~SARs~~PSUs vested during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 was $~~0.6~~1.8 million and $~~0.3~~3.0 million, respectively. ~~For the nine months ended September 30, 2017 and~~ ~~2016, the total~~NaN cash amounts were received from the exercise of stock options under the Plans ~~was~~ ~~$0.0 million~~ ~~and~~ ~~$0.0 million, respectively.~~during the periods reported on.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes information about ~~stock options and~~ SARs outstanding at ~~September 30, 2017~~March 31, 2020. There were 0 options outstanding as of March 31, 2020.



	SARs Outstanding
	Number Outstanding		Weighted- Average Remaining Contractual Life	Number Exercisable

Exercise prices:
$132.56	19,118		1.7 years	19,118
$210.22	23,650		3.7 years	19,550
$216.48	11,149		5.9 years	11,149
$311.16	9,897		6.9 years	9,897
$310.55	203		7.1 years	135
$334.34	9,310		7.7 years	6,202
$303.77	11,566		8.7 years	3,848
$252.91	20,380		9.7 years	—

Totals	105,273			69,899

Aggregate intrinsic value (in thousands)	$	754		$	754

Options/SARs Outstanding

Number
Outstanding

Weighted-
Average
Remaining
Contractual Life

Number
Exercisable

Exercise prices:
255.13 (options) 13,018
0.5 years 13,018
208.05 (options) 6,000
0.6 years 6,000
114.64 (SARs) 11,900
1.3 years 11,900
132.56 (SARs) 21,968
4.0 years 13,962
210.22 (SARs) 28,050
6.1 years 6,850
216.48 (SARs) 12,998
8.4 years 3,962
311.16 (SARs) 11,512
9.4 years —
310.55 (SARs) 203
9.6 years —

Totals 105,649
55,692

Aggregate intrinsic value (in thousands) $ 15,670
$ 9,354

The aggregate intrinsic value in the table above is based on the closing Class A stock price of $~~349.00~~172.00 per share on ~~September 30, 2017~~March 31, 2020.

The stock options shown above with exercise prices of $255.13 and $208.05 have remaining contractual lives of less than one year each. The option holders for these respective grants have until the end of the contractual life, April 18, 2018 and June 20, 2018, respectively, to exercise these holdings or otherwise forfeit the option grants held.

In estimating the fair value of the ~~share-based awards~~SARs outstanding at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, the Company employed the Black-Scholes option pricing model with assumptions detailed below.



	March 31, 2020		December 31, 2019

Expected term	1.7 to 9.7 years		1.9 to 10.0 years
Expected volatility weighted-average	28.30	%	22.19	%
Expected dividend yield	0.21	%	0.12	%
Risk-free rate weighted-average	0.23	%	1.61	%

September 30,
2017 December 31,
2016

Expected term of options 0.5 to 9.6 years
1.3 to 9.1 years
Expected volatility weighted-average 23.52 % 23.83 %
Expected dividend yield 0.10 % 0.12 %
Risk-free rate weighted-average 1.60 % 1.03 %

The Company reviewed the contractual term relative to the ~~options~~SARs as well as perceived future behavior patterns of exercise. Volatility is based on the Company’s historical volatility over the expected term of the ~~option’s~~SARs by expected exercise date.

The pre-tax compensation cost/(benefit) recognized in the financial statements related to these plans was ~~$1.3~~$(6.3) million and ~~$5.6~~$(1.5) million for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~$1.7 million and $(1.1) million for the three and nine months ended September 30, 2016,~~2019, respectively. The related tax expense/(benefit) recognized was ~~$(0.5)~~$1.3 million and ~~$(2.0)~~$0.3 million for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~$(0.6)~~2019.

As of March 31, 2020, the total pre-tax compensation expense related to non-vested share-based awards not yet recognized was $3.5 million ~~and $0.4 million for~~. This amount is expected to be recognized over a weighted-average period of 1.5 years. The Company recognizes compensation cost over the ~~three and nine months ended September 30, 2016, respectively.~~graded vesting periods.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~As of~~ ~~September 30, 2017, the total compensation cost related to nonvested share based awards not yet recognized was~~ ~~$5.9 million. This amount is expected to be recognized over a weighted-average period of 1.3 years. The Company recognizes compensation cost over the graded vesting periods.~~


(8)	COMMITMENTS AND CONTINGENCIES

(A) Legal Proceedings

In the normal course of business, the Company is involved or may become involved in various legal actions in which claims for alleged economic and punitive damages have been or may be asserted, some for substantial amounts. In recent years, carriers offering life insurance and annuity products have faced litigation, including class action lawsuits, alleging improper product design, improper sales practices, and similar claims. As previously disclosed, the Company has been a defendant in prior years in such class action lawsuits. Given the uncertainty involved in these types of actions, the ability to make a reliable evaluation of the likelihood of an unfavorable outcome or an estimate of the amount of or range of potential loss is endemic to the particular circumstances and evolving developments of each individual matter on its own merits.

On October 26, 2011 the Brazilian Superintendence of Private Insurance (“SUSEP”) attempted to serve National Western with a subpoena regarding an administrative proceeding initiated by SUSEP in which it alleged that National Western was operating as an insurance company in Brazil without due authorization. National Western had been informed that SUSEP was attempting to impose a penal fine, based on currency exchange rates at that time, of approximately $6.0 billion on the company. SUSEP unsuccessfully attempted to serve National Western with notice regarding this matter. National Western does not transact business in Brazil and has no officers, employees, property, or assets in Brazil. National Western believes that SUSEP has no jurisdiction over the company, that SUSEP's attempts at service of process were invalid, and that any penal fine would be unenforceable. In addition, due to a new law recently enacted in Brazil the penal fine has been limited to 3 million reais (approximately $960,000). For the reasons described above, the Company does not believe that this matter meets the definition of a material pending legal proceeding as such term is defined in Item 103 of Regulation S-K but has included the foregoing description solely due to the purported amount of the fine sought at that time. Despite SUSEP's lack of jurisdiction over National Western and absence of National Western officers, employees, property, or assets in Brazil, SUSEP affirmed its imposition of a penal fine against National Western, but in the reduced amount of 3 million reais (approximately $960,000). In light of the substantial reduction in the proposed penal fine by SUSEP, during the fourth quarter of 2016 National Western paid the penal fine in the reduced amount under protest and thereby retained its rights to seek judicial review in Brazil of the merits of the SUSEP charges. In consideration of these developments, National Western ceased accepting new applications in the fourth quarter of 2015 from residents in Brazil.

~~National Western was the named defendant in the case of~~ ~~Damaris Maldonado Vinas, et al. vs. National Western Life Insurance~~, in which the plaintiffs, after National Western had paid the death benefits to the beneficiary (Francisco Iglesias-Alvarez) upon the annuitant’s (Carlos Iglesias-Alvarez) death, sought to annul two annuity policies issued by National Western at the behest of Carlos Iglesias-Alvarez and which named Francisco Iglesias-Alvarez as their beneficiary. On March 31, 2016, the United States District Court for the District of Puerto Rico (the “Court”) issued its Opinion and Order on the pending Motions for Summary Judgment submitted by the parties, and therein denied National Western’s motion and granted plaintiffs’ motion voiding the two annuities and requesting a refund of the premiums paid ($2.9 million). National Western vigorously defended the case and believes that the Court’s Opinion and Order is contrary to applicable law. As such, National Western filed a Motion for Reconsideration of Opinion and Order and Corresponding Judgment with the Court on April 27, 2016, which the Court denied on May 5, 2016. National Western filed a Notice of Appeal on June 10, 2016, filed its Appeal Brief on September 12, 2016, and oral arguments with the U.S. Court of Appeals for the First Circuit were held on March 9, 2017. On June 29, 2017, the Court of Appeals vacated the district court's judgment and remanded to the district court to determine whether it is nevertheless equitable for the case to proceed without Francisco Iglesias-Alvarez. Plaintiffs filed a Motion in Support of Determination in Equity and Good Conscience That Action Should Proceed Among Existing Parties Under Fed.R.Civ.P. 19(B) on September 14, 2017, and National Western filed its Opposition to Plaintiff’s Motion on October 27, 2017.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

On September 28, 2017, a purported shareholder derivative lawsuit was filed in the 122nd District Court of Galveston County, State of Texas entitled Robert L. Moody, Jr. derivatively on behalf of National Western Life Insurance Company and National Western Life Group, Inc. v. Ross Rankin Moody, et al., naming certain current and former directors and current officers as defendants. The complaint ~~alleges~~challenged the directors’ oversight of insurance sales to non-U.S. residents and alleged that the defendants breached their fiduciary duties in the conduct of their duties as board members by failing to act (i) on an informed basis and (ii) in good faith or with the honest belief that their actions were in the best interests of the Company. The complaint ~~seeks~~sought an undetermined amount of damages, attorneys’ fees and costs, and equitable relief, including the removal of the Company’s Chairman and Chief Executive Officer and other board members and/or officers of the Company. The Company believes that the claims in the complaint ~~are~~were baseless and without merit, will continue to vigorously defend this lawsuit, and ~~will seek~~was awarded reimbursement of ~~all~~ legal costs and expenses from ~~plaintiff.~~plaintiff as detailed below. The Company believes, based on information currently available, that the final outcome of this lawsuit will not have a material adverse effect on the Company’s business, results of operations, or consolidated financial position. The companies and directors filed their respective Pleas to the Jurisdiction ("Pleas") contesting the plaintiff's standing to even pursue this action, along with their Answers, on October 27, 2017. On December 14, 2017, plaintiff filed a Response to the Pleas and on December 21, 2017, the Court heard oral argument on the Pleas. Plaintiff then filed a First Amended Petition on January 11, 2018. The companies and directors filed a Supplement to the Pleas on January 30, 2018, to which plaintiff responded on February 1, 2018, and the companies and directors replied on February 9, 2018. On May 3, 2018, the Court issued a memorandum to all attorneys of record stating that the Court would grant the defendants' Pleas and asked the attorney for defendants to prepare and submit proposed orders/judgments granting the requested relief for consideration by the Court. The defendants filed such proposed order granting the Pleas on May 7, 2018. On May 16, 2018 the Court issued an Order granting the Pleas and dismissing Robert L. Moody, Jr.’s claims with prejudice, and plaintiff then filed a Motion to Transfer Venue (“MTTV”). Defendants filed an Application for Fees, seeking to recover defendants’ legal costs and expenses from plaintiff, and a Response to the MTTV on June 8, 2018. In response plaintiff filed a Motion to Vacate, a Response to the Application for Fees, and his own Request for Attorney’s Fees on July 5, 2018. Defendants filed a Response to the Motion to Vacate and to plaintiff’s Request for Attorney’s Fees on July 11, 2018, and the Court heard oral arguments on July 16, 2018. Plaintiff filed supplemental briefing in support of his July 5, 2018 filings on July 25, 2018, and defendants filed their response to plaintiff's supplemental briefing on July 27, 2018. On August 8, 2018 the Court issued an Order denying plaintiff's Motion to Vacate. Pursuant to the Court’s instructions, on October 5, 2018, defendants filed an Order Granting Application for Expenses. Defendants then filed a Motion for Entry of Final Judgment and a Request for Submission Date on Motion for Entry of Final Judgment on October 11, 2018, which the Court set as October 30, 2018. Plaintiff filed his Objection to Proposed Final Judgment and Objection to Proposed Order on Attorneys’ Fees on October 25, 2018, to which defendants filed a response on October 30, 2018. On November 11, 2018, the Court issued its Final Judgment: ordering Plaintiff to pay the companies $1,314,054 for reasonable and necessary fees and expenses; denying Plaintiff’s Motion to Transfer Venue, and; dismissing Plaintiff’s counterclaim. Plaintiff has appealed the Court’s Final Judgment and that appeal is pending before the First District Court of Appeals in Houston, TX.

In April of 2019, National Western defended a two-week jury trial in which it was alleged that it committed actionable Financial Elder Abuse in its issuance of a $100,000 equity indexed annuity to the Plaintiff in the case of Williams v Pantaleoni et al, Case No. 17CV03462, Butte County California Superior Court. The Court entered an Amended Judgment on the Jury Verdict on July 27, 2019 against National Western in the amount of $14,949 for economic damages and $2.9 million in non-economic and punitive damages. National Western vigorously disputes the verdicts and the amounts awarded, and in furtherance of such, filed a Motion for Judgment Notwithstanding Jury Verdict and a Motion for New Trial, both of which were rejected by the Court. On September 9, 2019, NWLIC filed its Notice of Appeal. On November 11, 2019, the judge awarded the Plaintiff attorney’s fees in the amount of $1.26 million. Both the Plaintiff and NWLIC have appealed this ruling.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Although there can be no assurances, at the present time, the Company does not anticipate that the ultimate liability arising from such other potential, pending, or threatened legal actions will have a material adverse effect on the financial condition or operating results of the Company.

Separately, ~~in 2015,~~ Brazilian authorities commenced an investigation into possible violations of Brazilian criminal law in connection with the issuance of National Western insurance policies to Brazilian residents, and in assistance of such investigation a Commissioner appointed by the U.S. District Court for the Western District of Texas issued a subpoena in March of 2015 upon ~~the Company~~NWLIC to provide information relating to such possible violations. No conclusion can be drawn at this time as to its outcome or how such outcome may impact the Company’s business, results of operations or financial condition. National Western ishas been cooperating with the relevant governmental authorities in regard to this matter.

(B) Financial Instruments

In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the Condensed Consolidated Balance Sheets.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.

The Company had ~~$14.9 million~~0 commitments to fund new loans and ~~$1.4 million in~~0 commitments to extend credit relating to existing loans at ~~September 30, 2017~~.March 31, 2020. The Company evaluates each customer's creditworthiness on a case-by-case basis.


(9)	INVESTMENTS


(A)	Investment Gains and Losses

The Company uses the specific identification method in computing realized gains and losses. The table below presents realized gains and losses, excluding impairment losses, for the periods indicated.



	Three Months Ended March 31,
	2020		2019
	(In thousands)

Available for sale debt securities:
Realized gains on disposal	$	761	1,183
Realized losses on disposal	—		(84	)
Held to maturity debt securities:
Realized gains on disposal	2,724		27
Realized losses on disposal	—		—
Real estate gains (losses)	—		3,503

Totals	$	3,485	4,629

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


~~(9)~~	~~INVESTMENTS~~


~~(A)~~	~~Investment Gains and Losses~~

~~The table below presents realized investment gains and losses, excluding impairment losses, for the periods indicated.~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Available for sale debt securities:
Realized gains on disposal $ 1,529
1,773
4,137
2,455
Realized losses on disposal —
(23 ) —
(29 )
Held to maturity debt securities:
Realized gains on disposal 555
3,278
4,059
4,764
Realized losses on disposal —
(3 ) (34 ) (109 )
Equity securities realized gains (losses) (10 ) 401
87
607
Real estate gains (losses) —
—
2,657
2,901

Totals $ 2,074
5,426
10,906
10,589

Disposals in the held to maturity category during the periods shown ~~primarily~~ represent calls initiated by the credit issuer of the debt security. It is the Company's policy to initiate disposals of debt securities in the held to maturity category only in instances in which the credit status of the issuer comes into question and the realization of all or a significant portion of the investment principal of the holding is deemed to be in jeopardy.

Net real estate gains for the three months ended March 31, 2019 primarily pertain to the Company's sale of its nursing home operations in Reno, Nevada and San Marcos, Texas as well as a property sold located in Austin, Texas. The sale of the Reno nursing home was completed effective February 1, 2019 and a gain of $5.7 million was realized on the sale of the land and building associated with the operation. The sale of the San Marcos nursing home was concluded effective May 1, 2019 and the Company recorded a loss of $(2.0) million associated with the sale of the land and building of this operation (an impairment loss on this property of $(2.2) million was recorded in the quarter ended March 31, 2019). The sale of the Company's prior home office completed effective June 7, 2019 realized a gain on the sale of $3.2 million.

For the three months ended March 31, 2020 and 2019 the percentage of gains on bonds due to the call of securities was 99.6% and 41.4%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities.


(B)	Debt Securities

The table below presents amortized costs and fair values of debt securities held to maturity at March 31, 2020.



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

U.S. agencies	$	89,906	3,270	—		93,176	(4	)
U.S. Treasury	3,787		217	—		4,004	—
States and political subdivisions	418,332		21,576	(174	)	439,734	(74	)
Foreign governments	1,139		123	—		1,262	—
Public utilities	891,636		22,159	(7,360	)	906,435	(1,173	)
Corporate	4,547,631		140,323	(65,070	)	4,622,884	(4,788	)
Commercial mortgage-backed	3,031		—	(12	)	3,019	—
Residential mortgage-backed	1,038,062		70,619	(49	)	1,108,632	—
Asset-backed	2,556		6	(21	)	2,541	—

Totals	$	6,996,080	258,293	(72,686	)	7,181,687	(6,039	)

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company uses the specific identification method in computing realized gains and losses. For the three months ended September 30, 2017 and 2016 the percentage of gains on bonds due to the call of securities was 100.0% and 95.0%, respectively. For the nine months ended September 30, 2017 and 2016 the percentage of gains on bonds due to the call of securities was 88.0% and 87.0%, respectively. This includes calls out of the Company's available for sale portfolio of debt securities.

The table below presents ~~net impairment losses recognized in earnings~~amortized costs and fair values of debt securities available for ~~the periods indicated.~~sale at March 31, 2020.



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

States and political subdivisions	$	89,407	6,477	(8	)	95,876	—
Foreign governments	9,986		152	—		10,138	—
Public utilities	64,401		2,363	(406	)	66,358	—
Corporate	2,941,700		65,845	(104,331	)	2,903,214	—
Commercial mortgage-backed	27,514		3	(1,183	)	26,334	—
Residential mortgage-backed	12,071		1,340	(192	)	13,219	—
Asset-backed	61,278		302	(2,459	)	59,121	—

Totals	$	3,206,357	76,482	(108,579	)	3,174,260	—

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
(In thousands)

Total other-than-temporary impairment gains (losses) on debt securities $ 26
27
69
80
Portion of loss (gain) recognized in comprehensive income (26 ) (27 ) (69 ) (80 )

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

Totals $ —
—
—
—

The table below presents ~~a roll forward~~amortized costs and fair values of ~~credit losses on~~debt securities ~~for which the Company also recorded non-credit other-than-temporary impairments in other comprehensive loss.~~held to maturity at December 31, 2019.



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

U.S. agencies	$	100,910	1,686	—		102,596
U.S. Treasury	3,782		140	—		3,922
States and political subdivisions	431,433		19,440	(84	)	450,789
Foreign governments	1,144		55	—		1,199
Public utilities	888,444		36,638	(83	)	924,999
Corporate	4,607,826		212,281	(718	)	4,819,389
Commercial mortgage-backed	3,032		52	—		3,084
Residential mortgage-backed	1,066,899		32,706	(716	)	1,098,889
Asset-backed	2,775		62	(1	)	2,836

Totals	$	7,106,245	303,060	(1,602	)	7,407,703

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017 Year Ended
December 31,
2016
(In thousands)

Beginning balance, cumulative credit losses related to other-than-temporary impairments $ 1,440
1,440
2,278
Reductions for securities sold during current period —
—
(838 )
Additions for credit losses not previously recognized in other-than-temporary impairments —
—
—

Ending balance, cumulative credit losses related to other-than-temporary impairments $ 1,440
1,440
1,440

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


~~(B)~~	~~Debt and Equity Securities~~

The table below presents amortized costs and fair values of ~~securities held to maturity at September 30, 2017.~~

Securities Held to Maturity

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
(In thousands)

Debt securities:
U.S. Treasury $ 1,336
205
—
1,541
States and political subdivisions 455,435
21,927
(723 ) 476,639
Public utilities 1,109,167
37,863
(489 ) 1,146,541
Corporate 4,397,029
146,802
(7,402 ) 4,536,429
Residential mortgage-backed 1,293,507
38,274
(3,922 ) 1,327,859
Home equity 7,377
1,305
—
8,682
Manufactured housing 1,144
87
—
1,231

Totals $ 7,264,995
246,463
(12,536 ) 7,498,922

~~The table below presents amortized costs and fair values of~~debt securities available for sale at ~~September 30, 2017~~.

Securities Available for Sale

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
(In thousands)

Debt securities:
States and political subdivisions $ 577
9
—
586
Foreign governments 9,962
451
—
10,413
Public utilities 103,908
4,864
—
108,772
Corporate 2,783,263
98,637
(8,125 ) 2,873,775
Residential mortgage-backed 21,790
1,693
(69 ) 23,414
Home equity 8,287
380
—
8,667
Manufactured housing —
—
—
—
2,927,787
106,034
(8,194 ) 3,025,627

Equity securities 14,807
5,371
(202 ) 19,976

Totals $ 2,942,594
111,405
(8,396 ) 3,045,603

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~The table below presents amortized costs and fair values of securities held to maturity at~~ December 31, ~~2016~~2019.



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

States and political subdivisions	$	98,037	4,495	(3	)	102,529
Foreign governments	9,983		203	—		10,186
Public utilities	67,895		3,476	—		71,371
Corporate	2,921,431		141,705	(2,479	)	3,060,657
Commercial mortgage-backed	28,871		1,071	—		29,942
Residential mortgage-backed	12,815		1,077	(117	)	13,775
Asset-backed	67,088		1,397	—		68,485

Totals	$	3,206,120	153,424	(2,599	)	3,356,945

Securities Held to Maturity

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
(In thousands)

Debt securities:
U.S. Treasury $ 1,333
235
—
1,568
States and political subdivisions 456,069
22,697
(2,841 ) 475,925
Public utilities 1,087,176
36,904
(3,133 ) 1,120,947
Corporate 4,237,029
116,720
(29,701 ) 4,324,048
Residential mortgage-backed 1,367,270
42,345
(6,468 ) 1,403,147
Home equity 8,826
1,462
—
10,288
Manufactured housing 1,556
132
—
1,688

Totals $ 7,159,259
220,495
(42,143 ) 7,337,611

~~The table below presents amortized costs and fair values of securities available for sale at~~ ~~December 31, 2016~~.

Securities Available for Sale

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
(In thousands)

Debt securities:
States and political subdivisions $ 580
—
(6 ) 574
Foreign governments 9,956
380
—
10,336
Public utilities 127,181
4,745
(232 ) 131,694
Corporate 2,802,852
80,414
(22,603 ) 2,860,663
Residential mortgage-backed 27,110
2,137
(91 ) 29,156
Home equity 9,341
286
—
9,627
Manufactured housing —
—
—
—
2,977,020
87,962
(22,932 ) 3,042,050

Equity securities 14,022
4,657
(366 ) 18,313

Totals $ 2,991,042
92,619
(23,298 ) 3,060,363

The Company does not consider securities to be other-than-temporarily impaired when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality and when recovery of all amounts due under the contractual terms of the security is anticipated. Based on the review and the Company's ability and intent not to sell these securities until maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2017. 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.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

~~During the three and nine months ended September 30, 2017, the Company recorded no other-than-temporary impairment on debt and equity securities.~~

Unrealized losses for debt securities held to maturity and debt securities available for sale ~~decreased during the first nine months of 2017~~increased at March 31, 2020 from comparable balances at December 31, 2019 primarily due to the ~~downward movement~~widening in ~~market~~ interest ~~rates~~rate spreads that occurred during ~~this~~the period ~~(which increases the market price~~as a result of COVID-19 effects on financial markets. Market values of debt ~~securities).~~securities generally decline as interest rate levels increase.

Debt securities balances at March 31, 2020 and 2019 include Ozark National holdings of $324.6 million and $265.2 million in held to maturity and $388.1 million and $392.5 million in available for sale. As part of the acquisition effective January 31, 2019 the Company employed purchase accounting procedures in accordance with GAAP which revalued the acquired investment portfolio to their fair values as of the date of the acquisition. These fair values became the book values for Ozark National from that point going forward. Accordingly, unrealized gains and losses for the Ozark National debt securities represent the changes subsequent to the purchase accounting book values established at the acquisition.

The following table shows the gross unrealized losses and fair values of the Company's held to maturity ~~investments~~debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at ~~September 30, 2017~~.

March 31, 2020.


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

Debt securities:
States and political subdivisions	$	39,659	(723	)	—	—		39,659	(723	)	$	3,884	(102	)	1,713	(72	)	5,597	(174	)
Public utilities	41,567		(489	)	—	—		41,567	(489	)	276,339		(7,360	)	—	—		276,339	(7,360	)
Corporate	456,605		(5,863	)	104,355	(1,539	)	560,960	(7,402	)	1,058,680		(64,115	)	16,617	(955	)	1,075,297	(65,070	)
Commercial mortgage-backed											3,019		(12	)	—	—		3,019	(12	)
Residential mortgage-backed	220,414		(3,556	)	9,036	(366	)	229,450	(3,922	)	1,229		(49	)	—	—		1,229	(49	)
Asset-backed											1,818		(21	)	—	—		1,818	(21	)

Total temporarily impaired securities	$	758,245	(10,631	)	113,391	(1,905	)	871,636	(12,536	)
Totals											$	1,344,969	(71,659	)	18,330	(1,027	)	1,363,299	(72,686	)

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table shows the gross unrealized losses and fair values of the Company's available for sale ~~investments~~debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at ~~September 30, 2017~~March 31, 2020.


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

Debt securities:
States and political subdivisions	$	—	—		—	—		—	—		$	1,024	(8	)	—	—		1,024	(8	)
Public utilities	—		—		—	—		—	—		28,536		(406	)	—	—		28,536	(406	)
Corporate	350,939		(6,120	)	57,034	(2,005	)	407,973	(8,125	)	987,347		(100,065	)	26,689	(4,266	)	1,014,036	(104,331	)
Commercial mortgage-backed											21,331		(1,183	)	—	—		21,331	(1,183	)
Residential mortgage-backed	1,371		(14	)	1,115	(55	)	2,486	(69	)	—		—		577	(192	)	577	(192	)
Asset-backed											41,288		(2,459	)	—	—		41,288	(2,459	)
	352,310		(6,134	)	58,149	(2,060	)	410,459	(8,194	)

Equity securities	940		(128	)	375	(74	)	1,315	(202	)

Total temporarily impaired securities	$	353,250	(6,262	)	58,524	(2,134	)	411,774	(8,396	)
Totals											$	1,079,526	(104,121	)	27,266	(4,458	)	1,106,792	(108,579	)

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~



	Debt 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)

States and political subdivisions	$	5,013	(33	)	1,712	(51	)	6,725	(84	)
Public utilities	2,345		(83	)	—	—		2,345	(83	)
Corporate	31,419		(337	)	17,191	(381	)	48,610	(718	)
Residential mortgage-backed	25,859		(63	)	43,498	(653	)	69,357	(716	)
Asset-backed	1,349		(1	)	—	—		1,349	(1	)

Totals	$	65,985	(517	)	62,401	(1,085	)	128,386	(1,602	)

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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:
States and political subdivisions $ 80,507
(2,841 ) —
—
80,507
(2,841 )
Public utilities 162,587
(3,133 ) —
—
162,587
(3,133 )
Corporate 1,063,194
(22,867 ) 179,113
(6,834 ) 1,242,307
(29,701 )
Residential mortgage-backed 274,045
(5,989 ) 8,943
(479 ) 282,988
(6,468 )

Total temporarily impaired securities $ 1,580,333
(34,830 ) 188,056
(7,313 ) 1,768,389
(42,143 )

The following table shows the gross unrealized losses and fair values of the Company's available for sale ~~investments~~debt securities by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, ~~2016~~2019.



	Debt 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)

States and political subdivisions	$	470	(3	)	—	—		470	(3	)
Public utilities	—		—		—	—		—	—
Corporate	40,080		(105	)	28,582	(2,374	)	68,662	(2,479	)
Residential mortgage-backed	—		—		710	(117	)	710	(117	)

Totals	$	40,550	(108	)	29,292	(2,491	)	69,842	(2,599	)

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:
States and political subdivisions $ 574
(6 ) —
—
574
(6 )
Public utilities 10,765
(232 ) —
—
10,765
(232 )
Corporate 680,988
(16,427 ) 106,969
(6,176 ) 787,957
(22,603 )
Residential mortgage-backed 1,292
(91 ) —
—
1,292
(91 )
693,619
(16,756 ) 106,969
(6,176 ) 800,588
(22,932 )

Equity securities 4,154
(305 ) 422
(61 ) 4,576
(366 )

Total temporarily impaired securities $ 697,773
(17,061 ) 107,391
(6,237 ) 805,164
(23,298 )

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Debt securities. The gross unrealized losses for debt securities are made up of ~~168~~325 individual issues, or ~~12.7%~~22.8% of the total debt securities held by the Company at ~~September 30, 2017.~~March 31, 2020. The market value of these bonds as a percent of amortized cost approximates ~~98.4%~~93.2%. Of the ~~168~~325 securities, ~~28,~~8, or ~~16.7%~~2.5%, fall in the 12 months or greater aging category; and ~~163~~295 were rated investment grade at ~~September 30, 2017.~~March 31, 2020.

~~Equity securities.~~ ~~The gross unrealized losses for equity securities are made up of 26 individual issues at September 30, 2017. These holdings are reviewed quarterly for impairment.~~

The amortized cost and fair value of investments in debt securities at ~~September 30, 2017,~~March 31, 2020, 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	$	152,316	151,449	652,617		659,061
Due after 1 year through 5 years	1,334,782		1,324,948	2,942,362		2,969,035
Due after 5 years through 10 years	1,340,411		1,312,864	1,710,000		1,757,710
Due after 10 years	277,985		286,325	647,452		681,689
	3,105,494		3,075,586	5,952,431		6,067,495

Mortgage and asset-backed securities	100,863		98,674	1,043,649		1,114,192

Totals before allowance for credit losses	3,206,357		3,174,260	6,996,080		7,181,687

Allowance for credit losses	—		—	(6,039	)	—

Totals	$	3,206,357	3,174,260	6,990,041		7,181,687

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 $ 107,418
109,701
327,702
334,140
Due after 1 year through 5 years 1,134,227
1,193,059
2,165,828
2,270,603
Due after 5 years through 10 years 1,604,862
1,638,814
3,103,155
3,174,126
Due after 10 years 51,203
51,972
366,282
382,281
2,897,710
2,993,546
5,962,967
6,161,150

Mortgage and asset-backed securities 30,077
32,081
1,302,028
1,337,772

Total $ 2,927,787
3,025,627
7,264,995
7,498,922

As disclosed in Note (2) New Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements, the Company adopted new accounting guidance as of January 1, 2020 for credit loss recognition of certain financial assets, including debt securities classified in the held to maturity category. The Company employs a cohort cumulative loss rate method in estimating current expected credit losses with respect to its held to maturity debt securities. This method applies publicly available industry wide statistics of default incidence by defined segmentations of debt security investments combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term.The Company utilizes Moody's loss rates by industry type and credit ratings and applies them to each major bond category. These bond categories are further segmented by credit ratings and by maturities of two years and less and more than two years. The following table presents the allowance for credit losses for the quarter ended March 31, 2020.



	Debt Securities Held to Maturity		Debt Securities Available for Sale
	(In thousands)

Balance, beginning of period	$	—	—
Provision January 1, 2020 for adoption of new accounting guidance	3,334		—
Provision during the period	2,705		—
Releases	—		—

Balance, end of period	$	6,039	—

Provisions to and releases from the allowance for credit losses are recorded in net investment income in the Condensed Consolidated Statements of Earnings (Loss). Previous accounting guidance required the Company to review its portfolio for potential other-than-temporary impairments which would require that affected securities be written down to an adjusted cost basis with the amount of the writedown recorded as part of net realized gains and losses in the Condensed Consolidated Statements of Earnings (Loss).

The Company determines current expected credit losses for available-for-sale debt securities in accordance with FASB ASC Subtopic 326-30 when fair value is less than amortized cost, interest payments are missed and the security is experiencing credit issues. At March 31, 2020, the Company performed additional analyses on certain available-for-sale securities whose market values were negatively impacted by the change in the economic environment precipitated by the COVID-19 pandemic crisis. Based on its review, the Company determined none of these investments required an allowance for credit loss at March 31, 2020. Under the previous guidance, debt securities were considered to be other-than-temporarily impaired when a decline in market value was attributable to factors such as market volatility, liquidity, spread widening and credit quality in which it was anticipated that a recovery of all amounts due under the contractual terms of the security would occur and the Company had the intent and ability to hold the security until recovery or maturity. There were 0 other-than-temporary impairments recorded during the three months ended March 31, 2019. The Company's operating procedures include monitoring the investment portfolio on an ongoing basis for any changes in issuer facts and circumstances that might lead to future need for a credit loss allowance.

In the table below, held to maturity securities and their corresponding allowance for credit losses are represented according to credit ratings by nationally recognized statistical rating organizations.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Debt Securities Held to Maturity
	Amortized Cost		Allowance for Credit Losses		Carrying Value
	(In thousands)

AAA	$	97,878	—		97,878
AA	1,853,169		(57	)	1,853,112
A	2,213,874		(1,201	)	2,212,673
BBB	2,758,085		(4,468	)	2,753,617
BB and other below investment	73,074		(313	)	72,761

Bonds Total	$	6,996,080	(6,039	)	6,990,041


(C)	Transfer of Securities

During the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 the Company made no transfers from the held to maturity category to securities available for sale.

(D) 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. ~~Mortgage, equity,~~The Company's mortgage, participation and mezzanine loans on real estate are ~~considered~~the only financing receivables ~~reported by~~included in the ~~Company.~~Condensed Consolidated Balance Sheets.

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 proved 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.

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 Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss). 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 had no mortgage loans past due 90 days or more at ~~September 30, 2017~~March 31, 2020 or ~~2016~~2019 and as a result all interest income was recognized at ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019. At March 31, 2020, no loan terms had been modified or restructured on mortgage loans due to the economic climate changes precipitated by the COVID-19 pandemic crisis.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table represents the mortgage loan portfolio by loan-to-value ratio.


	September 30, 2017					December 31, 2016					March 31, 2020					December 31, 2019
	Amount			%		Amount			%		Amount			%		Amount			%
	(In thousands)					(In thousands)					(In thousands)					(In thousands)

Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%	$	80,202		42.4		$	54,783		31.3		$	57,157		20.6		$	52,778		19.3
50% to 60%	27,630			14.6		12,946			7.4		45,896			16.5		56,929			20.8
60% to 70%	64,253			33.9		76,959			43.9		127,832			46.0		117,377			43.0
70% to 80%	4,657			2.5		6,192			3.5		47,083			16.9		46,013			16.9
80% to 90%	6,999			3.7		18,688			10.7		—			—		—			—
Greater than 90%	5,532			2.9		5,616			3.2		—			—		—			—
Gross balance	189,273			100.0		175,184			100.0		277,968			100.0		273,097			100.0

Allowance for possible losses	(650		)	(0.3	)	(650		)	(0.4	)
Allowance for credit losses											(1,885		)	(0.7	)	(675		)	(0.2	)

Totals	$	188,623		99.7		$	174,534		99.6		$	276,083		99.3		$	272,422		99.8

(1) Loan-to-Value Ratio is determined 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.

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”.~~list.” Among the criteria that may indicate a potential problem include: 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~~Prior to January 1, 2020, mortgage loans ~~are~~were considered impaired when, based on current information and events, it iswas probable that the Company ~~will~~would be unable to collect all amounts due according to the contractual terms of the loan agreement. When it iswas determined that a loan iswas impaired, a loss iswas recognized for the difference between the carrying amount of the mortgage loan and the estimated value reduced by the cost to sell. Estimated value iswas 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~~were reported in net realized investment gains (losses) in the Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss). The Company held a valuation allowance of $0.7 million at December 31, 2019.

Effective January 1, 2020, the Company implemented FASB ASU 2016-13, Financial Instruments-Credit Losses, which revises the credit loss recognition criteria for certain financial assets measured at amortized cost. The ~~following table represents~~new guidance replaces the existing incurred loss recognition model with an expected loss recognition model (“CECL”). The objective of the CECL model is for the reporting entity to recognize its estimate of current expected credit losses for affected financial assets in a valuation allowance deducted from the amortized cost basis of the related financial assets that results in presenting the net carrying value of the financial assets at the amount expected to be collected. For mortgage loan ~~allowance.~~investments the Company is using the Weighted Average Remaining Maturity ("WARM") method, which uses an average annual charge-off rate applied to each mortgage loan risk category. Under this new accounting guidance, at January 1, 2020 a balance of $1.2 million was recorded which incorporated the previous year-end balance under the prior accounting method. The adjustment resulted in a charge to retained earnings as a change in accounting, net of tax, of $0.4 million. Subsequent changes in the allowance for current expected credit losses are reported in net investment income in the Condensed Consolidated Statements of Earnings (Loss).

September 30, 2017 December 31, 2016
(In thousands)

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

Balance, end of period $ 650
650

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table represents the mortgage loan allowance for credit losses.



	March 31, 2020		December 31, 2019
	(In thousands)

Balance, beginning of the period	$	675	675
Provision January 1, 2020 for adoption of new accounting guidance	504		—
Provision during the period	706		—
Releases	—		—

Total ending allowance for credit losses	$	1,885	675

The Company's direct investments in real estate are not a significant portion of its total investment portfolio and totaled approximately ~~$31.3~~$34.4 million and ~~$31.8~~$34.6 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively. The Company recognized operating income on real estate properties of approximately ~~$2.1~~$0.7 million and ~~$2.0~~$0.6 million for the first ~~nine~~three months of ~~2017~~2020 and ~~2016,~~2019, respectively.


(10)	FAIR VALUES OF FINANCIAL INSTRUMENTS

For financial instruments, the FASB provides guidance which defines fair value, establishes a framework for measuring fair value under GAAP, and requires additional disclosures about fair value measurements. In compliance with this GAAP guidance, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities ~~(Level 1)~~("Level 1") and the lowest priority to unobservable inputs ~~(Level 3)~~("Level 3"). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Condensed Consolidated Balance Sheets are categorized as follows:

Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. These generally provide the most reliable evidence and are used to measure fair value whenever available. The Company's Level 1 assets are equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.

Level 2: Fair value is based upon significant inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable for substantially the full term of the asset or liability through corroboration with observable market data as of the reporting date. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, model-derived valuations whose inputs are observable or whose significant value drivers are observable and other observable inputs. The Company’s Level 2 assets include fixed maturity debt securities (corporate and private bonds, government or agency securities, asset-backed and mortgage-backed securities)~~, and preferred stock.~~. Valuations are generally obtained from third party pricing services for identical or comparable assets or determined through use of valuation methodologies using observable market inputs.

Level 3: Fair value is based on significant unobservable inputs which reflect the entity’s or third party pricing service’s assumptions about the assumptions market participants would use in pricing an asset or liability. The Company’s Level 3 assets are over-the-counter derivative ~~contracts and the~~contracts. The Company’s Level 3 liabilities consist of share-based compensation obligations, ~~and~~ certain product-related embedded ~~derivatives.~~derivatives, and contingent consideration in the acquisition of businesses. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables set forth the Company’s assets and liabilities that are measured at fair value on a recurring basis as of the date indicated:



	March 31, 2020
	Total		Level 1	Level 2	Level 3
	(In thousands)

Debt securities, available for sale	$	3,174,260	—	3,174,260	—
Equity securities	15,984		15,984	—	—
Derivatives, index options	24,335		—	—	24,335
Other invested assets	2		2	—	—

Total assets	$	3,214,581	15,986	3,174,260	24,335

Policyholder account balances (a)	$	61,625	—	—	61,625
Other liabilities (b)	7,255		—	—	7,255

Total liabilities	$	68,880	—	—	68,880

September 30, 2017
Total Level 1 Level 2 Level 3
(In thousands)

Debt securities, available for sale $ 3,025,627
—
3,025,627
—
Equity securities, available for sale 19,976
19,976
—
—
Derivatives, index options 163,536
—
—
163,536

Total assets $ 3,209,139
19,976
3,025,627
163,536

Policyholder account balances (a) $ 175,221
—
—
175,221
Other liabilities (b) 16,641
—
—
16,641

Total liabilities $ 191,862
—
—
191,862

During the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020, the Company ~~had~~made no transfers into or out of Levels 1, 2 or 3.


	December 31, 2016					December 31, 2019
	Total		Level 1	Level 2	Level 3	Total		Level 1	Level 2	Level 3
	(In thousands)					(In thousands)

Debt securities, available for sale	$	3,042,050	—	3,042,050	—	$	3,356,945	—	3,356,945	—
Equity securities, available for sale	18,313		18,313	—	—
Equity securities						23,594		23,594	—	—
Derivatives, index options	120,644		—	—	120,644	157,588		—	—	157,588
Other invested assets						2		2	—	—

Total assets	$	3,181,007	18,313	3,042,050	120,644	$	3,538,129	23,596	3,356,945	157,588

Policyholder account balances (a)	$	122,666	—	—	122,666	$	155,902	—	—	155,902
Other liabilities (b)	12,027		—	—	12,027	15,301		—	—	15,301

Total liabilities	$	134,693	—	—	134,693	$	171,203	—	—	171,203

(a) Represents the fair value of certain product-related embedded derivatives that were recorded at fair value.

(b) Represents the liability for share-based ~~compensation.~~compensation and contingent consideration for businesses acquired.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables present, by pricing source and fair value hierarchy level, the Company’s assets that are measured at fair value on a recurring basis:


	September 30, 2017									March 31, 2020
	Total			Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3
	(In thousands)									(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,025,627		—		3,025,627		—		$	3,174,260		—		3,174,260		—
Priced internally	—			—		—		—		—			—		—		—
Subtotal	3,025,627			—		3,025,627		—		3,174,260			—		3,174,260		—

Equity securities, available for sale:
Equity securities:
Priced by third-party vendors	19,976			19,976		—		—		15,984			15,984		—		—
Priced internally	—			—		—		—		—			—		—		—
Subtotal	19,976			19,976		—		—		15,984			15,984		—		—

Derivatives, index options:
Priced by third-party vendors	163,536			—		—		163,536		24,335			—		—		24,335
Priced internally	—			—		—		—		—			—		—		—
Subtotal	163,536			—		—		163,536		24,335			—		—		24,335

Other invested assets:
Priced by third-party vendors										2			2		—		—
Priced internally										—			—		—		—
Subtotal										2			2		—		—

Total	$	3,209,139		19,976		3,025,627		163,536		$	3,214,581		15,986		3,174,260		24,335

Percent of total	100.0		%	0.6	%	94.3	%	5.1	%	100.0		%	0.5	%	98.7	%	0.8	%

December 31, 2016
Total Level 1 Level 2 Level 3
(In thousands)

Debt securities, available for sale:
Priced by third-party vendors $ 3,042,050
—
3,042,050
—
Priced internally —
—
—
—
Subtotal 3,042,050
—
3,042,050
—

Equity securities, available for sale:

Priced by third-party vendors 18,313
18,313
—
—
Priced internally —
—
—
—
Subtotal 18,313
18,313
—
—

Derivatives, index options:

Priced by third-party vendors 120,644
—
—
120,644
Priced internally —
—
—
—
Subtotal 120,644
—
—
120,644

Total $ 3,181,007
18,313
3,042,050
120,644

Percent of total 100.0 % 0.6 % 95.6 % 3.8 %

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	December 31, 2019
	Total			Level 1		Level 2		Level 3
	(In thousands)

Debt securities, available for sale:
Priced by third-party vendors	$	3,356,945		—		3,356,945		—
Priced internally	—			—		—		—
Subtotal	3,356,945			—		3,356,945		—

Equity securities, available for sale:
Priced by third-party vendors	23,594			23,594		—		—
Priced internally	—			—		—		—
Subtotal	23,594			23,594		—		—

Derivatives, index options:
Priced by third-party vendors	157,588			—		—		157,588
Priced internally	—			—		—		—
Subtotal	157,588			—		—		157,588

Other invested assets:
Priced by third-party vendors	2			2		—		—
Priced internally	—			—		—		—
Subtotal	2			2		—		—

Total	$	3,538,129		23,596		3,356,945		157,588

Percent of total	100.0		%	0.7	%	94.8	%	4.5	%

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following tables provide additional information about fair value measurements for which significant unobservable (Level 3) inputs were utilized to determine fair value.


	For the Three Months Ended September 30, 2017									Three Months Ended March 31, 2020
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities		Debt Securities, Available for Sale		Equity Securities	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)									(In thousands)

Balance at July 1, 2017	$	—	—	149,341		149,341		173,356
Balance at January 1, 2020										$	—	—	157,588		157,588		171,203
Total realized and unrealized gains (losses):
Included in net income	—		—	45,130		45,130		48,927		—		—	(106,629	)	(106,629	)	(73,848	)
Purchases, sales, issuances and settlements, net:
Purchases	—		—	19,847		19,847		19,847		—		—	22,403		22,403		22,403
Sales	—		—	—		—		—		—		—	—		—		—
Issuances	—		—	—		—		531		—		—	—		—		—
Settlements	—		—	(50,782	)	(50,782	)	(50,799	)	—		—	(49,027	)	(49,027	)	(50,878	)
Transfers into (out of) Level 3	—		—	—		—		—		—		—	—		—		—

Balance at end of period	$	—	—	163,536		163,536		191,862		$	—	—	24,335		24,335		68,880

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	16,436		16,436		—
Net investment income (loss)										$	—	—	(105,997	)	(105,997	)	—
Benefits and expenses	—		—	—		—		17,195		—		—	—		—		(112,192	)

Total	$	—	—	16,436		16,436		17,195		$	—	—	(105,997	)	(105,997	)	(112,192	)

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	For the Three Months ended September 30, 2016									Three Months Ended March 31, 2019
	Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities		Debt Securities, Available for Sale		Equity Securities, Available for Sale	Derivatives, Index Options		Total Assets		Other Liabilities
	(In thousands)									(In thousands)

Balance at July 1, 2016	$	—	—	63,319		63,319		81,056
Balance at January 1, 2019										$	—	—	14,684		14,684		56,704
Total realized and unrealized gains (losses):
Included in net income	—		—	19,113		19,113		13,492		—		—	42,003		42,003		25,529
Purchases, sales, issuances and settlements, net:
Purchases	—		—	18,848		18,848		18,848		—		—	17,592		17,592		17,592
Sales	—		—	—		—		—		—		—	—		—		—
Issuances	—		—	—		—		388		—		—	—		—		3,700
Settlements	—		—	(11,183	)	(11,183	)	(11,255	)	—		—	(3,278	)	(3,278	)	(5,800	)
Transfers into (out of) Level 3	—		—	—		—		—		—		—	—		—		—

Balance at end of period	$	—	—	90,097		90,097		102,529		$	—	—	71,001		71,001		97,725

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income	$	—	—	23,851		23,851		—		$	—	—	40,464		40,464		—
Benefits and expenses	—		—	—		—		25,150		—		—	—		—		38,961

Total	$	—	—	23,851		23,851		25,150		$	—	—	40,464		40,464		38,961

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Nine Months Ended September 30, 2017

Debt
Securities,
Available
for Sale

Equity
Securities,
Available
for Sale
Derivatives, Index Options
Total
Assets

Other
Liabilities
(In thousands)

Beginning balance, January 1, 2017 $ —
—
120,644
120,644
134,693
Total realized and unrealized gains (losses):

Included in net income —
—
138,552
138,552
152,569
Purchases, sales, issuances and settlements, net:
Purchases —
—
55,226
55,226
55,226
Sales —
—
—
—

Issuances —
—
—
—
1,275
Settlements —
—
(150,886 ) (150,886 ) (151,901 )
Transfers into (out of) Level 3 —
—
—
—
—

Balance at end of period $ —
—
163,536
163,536
191,862

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income $ —
—
83,540
83,540
—
Other operating expenses —
—
—
—
87,894

Total $ —
—
83,540
83,540
87,894

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

Nine Months Ended September 30, 2016

Debt
Securities,
Available
for Sale

Equity
Securities,
Available
for Sale
Derivatives, Index Options
Total
Assets

Other
Liabilities
(In thousands)

Beginning balance, January 1, 2016 $ —
—
38,409
38,409
66,028
Total realized and unrealized gains (losses):

Included in net income —
—
8,307
8,307
(7,691 )
Purchases, sales, issuances and settlements, net:
Purchases —
—
56,387
56,387
56,387
Sales —
—
—
—
—
Issuances —
—
—
—
921
Settlements —
—
(13,006 ) (13,006 ) (13,116 )
Transfers into (out of) Level 3 —
—
—
—
—

Balance at end of period $ —
—
90,097
90,097
102,529

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period:
Net investment income $ —
—
15,628
15,628
—
Other operating expenses —
—
—
—
13,582

Total $ —
—
15,628
15,628
13,582

The following table presents the valuation method for financial assets and liabilities categorized as level 3, as well as the unobservable inputs used in the valuation of those financial instruments:

September 30, 2017

March 31, 2020

Fair Value

Valuation Technique

Unobservable Input

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(In thousands)

Assets:

Derivatives, index options

163,536

Broker prices

Implied volatility

24,335

Broker prices

Implied volatility

12.96% - 53.69% (16.06%)

Inputs from broker proprietary models

Total assets

163,536

24,335

Liabilities:

Policyholder account balances

175,221

Deterministic cash flow model

Projected option cost

61,625

Deterministic cash flow model

Projected option cost

0.0% - 15.95% (1.32%)

Other liabilities

16,641

Black-Scholes model

Expected term

Share based compensation

3,081

Black-Scholes model

Expected term

1.7 to 9.7 years

Forfeiture assumptions

Expected volatility

28.30%

Contingent consideration on businesses acquired

4,174

Probabilistic Method

Discount rate

10%

Projected renewal premium

$57.2-82.4 million ($71.9)

Total liabilities

191,862

68,880



	December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(In thousands)

Assets:
Derivatives, index options	$	157,588	Broker prices	Implied volatility	13.10% - 19.90% (15.25%)

Total assets	$	157,588

Liabilities:
Policyholder account balances	$	155,902	Deterministic cash flow model	Projected option cost	0.0% - 17.55% (3.14%)
Share based compensation	11,225		Black-Scholes model	Expected term	1.9 to 10 years
				Expected volatility	22.19%
Contingent consideration on businesses acquired	4,076		Probabilistic Method	Discount rate	10.0%
				Projected renewal premium	$57.2 - $82.4 million ($71.9)
Total liabilities	$	171,203

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2016
Fair Value Valuation Technique Unobservable Input
(In thousands)

Derivatives, index options $ 120,644
Broker prices Implied volatility
Inputs from broker proprietary models

Total assets $ 120,644

Policyholder account balances $ 122,666
Deterministic cash flow model Projected option cost
Other liabilities 12,027
Black-Scholes model Expected term
Forfeiture assumptions

Total liabilities $ 134,693

Realized gains (losses) on debt ~~and equity~~ securities are reported in the Condensed Consolidated Statements of Earnings (Loss) as net investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on available for sale debt ~~and equity~~ securities are reported as other comprehensive income (loss) within the stockholders' equity section of the Condensed Consolidated Balance Sheet.

The fair value hierarchy classifications are reviewed each reporting period. Reclassification of certain financial assets and liabilities may result based on changes in the observability of valuation attributes. Reclassifications are reported as transfers into and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.

The carrying amounts and fair values of the Company's financial instruments are as follows:



	March 31, 2020
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3
	(In thousands)
ASSETS
Debt securities held to maturity	$	6,990,041	7,181,687	—	7,181,687
Debt securities available for sale	3,174,260		3,174,260	—	3,174,260	—

Cash and cash equivalents	352,215		352,215	352,215	—	—
Mortgage loans	276,083		278,015	—	—	278,015
Real estate	34,443		48,547			48,547
Policy loans	78,036		135,870	—	—	135,870
Other loans	13,461		13,643	—	—	13,643
Derivatives, index options	24,335		24,335	—	—	24,335
Equity securities	15,984		15,984	15,984	—	—
Life interest in Libbie Shearn Moody Trust	9,230		12,775	—	—	12,775
Other investments	4,515		22,582	2	—	22,580

LIABILITIES
Deferred annuity contracts	$	6,866,418	5,760,527	—	—	5,760,527
Immediate annuity and supplemental contracts	399,448		449,249	—	—	449,249
Contingent consideration on businesses acquired	4,174		4,174	—	—	4,174

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

~~The carrying amounts and fair values of the Company's financial instruments are as follows:~~



	December 31, 2019
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3
	(In thousands)
ASSETS
Debt securities held to maturity	$	7,106,245	7,407,703	—	7,407,703	—
Debt securities available for sale	3,356,945		3,356,945	—	3,356,945	—

Cash and cash equivalents	253,524		253,524	253,524	—	—
Mortgage loans	272,422		270,931	—	—	270,931
Real estate	34,588		57,204	—	—	57,204
Policy loans	80,008		123,650	—	—	123,650
Other loans	13,547		13,698	—	—	13,698
Derivatives, index options	157,588		157,588	—	—	157,588
Equity securities	23,594		23,594	23,594	—	—
Life interest in Libbie Shearn Moody Trust	9,230		12,775	—	—	12,775
Other investments	197		16,182	2	—	16,180

LIABILITIES
Deferred annuity contracts (1)	$	7,014,833	5,931,352	—	—	5,931,352
Immediate annuity and supplemental contracts	400,465		422,931	—	—	422,931
Contingent consideration on businesses acquired	4,076		4,076	—	—	4,076

September 30, 2017
Fair Value Hierarchy Level

Carrying
Values

Fair
Values
Level 1 Level 2 Level 3
(In thousands)
ASSETS
Investments in debt and equity securities:
Securities held to maturity $ 7,264,995
7,498,922
—
7,498,922
—
Securities available for sale 3,045,603
3,045,603
19,976
3,025,627
—

Cash and cash equivalents 170,560
170,560
170,560
—
—
Mortgage loans 188,623
189,739
—
—
189,739
Policy loans 57,466
102,536
—
—
102,536
Other loans 9,786
10,091
—
—
10,091
Derivatives, index options 163,536
163,536
—
—
163,536
Short-term investments —
—
—
—
—
Life interest in Trust 7,550
12,775
—
—
12,775

LIABILITIES
Deferred annuity contracts $ 7,806,058
7,418,285
—
—
7,418,285
Immediate annuity and supplemental contracts 439,440
469,348
—
—
469,348
(1) Revised to correct for an adjustment related to the understatement of reserve liabilities of $15.0 million. See Note 1.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

December 31, 2016
Fair Value Hierarchy Level

Carrying
Values

Fair
Values
Level 1 Level 2 Level 3
(In thousands)
ASSETS
Investments in debt and equity securities:
Securities held to maturity $ 7,159,259
7,337,611
—
7,337,611
—
Securities available for sale 3,060,363
3,060,363
18,313
3,042,050
—

Cash and cash equivalents 51,247
51,247
51,247
—
—
Mortgage loans 174,534
176,890
—
—
176,890
Policy loans 58,699
101,092
—
—
101,092
Other loans 14,343
14,898
—
—
14,898
Derivatives, index options 120,644
120,644
—
—
120,644
Life interest in Trust 7,550
12,775
—
—
12,775

LIABILITIES
Deferred annuity contracts $ 7,739,337
7,367,851
—
—
7,367,851
Immediate annuity and supplemental contracts 443,226
470,414
—
—
470,414

Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.


(11)	DERIVATIVE INVESTMENTS

Fixed-index products provide traditional fixed annuities and universal life contracts with the option to have credited interest rates linked in part to an underlying equity index or a combination of equity indices. The equity return component of such policy contracts is identified separately and accounted for in future policy benefits as embedded derivatives on the Condensed Consolidated Balance Sheets. The remaining portions of these policy contracts are considered the host contracts and are recorded separately as fixed annuity or universal life contracts. The host contracts are accounted for under debt instrument type accounting in which future policy benefits are recorded as discounted debt instruments and accreted, using the effective yield method, to their minimum account values at their projected maturities or termination dates.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The ~~company~~Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its fixed-index annuity and life products. The index options act as hedges to match closely the returns on the underlying index or indices. The amounts which may be credited to policyholders are linked, in part, to the returns of the underlying index or indices. As a result, changes to policyholders' liabilities are substantially offset by changes in the value of the options. Cash is exchanged upon purchase of the index options and no principal or interest payments are made by either party during the option periods. Upon maturity or expiration of the options, cash may be paid to the ~~company~~Company depending on the performance of the underlying index or indices and terms of the contract.

~~NATIONAL WESTERN LIFE GROUP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(UNAUDITED)~~

The Company does not elect hedge accounting relative to these derivative instruments.The index options are reported at fair value in the accompanying Condensed Consolidated Financial Statements. The changes in the values of the index options and the changes in the policyholder liabilities are both reflected in the Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss). Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss). Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in values, are reflected as net investment income in the Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss).

Although there is credit risk in the event of nonperformance by counterparties to the index options, the ~~company~~Company does not expect any of its counterparties to fail to meet their obligations, given their high credit ratings. In addition, credit support agreements are in place with all counterparties for option holdings in excess of specific limits, which may further reduce the ~~company's~~Company's credit exposure.

The tables below present the fair value of derivative instruments as of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, respectively.

September 30, 2017

March 31, 2020

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

Balance

Sheet

Location

Fair

Value

Balance

Sheet

Location

Fair

Value

Balance

Sheet

Location

Fair

Value

Balance

Sheet

Location

Fair

Value

(In thousands)

Derivatives not designated as hedging instruments

Equity index options

Derivatives, Index Options

163,536

Derivatives, Index Options

24,335

Fixed-index products

Universal Life and Annuity Contracts

175,221

Universal Life and Annuity Contracts

61,625

Total

163,536

175,221

24,335

61,625

December 31, 2016
Asset Derivatives Liability Derivatives

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value
(In thousands) (In thousands)

Derivatives not designated as hedging instruments

Equity index options Derivatives, Index Options $ 120,644

Fixed-index products
Universal Life and Annuity Contracts $ 122,666

Total $ 120,644
$ 122,666

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	December 31, 2019
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(In thousands)			(In thousands)

Derivatives not designated as hedging instruments

Equity index options	Derivatives, Index Options	$	157,588

Fixed-index products				Universal Life and Annuity Contracts	$	155,902

Total		$	157,588		$	155,902

The table below presents the effect of derivative instruments in the Condensed Consolidated Statements of Earnings (Loss) for the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019.


		September 30, 2017			September 30, 2016			March 31, 2020			March 31, 2019
Derivatives Not Designated As Hedging Instruments	Location of Gain or (Loss) Recognized In Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives					Location of Gain or (Loss) Recognized In Income on Derivatives	Amount of Gain or (Loss) Recognized in Income on Derivatives
		(In thousands)						(In thousands)

Equity index options	Net investment income	$	45,131		19,114		Net investment income (loss)	$	(106,629	)	42,003

Fixed-index products	Universal life and annuity contract interest	(48,168		)	(12,194	)	Universal life and annuity contract interest	67,653			(27,032	)

		$	(3,037	)	6,920			$	(38,976	)	14,971

The ~~table below presents~~embedded derivative liability, the ~~effect~~change of ~~derivative instruments~~which is recorded in universal life and annuity contract interest in the Condensed Consolidated Statements of Earnings ~~for~~(Loss), includes projected interest credits that are offset by the ~~nine~~expected collectability by the Company of asset management fees on fixed-index products. The anticipated asset management fees to be collected increases or decreases based upon the most recent performance of index options and adds to or reduces the offset applied to the embedded derivative liability (increasing or decreasing contract interest expense). For the three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019, the change in the embedded derivative liability due to the expected collectability of asset management fees increased/(decreased) contract interest expense by $29.3 million and $(15.7) million, respectively.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

September 30,
2017 September 30,
2016
Derivatives Not Designated
As Hedging Instruments

Location of Gain
or (Loss) Recognized
In Income on Derivatives

Amount of Gain or
(Loss) Recognized in
Income on Derivatives
(In thousands)

Equity index options Net investment income $ 138,552
8,307

Fixed-index products Universal life and annuity contract interest (148,214 ) 5,645

$ (9,662 ) 13,952

(12) 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 has 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 has 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 is revalued during the earn-out term using the same probabilistic method and had a fair value of $4.2 million and $4.1 million as of March 31, 2020 and December 31, 2019, respectively, with the changes in fair value during the three months ended March 31, 2020 recorded through Other operating expenses.

In addition to the purchase price, the Company incurred $3.3 million of acquisition-related costs in the quarter ended March 31, 2019. In accordance with GAAP, these costs are included in Other operating expenses in the Condensed Consolidated Statements of Earnings (Loss) 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. The following table presents the fair values of the net assets acquired as of January 31, 2019.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	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

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
	$	9,600

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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



	March 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	(218	)	$	2,800	(171	)
Internally developed software	7	3,800		(633	)	3,800		(498	)
Insurance licenses (1)	N/A	3,000		—		3,000		—

		$	9,600	(851	)	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 the estimated useful lives. These intangible 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 insurance licenses at each reporting period to determine whether the useful life remains indefinite.

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Value of Business Acquired ("VOBA")

VOBA is a purchase accounting convention for life insurance companies in business combinations based upon an actuarial determination of the difference between the fair value of policyholder liabilities acquired and the same policyholder liabilities measured in accordance with the acquiring company's accounting policies. The difference, referred to as VOBA, is an intangible asset subject to periodic amortization. As of the January 31, 2019 acquisition date, the VOBA balance recorded was $145.8 million. Changes in VOBA were as follows for the periods shown:



	March 31,			December 31,
	2020			2019
	(In thousands)

Balance, beginning of year	$	138,071		—
Business acquired	—			145,768
Amortization:
Amortization, excluding unlocking	(2,192		)	(7,697	)

Balance as of end of period	$	135,879		138,071

Estimated future amortization of VOBA, net of interest (in thousands), as of March 31, 2020, is as follows:



	Expected Amortization
	(In thousands)

Remainder of 2020	$	6,578
2021	$	8,324
2022	$	7,901
2023	$	7,533
2024	$	7,205

Goodwill

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



	March 31,		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 period	$	13,864	13,864

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Due to the severe change in economic climate which began in the first quarter of 2020 as a result of the COVID-19 pandemic, the Company evaluated the goodwill balance for potential impairment as of March 31, 2020 and determined that there was evidence to support not impairing the balance.

Financial Information

Subsequent to the acquisition date of January 31, 2019, Ozark National and NIS total revenues of $19.6 million and net earnings of $3.3 million were included in Condensed Consolidated Statements of Earnings (Loss) for the quarter ended March 31, 2019. These results for segment reporting purposes have been combined in the Acquired Businesses segment.

The following unaudited comparative pro forma total revenues and net earnings represent Condensed Consolidated Results of Operations for the Company which assume amounts estimated had the acquisition of Ozark National and NIS by the Company been effective January 1, 2018.



	Three Months Ended March 31,
	2020			2019
	(In thousands)


Total revenues	$	52,488		227,708

Net earnings (loss)	$	(2,062	)	41,830

The pro forma amounts shown above include the estimated total revenues and net earnings of the acquired businesses for each period incorporating amortization of identifiable intangible assets acquired and fair value adjustments to acquired invested assets and traditional life insurance reserves.

~~(12)~~(13) SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date of filing and no reportable items were identified.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained herein or in other written or oral statements made by or on behalf of National Western Life Group, Inc. and its subsidiaries (the "Company") are or may be viewed as forward-looking. Although the Company has taken appropriate care in developing any such information, forward-looking information involves risks and uncertainties that could significantly impact actual results. These risks and uncertainties include, but are not limited to, matters described in the Company's SEC filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues. However, as a matter of policy, the Company does not make any specific projections as to future earnings, nor does it endorse any projections regarding future performance that may be made by others. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments. Also, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

Management's discussion and analysis of the financial condition and results of operations (“MD&A”) of National Western Life Group, Inc. ("NWLGI") for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 follows. Where appropriate, discussion specific to the insurance operations of National Western Life Insurance Company is denoted by "National Western" or ~~"company"~~"NWLIC". This discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related notes beginning on page 3 of this report and with the ~~2016~~2019 Annual Report filed on Form 10-K with the SEC.

Effective January 31, 2019, the Company completed its previously announced acquisition of Ozark National Life Insurance Company ("Ozark National") and N.I.S. Financial Services, Inc. ("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). The results of Ozark National and NIS are included in the Company's Condensed Consolidated Financial Statements for their respective business activity subsequent to the acquisition date and reference to each is made in this MD&A where appropriate.

Overview

National Western ~~provides~~has historically provided life insurance products on a global basis for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contract ~~holders, both domestic and~~holders. As disclosed in previous filings, the Company discontinued accepting applications for its international ~~residents.~~ life insurance products from residents in other countries in May 2018.

The ~~company~~Company accepts funds from policyholders or ~~contract-holders~~contract holders and establishes a liability representing future obligations to pay the policy or ~~contract-holders~~contract holders and their beneficiaries. To ensure the ~~company~~Company will be able to pay these future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities.

Due to the business of accepting funds to pay future obligations in later years and the underlying economics, the relevant factors affecting the ~~company’s~~Company’s overall business and profitability include the following:



• ●	the level of sales and premium revenues collected
• ●	the volume of life insurance and annuity business in force
●	persistency of policies and contracts
• ●	~~returns~~the ability to price products to earn acceptable margins over benefit costs and expenses
●	return on investments sufficient to produce acceptable spread margins over interest crediting rates
• ●	investment credit quality which minimizes the risk of default or impairment
• ●	levels of policy benefits and costs to acquire business
• ●	the ability to manage the level of operating expenses
• ●	effect of interest rate changes on revenues and investments including asset and liability matching
• ●	maintaining adequate levels of capital and surplus
• ●	corporate tax rates and the treatment of financial statement items under tax rules and accounting
●	actual levels of surrenders, withdrawals, claims and interest spreads
• ●	changes in assumptions for amortization of deferred policy acquisition expenses and deferred sales inducements
• ●	changes in the fair value of derivative index options and embedded derivatives pertaining to fixed-index life and annuity products
• ●	pricing and availability of adequate counterparties for reinsurance and index option contracts
• ●	litigation subject to unfavorable judicial development, including the time and expense of litigation

The Company monitors these factors continually as key business indicators. The discussion that follows in this Item 2 includes these indicators and presents information useful to an overall understanding of the Company's business performance for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, incorporating required disclosures in accordance with the rules and regulations of the Securities and Exchange ~~Commission.~~Commission ("SEC").

Insurance Operations - Domestic

National Western is currently licensed to do business in all states, except New York, and the District of ~~Columbia except for New York.~~Columbia. Products marketed are annuities, universal life insurance, fixed-index universal life, and traditional life insurance, which include both term and whole life products. ~~The company's domestic~~Domestic sales in terms of premium levels have historically been more heavily weighted toward ~~annuity products, which include single and flexible premium deferred annuities, single premium immediate annuities, and fixed-index~~ annuities. Most of these annuities can be sold either as tax qualified or ~~nonqualified~~non-qualified products. More recently, a greater proportion of sales activity has been derived from single premium life insurance products, predominantly those with an equity-index crediting mechanism. Presently, ~~99%~~nearly all of National Western's domestic life premium sales come from single premium life products. At ~~September 30, 2017~~March 31, 2020, ~~the company~~National Western maintained approximately ~~133,600~~117,800 annuity contracts in force and ~~50,500~~47,400 domestic life insurance policies in force representing ~~$3.1~~nearly $3.4 billion in face amount of coverage.

National Western markets and distributes its domestic products primarily through independent national marketing organizations ("NMOs"). These NMOs assist the ~~company~~Company in recruiting, contracting, and managing independent agents. ~~The company's~~National Western's agents are independent contractors who are compensated on a commission basis. ~~The company~~It currently has approximately ~~27,950~~27,800 domestic independent agents contracted.

~~During~~Although reported separately for segment disclosure purposes, effective January 31, 2019, domestic insurance operations include the ~~third quarter~~activities of ~~2017, the~~Ozark National. Ozark National is a Missouri domiciled, stock life insurance company ~~hired~~currently licensed to conduct business in thirty states. Organized and incorporated in 1964, its largest markets by state are Missouri, Iowa, Minnesota, Nebraska, and Kansas. Ozark National utilizes a ~~new chief marketing officer over domestic marketing who has initiated new marketing and~~unique distribution ~~strategies~~system to ~~include general~~market its flagship Balanced Program which consists of a coordinated sale of a non-participating whole life insurance product with a mutual fund investment product offered through its affiliated broker-dealer, NIS. Due to Ozark National's coordinated sale their agents ~~banks, broker/dealers, and wirehouses. As part~~hold a securities license in addition to an insurance license. At March 31, 2020, Ozark National maintained approximately 182,200 life insurance policies in force representing nearly $6.2 billion in face amount of these new initiatives, the company will be expanding its presence into domestic multicultural markets. These distribution strategies aim to increase and balance sales between single and recurring premium life products.coverage.

Insurance Operations - International

National Western's international operations had generally focused on foreign nationals in upper socioeconomic classes of other countries. The ~~company does~~Company did not conduct business or maintain offices or employees in any other country, but ~~it does~~historically did accept applications at its home office in Austin, Texas, and ~~issues~~issued policies from there to non-U.S. residents. ~~The company's international clientèle consists mainly of foreign nationals in upper socioeconomic classes.~~ Insurance products ~~are~~ issued ~~currently~~were primarily to residents of countries ~~primarily~~ in South America ~~and the Caribbean based upon applications received~~consisting of product offerings not available in the ~~company's home office. The company~~local markets. International life insurance products issued to international residents were almost entirely universal life and traditional life insurance products.

As disclosed in previous Company filings, National Western ceased accepting applications from ~~Russian-speaking~~residents of Brazil, Central America, and the Pacific Rim region in the fourth quarter of 2015. During 2017, applications were no longer accepted from residents in the Eastern ~~Europe~~European region, primarily Russian-speaking. Due to the unsettled political, economic, civil, and ~~Asia~~social climate existing in Venezuela, National Western ceased accepting applications from residents in that country during the first ~~half~~quarter of ~~2017.~~ 2018. Ultimately, National Western ceased accepting applications for its international products from all remaining foreign residents effective May 11, 2018.

Issuing universal life and traditional life insurance policies to residents of countries in these different regions ~~provides~~had provided diversification that ~~helps~~helped to minimize large fluctuations that could arise due to various economic, political, and competitive pressures ~~that may occur~~occurring from one country to another. ~~Products issued~~These policies also provided diversification of earnings relative to ~~international residents are almost entirely universal life and traditional~~the Company's domestic life insurance ~~products. However, certain annuity~~segment. The Company's decision to cease accepting applications from residents of the remaining foreign countries was primarily due to the reduced sales activity associated with this segment, the incremental expenses associated with underwriting products in this line of business, and ~~investment contracts are also available.~~the lower anticipated incremental contribution to profits from new sales. The Company will continue to service and maintain the block of international policies in force. At ~~September 30, 2017~~March 31, 2020, ~~the company~~National Western had approximately ~~61,400~~48,900 international life insurance policies in force representing ~~approximately $16.8~~$13.3 billion in face amount of coverage.

International applications are submitted by independent contractor consultants and broker-agents. The company has approximately 2,150 independent international consultants and brokers currently contracted.

There ~~are~~were some inherent risks of accepting international applications which are not present within the domestic market that ~~are~~were reduced substantially by the ~~company~~Company in several ways. As previously described, National Western ~~accepts~~accepted applications from foreign nationals of other countries in upper socioeconomic classes who ~~have~~had substantial financial resources. This targeted customer base, coupled with ~~the company's~~National Western's conservative underwriting practices, have historically resulted in claims experience, due to natural causes, similar to that in the United States. The ~~company minimizes~~Company has minimized exposure to foreign currency risks by requiring payment of premiums ~~claims~~ and ~~other benefits entirely~~claims in United States ~~dollars (except for a small block~~dollars. In addition, the Company adopted an extensive anti-money laundering compliance program in order to fully comply with all applicable U.S. anti-money laundering or other illegal activities. All of ~~business in Haiti whose policies are denominated in Haitian gourdes). National Western's fifty plus years of experience with~~ the ~~international products and its longstanding independent consultant and broker-agent relationships further serve~~above served to minimize risks.

SALES

Life Insurance

The following table sets forth information regarding ~~National Western's~~ life insurance sales activity as measured by total premium for single premium life insurance products and annualized first year ~~premiums.~~premiums for all other life insurance products. While the figures shown below are in accordance with industry practice and represent the amount of new business sold during the periods indicated, they are considered a non-GAAP financial measure. The Company believes sales are a measure of distribution productivity and are a leading indicator of future revenue trends. However, revenues are driven by sales in prior periods as well as in the current period and therefore, a reconciliation of sales to revenues is not meaningful or determinable.


	Three Months Ended			Nine Months Ended		Three Months Ended
	September 30,			September 30,		March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

International:
Single premium life						$	47,895	35,310
Traditional life						848		891
Universal life	$	755	590	1,482	1,785	1		5
Traditional life	479		416	1,452	1,396
Equity-index life	1,580		2,143	4,997	6,744

	2,814		3,149	7,931	9,925
Domestic:
Universal life	8		22	18	32
Traditional life	20		32	78	89
Equity-index life	4,431		4,309	13,263	12,287

	4,459		4,363	13,359	12,408

Totals	$	7,273	7,512	21,290	22,333	$	48,744	36,206

Life insurance sales, as measured by total and annualized first year premiums, ~~decreased 3%~~increased 35% in the ~~third~~first quarter of ~~2017~~2020 as compared to the ~~third~~first quarter of ~~2016. By market segment, the domestic~~2019. Within these amounts, National Western's life insurance line of business sales increased ~~2% while the international life insurance line of business posted an 11% decrease~~35% from the comparable results of the ~~third~~first quarter of ~~2016. For~~2019. In the ~~nine~~three months ended ~~September 30, 2017, total life sales decreased 5% from 2016 levels as domestic~~March 31, 2020, life insurance sales ~~expanded 8% during this period and international~~included $0.8 million from Ozark National representing their traditional life ~~insurance~~ sales ~~decreased 20%. Increasing domestic life insurance business has been a focal point~~activity. The first quarter of ~~company management.~~2019 included $0.8 million in sales from Ozark National reflecting their two months of activity subsequent to their acquisition effective January 31, 2019.

~~The company's domestic operations~~National Western's life insurance product portfolio includes single premium universal life ("SPUL") and equity-index universal life ("EIUL") products as well as hybrids of the EIUL and SPUL products, combining features of these core products. Equity-index universal life products ~~continue to be~~have been the predominant product sold in the domestic life ~~market.~~market for a number of years. Most of these sales are single premium mode products (one year, five year, or ten year) designed for transferring accumulated wealth tax efficiently into life insurance policies with limited underwriting due to lesser net insurance amounts at risk (face amount of the insurance policy less cash premium contributed). These products were designed and implemented ~~several~~ years ago targeting the accumulated savings of the ~~Baby Boomer~~ segment of the population entering their retirement years. The wealth transfer life products have been valuable offerings for the ~~company's~~Company's distributors as evidenced by their comprising ~~99%~~98% of total ~~domestic~~ life sales in the first ~~nine~~three months of ~~2017.~~2020.

The company's international life business consists of applications accepted from residents of various regions outside of the United States, the volume of which typically varies based upon changes in the socioeconomic climates of these regions. Historically, the company has experienced a simultaneous combination of rising and declining sales in various countries; however, the appeal of the company's dollar-denominated life insurance products overcomes many of the local and national difficulties.

Applications submitted from residents of Latin America have historically comprised the majority of the company's international life insurance sales. This distribution has become more pronounced in the past couple of years as the company ceased accepting applications from residents in various other geographic locations as described below. The company's mix of international sales by geographic region is as follows:

Nine Months Ended September 30,
2017 2016

Percentage of International Sales:
Latin America 99.2 % 95.9 %
Eastern Europe/Asia 0.8
4.1

Totals 100.0 % 100.0 %

Year-to-date, the company has accepted new business from residents outside of the United States with Venezuela (25%), Peru (18%), Chile (15%), and Ecuador (14%) comprising the regions with contributions of 10% or more of total international sales.

As previously disclosed in prior SEC filings, the Brazilian Superintendence of Private Insurance ("SUSEP") attempted to serve National Western in 2011 with a subpoena regarding an administrative proceeding initiated by SUSEP in which it alleged the company was operating as an insurance company in Brazil without due authorization. While the company believes that SUSEP has no jurisdiction over the company, SUSEP affirmed its imposition of a penal fine against National Western, but in a reduced amount of 3 million reais (approximately $960,000). In light of the substantial reduction in the proposed penal fine by SUSEP, National Western paid the penal fine in the reduced amount in the fourth quarter of 2016 under protest and thereby retained its rights to seek judicial review in Brazil of the merits of the SUSEP charges. In light of these developments, the company ceased accepting new applications from residents in Brazil in the fourth quarter of 2015. Additionally, after careful consideration of various factors, including segment performance and the volume of application submissions, the company ceased accepting applications from residents in certain other countries in Central America and the Pacific Rim during that same time period.

The average new policy face amounts, excluding insurance riders, since ~~2011~~2016 are as shown in the following table.

Average New Policy Face Amount
Domestic International

Year ended December 31, 2011 178,500
363,600
Year ended December 31, 2012 254,900
380,200
Year ended December 31, 2013 286,000
384,000
Year ended December 31, 2014 286,600
382,600
Year ended December 31, 2015 274,500
342,500
Year ended December 31, 2016 308,700
336,500
Nine months ended September 30, 2017 307,200
311,600



	Average New Policy Face Amount
	NWLIC Domestic	Ozark National	NWLIC International

Year ended December 31, 2016	149,200	—	327,300
Year ended December 31, 2017	148,100	—	299,300
Year ended December 31, 2018	162,600	—	290,900
Year ended December 31, 2019	179,900	45,200	—
Three months ended March 31, 2020	177,700	53,100	—

Contracts issued to international residents historically had larger face amounts of life insurance coverage per policy compared to those issued to domestic policyholders. The ~~company's~~Company's efforts ~~are~~were directed toward ~~maintaining its competitive advantages in~~ accepting applications from upper socio-economic residents of international ~~countries and to~~countries. During the time period in which the Company was progressively disengaging from international markets, National Western's average face amount of insurance coverage per policy for domestic life insurance contracts exhibited an upward trend reflecting the shift in sales toward single premium life products, primarily fixed-index, as part of its wealth transfer ~~strategies~~strategy for domestic life sales. In both of these strategies the company's portfolio of fixed-index (equity indexed) life insurance products plays an important role. Fixed-index life products accounted for 86% of total life sales in the first nine months of 2017, as compared to 85% for the same period in 2016.

The table below sets forth information regarding ~~National Western's~~ life insurance in force for each date presented.


	Insurance In Force as of			Insurance In Force as of
	September 30,			March 31,		December 31,
	2017		2016	2020		2019
	($ in thousands)			($ in thousands)

National Western

Universal life:
Number of policies	41,070		44,940	32,940		33,760
Face amounts	$	4,271,900	5,064,620	$	4,635,560	4,746,100

Traditional life:
Number of policies	32,570		34,330	27,640		28,400
Face amounts	$	3,459,330	3,490,930	$	2,578,470	2,671,120

Fixed-index life:
Number of policies	38,300		38,850	35,700		36,170
Face amounts	$	9,104,030	9,462,720	$	9,480,070	9,635,810

Rider face amounts	$	3,043,010	3,046,760

Total life insurance:
Number of policies	111,940		118,120	96,280		98,330
Face amounts	$	19,878,270	21,065,030	$	16,694,100	17,053,030

Ozark National

Total life insurance (all traditional):
Number of policies				182,210		183,380
Face amounts				$	6,191,250	6,246,800

At ~~September 30, 2017~~March 31, 2020, ~~the company’s~~National Western’s face amount of life insurance in force was comprised of ~~$16.8~~$13.3 billion from the international line of business and ~~$3.1~~$3.4 billion from the domestic line of business. At ~~September 30, 2016,~~December 31, 2019, these amounts were ~~$18.0~~$13.7 billion and ~~$3.0~~$3.4 billion for the international and domestic lines of business, respectively.

Annuities

The following table sets forth information regarding the ~~company's~~Company's annuity sales activity as measured by single and annualized first year premiums. Similar to life insurance sales, these figures are considered a non-GAAP financial measure but are shown in accordance with industry practice and depict National Western's sales productivity.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Fixed-index annuities	$	147,966	156,297	420,757	498,186	$	74,753	60,223
Other deferred annuities	3,057		4,671	14,517	27,075	1,460		3,131
Immediate annuities	1,789		807	2,871	3,198	2,503		438

Totals	$	152,812	161,775	438,145	528,459	$	78,716	63,792

The ~~company's~~Company's mix of annuity sales has historically shifted with interest rate levels and the relative performance of the equity market. With the decline in interest rates subsequent to the subprime crisis, ~~sales of~~ fixed-index products have ~~become proportionately greater~~comprised the majority of annuity sales generally accounting for 90% or more of all annuity sales the past several years. During the first ~~nine~~three months of ~~2017,~~2020, this percentage ~~exceeded 96%~~approached 95% reflecting the ongoing bull market run in equities since bottoming out in ~~2009.~~2009 and historically low level in interest rates. For all fixed-index products, the ~~company~~Company purchases over the counter call options to hedge the equity return feature. The options are purchased relative to the issuance of the annuity contracts in such a manner to minimize timing risk. Generally, the index return during the indexing period (if the underlying index increases) becomes a component in a formula (set forth in the annuity), the result of which is credited as interest to contract holders electing the index formula crediting method at the beginning of the indexing period. The formula result can never be less than zero with these products. The ~~company~~Company does not deliberately mismatch or under hedge for the equity feature of the products. Fixed-index products also provide the contract holder the alternative to elect a fixed interest rate crediting option.

With the advent of a low interest rate policy engineered by the Federal Reserve in response to the subprime financial crisis, ~~company~~Company management evaluated the potential ramifications of continuing a high level of annuity sales in a depressed interest rate environment. Under the auspices of the ~~company's~~Company's enterprise risk management ~~(ERM)~~("ERM") processes, taking into consideration the Federal Reserve's announced intention to maintain interest rates at historically reduced levels over a prolonged period of time, the decision was made to curtail new sales to desired levels in order to minimize the level of assets added at low yield rates. While National Western does not subsidize its interest crediting rates on new policies in order to obtain market share, the Company's ERM considerations determined that managing to a lower level of annuity sales was prudent given the environment.

~~The decrease in~~Two subsequent regulatory events served to further pressure annuity sales ~~in 2017 relative to the prior year reflects the impact of two regulatory changes.~~activity. The first iswas the Department of Labor's "fiduciary rule" on standards for retirement investment advice ~~which has affected insurance carriers, marketing organizations and agents as each develop strategies for future product sales under this standard.~~in 2017. The uncertainty associated with the timing and ultimate requirements of the rule ~~has~~ served to decrease activity for annuity sales involving qualified funds ~~during~~as insurance carriers, marketing organizations, and independent distributors sought to develop strategies for operating under the ~~current year.~~proposed fiduciary rule guidelines. The Department of Labor's rule was ultimately vacated in 2018 at the appellate court level. The second regulatory change impacting the level of annuity sales occurred ~~late in 2016~~ when the state of California mandated more restrictive annuity product features for policies sold in the state. This required ~~the company~~National Western, and other annuity carriers, to refile products complying with the new standards for state approval. ~~As of the date of this filing,~~ California regulators ~~have yet~~were slow to process and approve product filings received from insurance carriers in the ~~company's~~aftermath of imposing these restrictive product ~~filings.~~features thus eliminating a key market for annuity sales for an extended period of time and disrupting distributor relationships.

In addition to the above, National Western, similar to other annuity product providers, faced a scenario of declining yields on its investment portfolio as securities backing annuity policies and their credited rates were subsequently reinvested at substantially lower yields in the depressed interest rate environment. The compression on interest rate margins resulted in decrements to fixed interest rate renewal rates provided to annuity contractholders often to the minimum interest rate guarantee levels prescribed by state insurance regulators under non-forfeiture laws. The low renewal interest crediting rates discouraged repeat sales to existing clients and prompted a movement toward annuities that offered multi-year interest rate guarantees.

As a result of the foregoing, the Company has undertaken an initiative to rebuild sales momentum in its annuity sales. In the latter half of 2019, it added to its marketing staff individuals with extensive experience and expertise in annuity production in the life insurance industry and has begun building products targeting new channels of distribution in addition to its current partnerships with national marketing organizations.

The level of annuity business in force requires a focused discipline on asset/liability analysis. The ~~company~~Company monitors its asset/liability matching within the self-constraints of desired capital levels and risk tolerance. ~~The company's~~National Western's capital level remains substantially above industry averages and regulatory targets. Management ~~has performed~~performs analyses of the capital strain associated with incrementally higher levels of annuity new business and determined that ~~the company's~~National Western's capital position is more than sufficient to handle an increase in sales ~~activity when a more favorable rate environment returns.~~activity.

The following table sets forth information regarding annuities in force for each date presented.


	Annuities In Force as of			Annuities In Force as of
	September 30,			March 31,		December 31,
	2017		2016	2020		2019
	($ in thousands)			($ in thousands)

Fixed-index annuities
Number of policies	75,070		73,930	70,000		70,790
GAAP annuity reserves	$	5,909,871	5,666,087	$	5,372,090	5,467,786

Other deferred annuities
Number of policies	44,620		47,780	35,450		36,550
GAAP annuity reserves	$	1,804,826	1,958,672	$	1,360,753	1,420,237	(1)

Immediate annuities
Number of policies	13,940		14,400	12,330		12,530
GAAP annuity reserves	$	369,188	368,724	$	351,612	349,389

Total annuities
Number of policies	133,630		136,110	117,780		119,870
GAAP annuity reserves	$	8,083,885	7,993,483	$	7,084,455	7,237,412

(1) Revised to correct for an adjustment related to the understatement of reserve liabilities of $15.0 million. See Note 1.

Impact of Recent Business Environment

The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by ~~metrics which indicate~~ improving employment data and increases in personal income. ~~Central banks~~Important metrics indicating sustained economic growth over the longer term principally revolve around employment and confidence, both consumer and business sentiment. The outbreak of the coronavirus (COVID-19) that spread rapidly across the globe has severely contracted economic activity and resulted in extended employment furloughs, job loss, and a sizable drop in confidence. Consumer spending fell 7.5% in March marking the most severe monthly decline in the ~~United States, Europe, and Japan are currently contemplating how to unwind the years of large asset purchases used to prop up capital markets. These policies, intended~~past sixty years. The pandemic is likely to be ~~temporary in order~~an unprecedented shock to ~~stabilize the financial system, are on the verge of being unwound as a favorable combination of growth and inflation has pervaded~~ the U.S. ~~and global economies. The prospect of U.S. corporate tax reform may cause a pick-up~~economy which could result in ~~economic growth stemming from desired changes~~significant negative GDP quarterly measures in the ~~tax code.~~near term. Initial forecasts have projected U.S. GDP declines more than double of that experienced during the Great Recession crisis a dozen years ago. The initial reading of first quarter GDP revealed a contraction of nearly 5%.

The morbidity exposure of COVID-19 to the life insurance industry, while uncertain at this point, is not expected to result in significant excess mortality claims. However, the economic turmoil caused by the pandemic could have a significant impact on life insurers. The biggest near-term risk to life insurance companies is the potential decline in the value of invested assets from elevated downgrades in credit market securities which may ultimately manifest in financial statements through impairment charges. This will show up in balance sheet deterioration, charges to capital, and lower reported earnings.

In recent years, in the attempt to acquire additional investment yield in the low rate environment, life insurers substantially increased allocations to BBB-rated bonds. In a recession, many of these investment grade corporate credits are at risk for downgrades, as well as the potential to default. Risk-based capital (RBC) formulas assess higher required capital charges as investment quality declines. A meaningful shift of BBB-rated debt securities to non-investment grade categories could have significant implications in terms of required capital levels which would depress RBC ratios of impacted insurers. Life insurance companies also have a large exposure to real estate in its investment portfolios through commercial mortgage, direct real estate investment, and mortgage-backed securities. These investments are highly dependent upon occupancy and payment of rent and lease obligations. The quarantine and shelter-at-home lockdown affect the ability to meet these payment obligations.

~~As noted previously, regulatory actions~~Life insurance revenues are driven more by renewal premiums than sales. Most state insurance departments have ~~recently been~~issued directives instructing insurers to allow premium payments to fall into arrears. New life insurance sales face the challenge of having to forego face-to-face consultation with agents and distributors. In addition, full medical underwriting which is a cornerstone of evaluating risk in an ~~impediment~~insurer making the decision to offer coverage and at what level of coverage will likely be unavailable or difficult to complete as medical test for life ~~insurers. This past week~~insurance applications will not be considered as "essential" in the Department of Labor (DOL) filed a rule with the Office of Management and Budget for an additional 18-month delay of the DOL's fiduciary rule from January 1, 2018 until July 1, 2019. As proposed, the rule is extending the applicability of the Best Interest Contract Exemption (BIC) and the Class Exemption for Principal Transactions (PTE) 84-24. Concerns have been raised by various parties that the DOL rule could disrupt the marketplace, increase costs for retirement savers, and eliminate access for middle- and lower-income workers to individualized retirement planning services. Observers are hopeful that the DOL and the SEC can reach a consensus on a uniform standard that protects investors as well their access to affordable, quality advice, products and services. It is uncertain what effect, if any, the extension, and any ultimate changes to the DOL's fiduciary rule, will have on the Company's business.pandemic environment.

With regard to the credit market, although not probable in the current environment, industry analysts and observers generally agree that a sudden jump in interest rate levels ~~while presently a highly unlikely scenario,~~ would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal levels of product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. ~~Currently,~~Ultimately, a mix of monetary policy adjustments, fiscal policy, and economic fundamentals will determine the ~~consensus view of the Federal Reserve's course of action is predicated on the thesis that the U.S. economy is in a position to absorb a series~~future direction of interest rate ~~hikes without impeding ongoing economic growth. A progression~~movements and the speed of ~~carefully measured increases in interest rates would be beneficial to financial service institutions, including life insurance companies.~~such shifts. It is uncertain ~~what direction and~~ at what pace interest rate movements may occur in the future and what impact, if any, such movements would have on the Company's business, results of operations, cash flows, or financial condition.

~~The U.S life insurance sector is experiencing an interest rate, economic and regulatory environment making strategic long-term planning decisions more challenging and suspect to inaccuracies.~~ In an environment such as this, the need for a strong capital position that can cushion against unexpected bumps is critical for stability and ongoing business activity. The Company's operating strategy continues to be ~~to maintain~~focused on maintaining capital levels substantially above regulatory and rating agency requirements. Our business model is predicated upon steady growth in invested assets while managing the block of business within profitability objectives. A key premise of our financial management is maintaining a high quality investment portfolio, well matched in terms of duration with policyholder obligations, that continues to outperform the industry with respect to adverse impairment experience. This discipline enables the Company to sustain resources more than adequate to fund future growth and absorb abnormal periods of cash outflows.

RESULTS OF OPERATIONS

The Company's Condensed Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, the Company regularly evaluates operating performance using non-GAAP financial measures which exclude or segregate derivative and realized investment gains and losses from operating revenues. Similar measures are commonly used in the insurance industry in order to assess profitability and results from ongoing operations. The Company believes that the presentation of these non-GAAP financial measures enhances the understanding of the Company's results of operations by highlighting the results from ongoing operations and the underlying profitability factors of the Company's business. The Company excludes or segregates derivative and realized investment gains and losses because such items are often the result of events which may or may not be at the Company's discretion and the fluctuating effects of these items could distort trends in the underlying profitability of the Company's business. Therefore, in the following sections discussing condensed consolidated operations and segment operations, appropriate reconciliations have been included to report information management considers useful in enhancing an understanding of the Company's operations to reportable GAAP balances reflected in the Condensed Consolidated Financial Statements.

Consolidated Operations

~~Revenues.~~Premiums and other revenues. The following details Company revenues.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020			2019
	(In thousands)					(In thousands)

Universal life and annuity contract charges	$	40,268	40,333	122,329	123,791	$	35,306		37,953
Traditional life premiums	5,285		4,631	13,639	13,721	23,522			17,583
Net investment income (excluding derivatives)	106,560		107,867	327,493	327,425	93,151			109,328
Other revenues	4,672		4,476	13,714	14,050	3,653			6,413

Operating revenues	156,785		157,307	477,175	478,987
Derivative gain (loss)	45,131		19,114	138,552	8,307	(106,629		)	42,003
Net realized investment gains (losses)	2,074		5,426	10,906	10,589	3,485			4,629

Total revenues	$	203,990	181,847	626,633	497,883	$	52,488		217,909

Universal life and annuity contract charges - Revenues for universal life and annuity contracts were ~~marginally~~ lower for the first ~~nine~~three months in ~~2017~~2020 compared to ~~2016~~.2019 with the component sources shown below. Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, ~~and~~ surrender charges assessed against policyholder account balances, and amortization of deferred premium loads less reinsurance premiums, as shown in the following table.


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016		2017		2016		2020			2019
	(In thousands)									(In thousands)

Contract Revenues:
Cost of insurance and administrative charges	$	33,915		33,335		100,823		99,624		$	31,441		31,185
Surrender charges	10,114			11,348		33,682		34,955		7,450			8,049
Other charges	(171		)	(187	)	(131	)	1,131		833			3,131
Gross contract revenues	43,858			44,496		134,374		135,710		39,724			42,365

Reinsurance premiums	(3,590		)	(4,163	)	(12,045	)	(11,919	)	(4,418		)	(4,412	)

Net contract revenues	$	40,268		40,333		122,329		123,791		$	35,306		37,953

Cost of insurance charges were $25.0 million in the quarter ended March 31, 2020 compared to $25.8 million in the first quarter of 2019. Cost of insurance charges typically trend with the size of the universal life insurance block in force and the amount of new business issued during the period. ~~Life~~The volume of universal life insurance in force ~~during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~averaged~~at March 31, 2020 declined to $14.1 billion from approximately ~~$20.3~~$14.4 billion while for the same period of 2016 it averaged $21.5 billion. Countering the decline in insurance in force, the company implemented higher cost of insurance charges on international life insurance products during the second quarter of 2016. Accordingly, for the three months ended September 30, 2017, cost of insurance charges increased to $26.9 million from $26.5 million at September 30, 2016, and for the nine months ended September 30, 2017, cost of insurance charges increased to $80.6 million from $79.2 million at September 30, 2016. In addition to the increase in international cost of insurance charges, the increase reflects larger domestic face amounts of insurance being added to the in force block of business, which produce higher contract charges per policy, replacing smaller face amounts terminated through death, surrender or lapsation.December 31, 2019. Administrative charges pertaining to new business issued ~~declined marginally~~increased to ~~$20.3 million~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~versus $20.5~~$6.4 million for the ~~nine~~three months ended ~~September 30, 2016~~ ~~due to a lower number of international life insurance policies issued.~~March 31, 2020 from $5.4 million for the same period in 2019 reflecting higher sales activity in the current period.

Surrender charges assessed against policyholder account balances upon withdrawal ~~remained relatively level~~decreased in the first ~~nine~~three months of ~~2017~~2020 versus the comparable prior year period. While the ~~company~~Company earns surrender charge income that is assessed upon policy terminations, the ~~company's~~Company's overall profitability is enhanced when policies remain in force and additional contract revenues are realized and the ~~company~~Company continues to make an interest rate spread equivalent to the difference it earns on its ~~investment~~investments and the amount that it credits to policyholders. In the first ~~nine~~three months of ~~2017,~~2020, lapse rates on ~~domestic~~annuity and life insurance policies were ~~better~~higher than the prior year while lapse rates for international life insurance and annuity policies increased somewhat. The increase in the international life insurance lapse rate most noticeably came from the countries from which National Western ceased accepting applications from residents in the fourth quarter of 2015.period. Surrender charge income recognized is also dependent upon the duration of policies at the time of surrender (i.e. later duration policy surrenders ~~having a~~have lower surrender ~~charge~~charges assessed and earlier ~~duration~~policy surrenders having a higher surrender ~~charge)~~charge assessed).

Other charges include the net amortization into income of the premium load on single premium life insurance products which is deferred at the inception of the policy. The amount of income recognized in a period reflects the excess of amortization of prior period deferrals over current period deferrals. As these products have become a substantial portion of domestic life insurance sales, the amortization of accumulated deferrals has surpassed current period premium loads deferred for several years. The decrease in net amortization into revenue in the first quarter of 2020 as compared to 2019 reflects the higher levels of sales achieved of these products in the current period resulting in an increased amount of current premium loads deferred.

Traditional life premiums - Traditional life premiums ~~were slightly lower in~~include the ~~three and nine months ended September 30, 2017 compared to the same periods in 2016 reflecting~~activity of Ozark National. Ozark National's principal product is a ~~slight decrease in sales during the first nine months of 2017 and the lapsation of international~~non-participating whole life insurance ~~policies noted above.~~policy with premiums remitted primarily on a monthly basis. The product is sold in tandem with a mutual fund investment product offered through its broker-dealer affiliate, NIS. Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. ~~The company's~~A sizable portion of National Western's traditional life business resided in the International Life segment which ceased accepting new applications in 2018. However, National Western's overall life insurance sales focus has historically been primarily centered around universal life ~~products, although additional term products have been added~~products. The addition of Ozark National's business of repetitive paying permanent life insurance adds an important complement to National Western's life insurance sales. Included in the ~~company's portfolio recently.~~amount for the quarter ended March 31, 2020 is $19.5 million of life insurance renewal premium from Ozark National compared to $13.0 million in the first quarter of 2019. Universal life products, especially ~~the company's~~National Western's equity indexed universal life products, which offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index, have been the more popular product offerings in the ~~company's markets representing 93% of new life insurance sales for 2017 thus far.~~Company's markets.

Net investment income - To ensure the Company will be able to honor future commitments to policyholders and provide a financial return, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed maturity debt securities. The income from these investments is closely monitored by the Company due to its significant impact on the business. A detail of net investment income (with and without index option gains and losses) is provided below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020			2019
	(In thousands)					(In thousands)

Gross investment income:
Debt and equities	$	101,664	103,650	307,540	312,833	$	86,498		103,924
Mortgage loans	2,645		2,070	8,333	5,576	2,704			3,352
Policy loans	885		868	2,638	2,732	878			878
Short-term investments	339		252	585	507	1,134			565
Other invested assets	1,408		1,318	9,363	6,594	2,681			1,333

Total investment income	106,941		108,158	328,459	328,242	93,895			110,052
Less: investment expenses	381		291	966	817	744			724

Net investment income (excluding derivatives)	106,560		107,867	327,493	327,425	93,151			109,328
Derivative gain (loss)	45,131		19,114	138,552	8,307	(106,629		)	42,003

Net investment income	$	151,691	126,981	466,045	335,732
Net investment income (loss)						$	(13,478	)	151,331

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, debt and equity securities generated approximately ~~94%~~93% of total net investment income, excluding derivative gain (loss). The Company's strategy is to invest substantially all of its cash flows in fixed debt securities ~~consistent with~~within its guidelines for credit quality, duration, and diversification. ~~The lower level of investment income from~~National Western's debt and equity securities ~~through the third quarter of 2017 versus 2016, reflects~~investment income continues to experience higher yielding debt securities maturing or being called by borrowers and being replaced with lower yielding securities in the current interest rate environment. ~~In addition, investment~~Investment yields on new bond purchases during the first ~~nine~~three months of ~~2017~~2020 approximated ~~3.57% remaining below~~3.76% as compared to the ~~portfolio's~~4.06% yield achieved during the full year 2019. During the first quarter of 2020, interest rate levels dropped significantly with the ten-year treasury bond falling over 120 basis points. Widening credit spreads along with purchases of slightly longer durations helped to partially offset the decline in rate environment. National Western's weighted average ~~yield.~~portfolio yield was 3.76% at March 31, 2020 declining from 3.78% at December 31, 2019. Ozark National's weighted average portfolio yield at March 31, 2020 was 3.66%.

~~Mortgage loan~~With the acquisition of Ozark National and NIS in the first quarter of 2019, a substantial portion of National Western's investable cash resources was applied toward the purchase of the two companies and then subsequently to pay back line of credit borrowings made to fund a part of the acquisition price. Accordingly, new investment activity was limited during this time frame and short-term investment balances were substantially reduced.

Changes in fair values of equity securities are included in net investment income ~~for~~in the ~~nine months~~Condensed Consolidated Statements of Earnings (Loss). For the quarter ended ~~September 30, 2017~~ ~~increased significantly over~~March 31, 2020, unrealized losses of $6.0 million are netted in net investment income (in the ~~comparable period~~Debt and equities line item in ~~2016~~the above table) while unrealized gains of $1.7 million are included in the first quarter of 2019 reflecting ~~increased~~the change in fair value of equity securities during each period. The carrying value of the Company's portfolio of equity securities was $16.0 million at March 31, 2020.

The Company's mortgage loan ~~origination~~ activity ~~beginning~~ in ~~2016.~~the first quarter of 2020 was impacted by the pandemic crisis and the low interest rate level which subsequently materialized. This environment ultimately led to the management decision to suspend underwriting of new loan applications until clarity regarding the impacts of closing down the economy has upon commercial real estate is available. The portfolio balance increased to $276.1 million at March 31, 2020 from ~~$108.3~~$272.4 million at December 31, ~~2015~~2019 reflecting new loan originations which were in process prior to ~~$174.5 million at December 31, 2016 as~~ the Company identified this as an area of investment focus. The mortgage loan portfolio balance further increased to $188.6 million at September 30, 2017 reflecting ongoing loan origination efforts during the period.pandemic crisis manifesting. During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 the Company originated new mortgage loans in the amount of ~~$38.2~~$7.0 million compared to ~~$55.8~~$17.3 million in the comparable period of ~~2016.~~2019.

~~Other invested asset~~As disclosed in the Notes to Condensed Consolidated Financial Statements, the Company adopted new accounting guidance pertaining to current expected credit losses on financial instruments ("CECL"). The adoption as of January 1, 2020 was reported as a change in accounting with initial balances recorded and charged to retained earnings. Remeasurement as of March 31, 2020 resulted in an increase to the CECL allowance of $3.4 million which is netted against gross investment income. The components of the charge for the allowance increase were $2.7 million for debt securities held to maturity and $0.7 million for mortgage loans which have been netted against gross income ~~increased during~~in the ~~first nine months of 2017 as various profit participation loans paid out during~~respective line items in the period. These loans, generally underwritten in conjunction with an underlying mortgage loan, enhance the Company's returns on its lending due the opportunity to participate in profit generation from the supporting venture.table shown above.

In order to evaluate underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding derivative gain (loss), which is a common practice in the insurance industry. Although this is considered a non-GAAP financial measure, Company management believes this financial measure provides useful supplemental information by removing the swings associated with fair value changes in derivative instruments. Net investment income and average invested assets shown below includes cash and cash equivalents. Net investment income performance is summarized as follows:


	Nine Months Ended September 30,					Three Months Ended March 31,
	2017			2016		2020			2019
	(In thousands)					(In thousands)

Excluding derivatives:
Net investment income	$	327,493		327,425
Net investment income (loss)						$	93,151		109,328
Average invested assets, at amortized cost	$	10,580,953		10,407,898		$	10,994,435		10,979,822
Annual yield on average invested assets	4.13		%	4.19	%	3.39		%	3.98	%

Including derivatives:
Net investment income	$	466,045		335,732
Net investment income (loss)						$	(13,478	)	151,331
Average invested assets, at amortized cost	$	10,723,043		10,472,151		$	11,085,397		11,022,664
Annual yield on average invested assets	5.79		%	4.27	%	(0.49		)%	5.49	%

The ~~yield on~~decline in average invested ~~assets,~~asset yield, excluding derivatives, ~~declined slightly from~~ ~~2016. Yields obtained on new fixed maturity debt securities investments during~~in the first ~~nine months~~quarter of ~~2017 were below~~2020 is due to the ~~total weighted average yield. During~~ ~~2016~~,Company continuing to obtain low yields on newly invested cash flows as higher yielding assets mature or are called, the mark-to-market unrealized loss on equity securities, and the increase in the allowance for expected credit losses.

The average yield on bond purchases during the three months ended March 31, 2020 to fund National Western insurance operations was ~~3.38%~~3.76% representing a ~~1.54%~~1.94% spread over treasury rates. ~~Insurance operation bond purchases through the~~ ~~third quarter~~ of ~~2017~~ ~~had a higher average yield of 3.57%; however, spreads decreased to 1.20% over treasury rates during this period while treasury rates increased.~~

~~The bond yield rates during both 2016 and 2017 are below the weighted average bond portfolio rate which was slightly less than 4.02% at September 30, 2017.~~ The weighted average quality of new purchases during the first ~~nine~~three months of ~~the current year~~2020 was ~~"A-~~"BBB+" which was slightly higher than the ~~overall "BBB+"~~"BBB" average quality ~~rating~~ of ~~purchases during 2016.~~new investments in 2019. The composite duration of purchases during the first ~~nine~~ ~~months~~quarter of ~~2017~~2020 was ~~approximately~~slightly longer than that of purchases made in previous years as the ~~same as~~Company purchased a higher proportion of investments for its life insurance line of business which has a longer liability duration than that ~~for 2016 purchases.~~of the annuity line of business. The Company's general investment strategy is to purchase debt securities with maturity dates approximating ten years in the future. Accordingly, an appropriate measure for benchmarking the direction of interest rate levels for the Company's debt security purchases is the ten year treasury bond rate. After ending ~~2016~~2019 at a rate of ~~2.45%~~1.92%, the daily closing yield of the ~~ten year~~ten-year treasury bond ranged from a low of ~~approximately 2.05%~~0.50% to a high of roughly ~~2.60%~~1.90% during the first ~~nine~~three months of ~~2017, and ended the third calendar quarter at 2.33%.~~2020.

The pattern in average invested asset yield, including derivatives, incorporates increases and decreases in the fair value of index options purchased by ~~the company~~National Western to support its fixed-index products. Fair values of the purchased call options ~~increased~~recorded a net loss during the ~~2017 and~~first three months of 2020 while recording a gain during the ~~2016 periods, substantially more in the 2017 period compared to the 2016 period,~~first quarter of 2019, corresponding to the movement in ~~equity market indices in~~the S&P 500 Index during these ~~time frames.~~periods (the primary index the fixed-index products employ). Refer to the derivatives discussion below for a more detailed ~~explanation of these instruments.~~explanation.

Other revenues - Other revenues primarily pertain to NIS, the broker-dealer affiliate of Ozark National; the operations of Braker P III ("BP III"), a subsidiary created at the end of 2016 to own and manage a commercial office building BP III acquired; and the Company's two nursing home operations in Reno, Nevada and San Marcos, Texas.

Revenues associated with ~~these operations~~NIS were ~~$13.5~~$2.4 million and ~~$13.5~~$1.4 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. ~~Level~~Revenues in the first quarter of 2019 were for the period subsequent to its acquisition effective January 31, 2019.

Revenues associated with BP III were $1.2 million and $0.9 million in the first three months of 2020 and 2019, respectively. The increased revenues in 2020 reflect tenant leases that were subsequently entered into. The facility is currently fully leased.

Revenues associated with the nursing operations were $0.0 million and $4.0 million for the three months ended March 31, 2020 and 2019, respectively. The Company closed on the sale of its Reno nursing home operations effective February 1, 2019 and on the sale of its San Marcos nursing home operations effective May 1, 2019. Revenues in the first three months of 2019 include Reno operating revenues ~~reflect stable census figures at~~for the ~~facilities thus far in 2017~~month of January and ~~a steady mix~~net gains from the sale of ~~payor sources by patient types.~~personal property and equipment of $1.4 million.

Derivative gain (loss) - Index options are derivative financial instruments used to hedge the equity return component of ~~the company's~~National Western's fixed-index products. Derivative gain or loss includes the amounts realized from the sale or expiration of the options. Since the index options do not meet the requirements for hedge accounting under GAAP, they are marked to fair value on each reporting date and the resulting unrealized gain or loss is ~~also~~ reflected as a component of net investment income. As the options hedging the notional amount of policyholder contract obligations are purchased as close as possible to like amounts, the amount of the option returns tends to correlate closely with indexed interest credited.

Gains and losses from index options are substantially due to changes in equity market conditions. Index options are intended to act as hedges to match the returns on the product's underlying reference index and the rise or decline in the index relative to the index level at the time of the option purchase which causes option values to likewise rise or decline. As income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the ~~company's~~Company's fixed-index products also fluctuates in a similar manner and direction. For the three ~~and nine~~ months ended ~~September 30, 2017, the reference indices increased~~March 31, 2020 and 2019, the Company recorded ~~an overall gain~~realized and unrealized gains/(losses) from index options as shown below.


	Three Months Ended September 30,				Nine Months Ended September 30,			Three Months Ended March 31,
	2017		2016		2017	2016		2020			2019
	(In thousands)							(In thousands)

Derivatives:
Unrealized gain (loss)	$	13,197	32,821		44,053	60,121		$	(138,127	)	61,101
Realized gain (loss)	31,934		(13,707	)	94,499	(51,814	)	31,498			(19,098	)

Total gain (loss) included in net investment income	$	45,131	19,114		138,552	8,307		$	(106,629	)	42,003

Total contract interest	$	107,799	67,776		299,862	179,592		$	(28,026	)	80,916

The economic impact of option performance in the Company's financial statements is not generally determined solely by the option gain or loss included in net investment income as there is a corresponding amount recorded in the contract interest expense line. The Company's profitability with respect to these options is largely dependent upon the purchase cost of the option remaining within the financial budget for acquiring options embedded in the product pricing. Option prices vary with interest rates, volatility, and dividend yields among other things. As option prices vary, the Company manages for the variability by making offsetting adjustments to product caps, participation rates, and management fees. For the periods shown, the Company's option costs have been close to or within the product pricing budgets.

The financial statement investment spread, the difference between investment income and interest credited to contractholders, is subject to variations from option performance during any given period. For example, many of the company's equity-index annuity products provide for the collection of asset management fees. These asset management fees are assessed when returns on expiring options are positive, and they are collected prior to passing any additional returns above the assessed management fees to the policy contractholders. During periods of positive returns, the collected asset management fees serve to increase the financial statement ~~investment~~ spread by increasing option realized gains ~~more~~reported as investment income in an amount greater than interest credited to policy ~~contractholders.~~contractholders which is reported as contract interest expense. Asset management fees collected in the first ~~nine~~three months of ~~2017~~2020 and 2019 were approximately ~~$20.9~~$10.2 million ~~more than in the first nine months of 2016. Of this amount, approximately $5.0~~and $1.6 million, ~~of the increase occurred in the quarter ended September 30, 2017.~~respectively.

Net realized investment gains (losses) - Realized gains (losses) on investments in ~~2017~~ ~~primarily resulted~~include proceeds from bond calls, sales and ~~sales.~~impairment write-downs as well as gains and losses on the sale of real estate property. The net gains reported for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 consisted of gross gains of ~~$11.0~~$3.5 million offset by gross losses of ~~$0.1~~$0.0 million. Included in the gross gains is approximately $2.3 million realized during the second quarter from a partial sale of home office land property to the Texas Department of Transportation (TxDOT) to be used in the construction of roadway expansion. The net gains reported for the ~~nine~~three months ended ~~September 30, 2016~~March 31, 2019 consisted of gross gains of ~~$10.0~~$6.9 million offset by gross losses of ~~$0.1~~$2.3 million. ~~No other-than-temporary credit~~Included in gross gains in the first quarter of 2019 is $5.7 million from the sale of land and building associated with the nursing home in Reno, Nevada sold effective February 1, 2019. This was partially offset by a $2.2 million impairment ~~losses were recorded~~writedown of the building pertaining to the San Marcos, Texas nursing home which was subsequently sold during the ~~nine months ended September 30, 2017~~second quarter of 2019.

Prior to January 1, 2020 and ~~2016.~~

~~The~~the adoption of the new accounting guidance on current expected credit losses, the Company ~~records~~recorded impairment write-downs when a decline in value iswas considered to be other-than-temporary and full recovery of the investment iswas not expected. Impairments due to credit factors are recorded in the Company's Condensed Consolidated Statements of Earnings while non-credit (liquidity) impairment losses are included in Condensed Consolidated Statement of Comprehensive Income (Loss). No impairment or valuation write-downs were recorded in the Company's Condensed Consolidated Statements of Earnings (Loss) while non-credit (liquidity) impairment losses were included in Condensed Consolidated Statements of Comprehensive Income (Loss). Under the new accounting guidance, credit loss allowances for available for sale debt securities are recorded following the same process previously applied for impairment accounting. Credit loss allowances are recorded through net investment income in the Condensed Consolidated Statements of Earnings (Loss). Impairment or valuation write-downs recorded in the Company's Condensed Consolidated Statements of Earnings (Loss) for the ~~periods~~three months ended March 31, 2020 and 2019 were as ~~shown in the following table.~~follows.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Impairment or valuation write-downs:
Bonds	$	—	—	—	—	$	—	—
Equities	—		—	—	—	—		—
Mortgage loans						—		—
Real estate						—		2,205

Total	$	—	—	—	—	$	—	2,205

~~While market values~~The Company previously recorded an impairment of ~~equity securities are subject~~$2.2 million at March 31, 2019 on the real estate property associated with its nursing home operations in San Marcos, Texas based upon a pending agreement to ~~variation between reporting periods,~~sell the ~~Company's analysis~~operations. Closing of ~~potential impairments~~the sale occurred May 1, 2019, and resulted in ~~the periods shown did not identify other than temporary declines. Equity securities (common stocks) represent 0.1%~~a realized loss of ~~invested assets and individual common stock holdings have an average cost basis of approximately $43,000.~~$2.0 million.

Benefits and Expenses. The following table details benefits and expenses.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020			2019
	(In thousands)					(In thousands)

Life and other policy benefits	$	21,015	17,430	58,626	48,571	$	33,634		28,189
Amortization of deferred policy acquisition costs	18,722		24,395	85,992	88,581
Amortization of deferred policy acquisition costs and value of business acquired						30,037			32,164
Universal life and annuity contract interest	107,799		67,776	299,862	179,592	(28,026		)	80,916
Other operating expenses	22,596		23,595	74,031	66,306	19,822			26,049

Totals	$	170,132	133,196	518,511	383,050	$	55,467		167,318

Life and other policy benefits - Death claim benefits, the largest component of policy benefits, ~~increased to $33.3~~were $15.2 million in the first ~~nine~~three months of ~~2017~~2020 compared to ~~$25.9~~$13.7 million for the first ~~nine~~three months of ~~2016. For~~2019. Of the amount included in the three months ended ~~September 30, 2017~~March 31, 2020, $7.5 million was associated with National Western business and ~~2016, death claim benefits~~$7.7 million pertained to Ozark National. In the first quarter of 2019, these amounts were ~~$12.3~~$8.1 million and ~~$8.0~~$5.6 million for National Western and Ozark National, respectively. Death claim amounts are ~~generally~~ subject to variation from period to period. For the first ~~nine~~three months of ~~2017,~~2020, the number of National Western life insurance claims ~~declined 8%~~increased 42% from the comparable period in ~~2016. However,~~2019 while the ~~distribution~~average dollar amount per net claim decreased to $31,000 from approximately $41,000. The increase in number of claims reflects additional claims reported through National Western's periodic search of the Social Security Administration's Master Death Claim database which was ~~skewed toward higher dollar policies within~~conducted in the ~~company's net retention limit~~first quarter of ~~$500,000 per life resulting in a higher average dollar per claim. The company's~~2020. National Western's overall mortality experience has generally been consistent with or better than its product pricing assumptions. The average net claim for Ozark National during the 2020 period was $15,700. Mortality exposure is managed through reinsurance treaties under which National Western's retained maximum net amount at risk on any one life is capped at $500,000. Ozark National's retained maximum net amount at risk is capped at $200,000 under its reinsurance treaties with limited exceptions related to the conversion of child protection and guaranteed insurability riders. Neither National Western nor Ozark National received claims during the first quarter ended March 31, 2020 in which the reported cause of death was due to the coronavirus (COVID-19).

Life and other policy benefits also includes ~~reserve changes~~policy liabilities held associated with the ~~company's~~Company's traditional life products, including riders such as the guaranteed minimum withdrawal benefit rider ~~(WBR)~~("WBR"), a popular rider to ~~its~~National Western's equity-indexed annuity products. ~~During the second quarter of 2016, as part of the unlocking of deferred policy acquisition costs, the company recorded a prospective unlocking adjustment which reduced WBR reserves by $3.1~~The increases in these liabilities for National Western were $9.7 million and ~~decreased life~~$9.4 million in the quarters ended March 31, 2020 and 2019, respectively.

Life and other policy benefits ~~by a like amount~~in the quarters ended March 31, 2020 and 2019 includes changes in traditional life reserves and miscellaneous benefit payments associated with Ozark National's operations of $8.5 million and $5.1 million, respectively. The amounts for the ~~nine~~first quarter of 2019 reflect two months ~~ended September 30, 2016.~~of activity subsequent to the acquisition date of January 31, 2019.

Amortization of deferred policy acquisition costs and value of business acquired - Life insurance companies are required to defer certain expenses that vary with, and are primarily related to, the cost of acquiring new business. The majority of these acquisition expenses consist of commissions paid to agents, underwriting costs, and certain marketing expenses. Recognition of these deferred policy acquisition costs (“DPAC”) as an expense in the Condensed Consolidated Financial Statements occurs over future periods in relation to the expected emergence of profits priced into the products sold. This emergence of profits is based upon assumptions regarding premium payment patterns, mortality, persistency, investment performance, and expense patterns. Companies are required to review universal life and annuity contract assumptions periodically to ascertain whether actual experience has deviated significantly from that assumed. If it is determined that a significant deviation has occurred, the emergence of profits pattern is to be "unlocked" and reset based upon ~~the~~ actual experience. DPAC balances are also adjusted each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (“true-up”) with the adjustment reflected in current period amortization expense. In accordance with GAAP guidance, the Company must also write-off deferred acquisition costs and unearned revenue liabilities upon internal replacement of certain contracts as well as annuitizations of deferred annuities.

The following table identifies the effects of unlocking adjustments on DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three ~~and nine~~ months ended~~September 30, 2017~~March 31, 2020 and ~~2016~~2019.


Amortization of DPAC	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016		2017		2016		2020		2019
	(In thousands)									(In thousands)

Unlocking adjustments	$	(12,935	)	(8,170	)	(11,856	)	(11,790	)	$	—	—
Other amortization components	31,657			32,565		97,848		100,371		27,844		30,541

Totals	$	18,722		24,395		85,992		88,581		$	27,844	30,541

~~During~~The amortization amount for the quarter ended September 30, 2017, the company unlocked the DPAC balances associated with its International Life insurance and Annuity segments the effect of which was to increase DPAC balances by $12.9 million (and reduce amortization expense). The International Life insurance DPAC balance was unlocked for favorable mortality, lower than expected lapses from disengaged countries, and the implementation of an interest crediting clawback on certain universal life policies. The Annuity DPAC balance was unlocked for crediting rate spreads and surrender/annuitization assumptions. Earlier in 2017, the company unlocked the interest crediting rate spread on three of its equity-indexed universal life products in its Domestic and International life insurance segments during the second quarter of 2017. The effect of the prospective unlocking was to decrease the DPAC balance by $1.1 million with a corresponding increase to amortization expense.

~~In the quarter and nine~~ months ended ~~September 30, 2016, the company unlocked the~~March 31, 2020 was comprised of DPAC ~~balance associated with its Domestic Life insurance segment for favorable mortality. The effect~~amortization by National Western of ~~the prospective unlocking was to increase DPAC balances~~$27.6 million and by ~~$8.2 million (and decrease amortization expense). During the second quarter~~Ozark National of 2016, the company unlocked the DPAC balance associated with its International Life insurance segment for favorable mortality, increased cost of insurance charges that had been implemented, and higher lapse assumptions for policies associated with residents in "disengaged countries" (countries which the company ceased accepting applications from residents during 2015). The effect of the prospective unlocking was to increase DPAC balances by $7.3 million (and decrease amortization expense). At the same time, the company also unlocked the DPAC balance for its Annuity segment for surrender and annuitization rates on its indexed, single tier, and two tier annuities. The effect of this prospective unlocking was to decrease DPAC balances by $3.7 million (and increase amortization expense). Accordingly, the net effect during the second quarter of 2016 for the unlockings was a $3.6 million increase to the DPAC balance and decrease to amortization expense.

~~The Company is required to evaluate its emergence of profits continually and management believes that the current amortization patterns of~~$0.2 million. Ozark National's deferred policy acquisition ~~costs, incorporating these unlocking adjustments, are reflective of actual experience. It is the company's intent going forward to annually perform any necessary DPAC~~cost balance ~~unlockings in the third calendar quarter of the year.~~was initiated February 1, 2019 following its acquisition by National Western.

As the DPAC balance is an asset on the Company's Condensed Consolidated Balance ~~Sheet, generally accepted accounting principles (GAAP) provide~~Sheets, GAAP provides for an earned interest return on the unamortized balance each period. The earned interest serves to increase the DPAC balance and reduce other amortization component expense. The rate at which the DPAC balance earns interest is the average credited interest rate on the ~~company's~~Company's universal life and annuity policies in force, including credited interest on ~~equity-index~~equity-indexed policies. ~~During the three and nine months ended September 30, 2017 the company's crediting rates have increased compared to comparable prior year periods due to higher equity-index credits and the~~The amount of earned interest on DPAC balances ~~has therefore increased serving to offset~~recorded for the three months ended March 31, 2020 and 2019 was $8.2 million and $1.8 million, respectively, decreasing other amortization component expense. The increased interest amount in the first quarter of 2020 reflects higher returns on equity-index products.

The Company is required to evaluate its emergence of profits continually and management believes that the current amortization patterns of deferred policy acquisition costs are reflective of actual experience. It is the Company's practice, absent intervening events or experience, to annually perform any necessary DPAC balance unlockings in the third calendar quarter of each year.

As part of the purchase accounting required with the acquisition of Ozark National effective January 31, 2019, the Company recorded an intangible asset of $145.8 million referred to as the value of business acquired ("VOBA"). VOBA represents the difference between the acquired assets and liabilities of Ozark National measured in accordance with the Company's accounting policies and the fair value of these same assets and liabilities. The VOBA balance sheet amount is amortized following a methodology similar to that used for amortizing deferred policy acquisition costs. In the quarters ended March 31, 2020 and 2019, the Company's VOBA amortization expense was $2.2 million and $1.6 million, respectively. The amount for the first quarter of 2019 reflects two months of amortization subsequent to the acquisition date of January 31, 2019.

Universal life and annuity contract interest - The ~~company~~Company closely monitors its credited interest rates on interest sensitive policies (National Western products), taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. As long term interest rates change, the ~~company's~~Company's credited interest rates are often adjusted accordingly, taking into consideration the factors described above. The difference between yields earned on investments over policy credited rates is often referred to as the "interest spread".

~~The company's~~National Western's approximated average credited rates through the first ~~nine~~three months, excluding and including ~~fixed-index (derivative)~~equity-indexed products, were as follows:


	September 30,				September 30,				March 31,				March 31,
	2017		2016		2017		2016		2020		2019		2020		2019
	(Excluding fixed-index products)				(Including fixed-index products)				(Excluding fixed-index products)				(Including fixed-index products)

Annuity	2.20	%	2.32	%	3.57	%	1.94	%	1.94	%	1.96	%	0.22	%	2.22	%
Interest sensitive life	3.42	%	3.62	%	6.83	%	3.90	%	3.36	%	3.37	%	(6.66	)%	8.46	%

Contract interest reported in ~~the~~ financial statements also encompasses the performance of the index options associated with the ~~company's~~Company's fixed-index products. As previously noted, the market value changes of these derivative features resulted in net realized and unrealized gains/(losses) of ~~$138.6~~$(106.6) million and ~~$8.3~~$42.0 million ~~being included in net investment income~~ for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. These ~~positive~~amounts consisted of realized gains of $31.5 million and unrealized losses of $(138.1) million for the first quarter of 2020, and realized losses of $(19.1) million and unrealized gains of $61.1 million for the comparable 2019 time frame. These returns similarly ~~increase~~increased/(decreased) the computed average credited rates for the periods shown above. Policyholders of equity-indexed products cannot receive an interest credit below 0% according to the policy contract terms.

Contract interest expense includes other items which may increase or decrease reported contract interest in a particular reporting period. For the three months ended March 31, 2020 and 2019, these other items include the amounts shown in the table below.



Contract Interest Expense	Three Months Ended March 31,
	2020			2019
	(In thousands)

Reserve changes	$	5,739		8,585
Unlocking adjustments	—			—
Asset management fees collected	(10,151		)	(1,618	)
Projected asset management fees	29,317			(15,656	)
Other embedded derivative components	6,124			4,093

Totals	$	31,029		(4,596	)

Contract interest expense includes reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitizations, and amortization of deferred sales inducement balances. These items are offset by policy charges assessed for policies having the withdrawal benefit rider (WBR). As changes in these items collectively impact contract interest expense, financial statement interest spread is also affected. Included in the reserve changes for the first three months of 2020 is an increase of $2.2 million for excess death benefits compared to $4.4 million in the same period for 2019. The lower increase in the first quarter of 2020 reflects an unlocking adjustment made in the third quarter of 2019.

Generally, the impact of the market value change of index options on asset values aligns closely with the movement of the embedded derivative liability held for the ~~company's~~Company's fixed-index products such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). However, other aspects of the embedded derivatives can cause deviations to occur between the change in index option asset values included in net investment income and the change in the embedded derivative liability included in contract interest. ~~Many~~As noted in the discussion of ~~the company's fixed-index products provide for~~net investment income, the collection of asset management ~~fees. These~~ fees ~~are~~in a period can cause investment income to increase marginally higher than contract interest expense since these collected ~~when realized gains on index options occur and~~fees are deducted from indexed interest credited to policyholders. ~~During~~The increase in collected asset management fees for the three months ended ~~September 30, 2017 and 2016, asset management fees collected were $7.5 million and $2.5 million, respectively. These collected fees serve to enhance~~March 31, 2020 reflects the ~~company's interest spread. For~~level of realized option gains incurred during the ~~nine months ended September 30, 2017 and 2016, asset management fees collected were $24.3 million and $3.5 million, respectively.~~period.

Accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the ~~next~~succeeding fiscal year. ~~The change~~This projection is based upon the most recent performance of the reference equity index. Increases in ~~this projection, plus or minus, is included in~~projected asset management fees collected reduce contract interest ~~for the period being reported on.~~expense while decreases in projected asset management fees collected increase contract interest expense. In the three month ~~periods~~period ended ~~September 30, 2017 and 2016,~~March 31, 2020 contract interest was increased ~~$1.5~~by $29.3 million ~~and decreased $(5.9) million, respectively,~~ for ~~these projection changes. In~~ the ~~nine month periods ended September 30, 2017 and 2016, contract interest was increased $5.0 million and decreased $(11.9) million, respectively, for this occurrence.~~projected decrease in asset management fees to be collected.

Contract interest expense also includes reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitization, and amortization of deferred sales inducement balances. These expense items are offset by policy charges assessed for policies with the withdrawal benefit rider. Collectively, the changes in these items also impact contract interest expense and the financial statement interest spread. For the three and nine month periods ended September 30, 2017, the changes in these items increased financial statement interest spread by $1.5 million and $6.0 million, respectively, relative to the comparable periods in 2016.

Similar to deferred policy acquisition costs, the ~~company~~Company defers sales inducements in the form of first year credited interest bonuses on annuity products that are directly related to the production of new business. These bonus interest charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest. In addition, deferred sales inducement balances are also reviewed periodically to ascertain whether actual experience has deviated significantly from that assumed (unlock) and are adjusted to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (true-up). These adjustments, plus or minus, are included in contract interest expense. No unlocking adjustments were recorded during the first quarter of 2020 or 2019.

As part of the DPAC unlocking discussed previously for the Annuity segment, the company also unlocked its deferred sales inducement balance during the three and nine months ended September 30, 2017 which decreased the deferred sales inducement balance by $4.3 million (and increased contract interest expense). During the nine months ended September 30, 2016, the company also unlocked its deferred sales inducement balance associated with its annuity segment for surrender and annuitization rate changes with the effect of this prospective unlocking decreasing the deferred sales inducement balance by $1.7 million (and increasing contract interest expense).

As part of these unlockings in 2017 and 2016, in addition to the changes in the DPAC and deferred sales inducement balances, net benefit reserves for the international universal life and deferred annuities (two tier) product lines were increased. The net amount of the reserve increase from these adjustments were $9.0 million and $5.8 million in the nine months ended September 30, 2017 and 2016, respectively. These reserve changes increased the contract interest charge for each period. For the three months ended September 30, 2017 and 2016, the reserve changes from these adjustments were $9.4 million and $(0.3) million, respectively.

Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, nursing home expenses, real estate expenses, brokerage expenses, and compensation costs. These expenses for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 are summarized in the table that follows.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

General insurance expenses	$	6,497	7,661	23,782	25,447	$	10,682	13,108
Nursing home expenses	4,135		4,531	12,622	13,650	31		2,574
Compensation expenses	7,140		6,909	22,203	14,063	1,699		4,959
Commission expenses	2,854		3,043	8,149	8,480	2,935		1,655
Real estate expenses						1,464		1,245
Brokerage expenses (NIS)						1,169		728
Taxes, licenses and fees	1,970		1,451	7,275	4,666	1,842		1,780

Totals	$	22,596	23,595	74,031	66,306	$	19,822	26,049

In the quarter ended March 31, 2019, general insurance expenses include a $3.3 million broker fee paid in connection with the acquisition of Ozark National and NIS which closed during the first quarter. GAAP precludes this fee from being part of the purchase price for acquiring these businesses. General insurance expenses include ~~provisions for litigation~~software amortization expense associated with National Western's proprietary policy administration system which was phased into production over the past few years as well as other acquired software. Expenses pertaining to these items were $3.0 million and ~~other settlement payments made in lieu of litigation. As discussed in the Legal Proceedings section of the footnotes to the Condensed Consolidated Financial Statements, the Company charged $2.9~~$3.0 million ~~against earnings~~ in the first quarter of ~~2016 related to litigation involving an annuity contract matter in Puerto Rico. In aggregate, general insurance~~2020 and 2019, respectively. This category of expenses also includes employee benefit plan expenses for the ~~nine months ended September 30, 2017 are slightly higher than~~various employee health and retirement plans the ~~prior year period (excluding this litigation charge) due to increases in 2017~~Company sponsors. Related expenses for ~~real estate expense from~~ the ~~new~~first quarter of 2020 and 2019 were $3.3 million and $1.8 million, respectively.

Nursing home ~~office building acquired in December 2016, incremental amortization from~~expenses reflect the ~~company's deployment~~operations of ~~its proprietary policy administration system, and employee benefit plan liability increases.~~the Company's two nursing home operations which were sold during 2019. The Reno, Nevada nursing home was sold effective February 1, 2019 while the San Marcos, Texas nursing home sale closed effective May 1, 2019.

Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock ~~options and SARs,~~appreciation rights ("SARs"), restricted stock units ~~(RSUs)~~("RSUs") and performance share units ~~(PSUs)~~("PSUs"). The related share-based compensation costs move in tandem not only with the number of awards outstanding but also with the movement in the market price of the Company's Class A common stock as a result of marking the ~~stock options,~~ SARs, RSUs, and ~~RSUs~~PSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positive or negative in any given period. In the amounts shown above, share-based compensation expense totaled $(6.3) million in the first quarter of 2020 and $(1.5) million in the first quarter of 2019. The negative expense levels reflect a change in the Company's Class A common share price ~~increased~~ from ~~$205.37~~$290.88 at ~~September 30, 2016~~December 31, 2019 to ~~$310.80~~$172.00 at ~~the end of 2016. During~~March 31, 2020, and from $300.70 at December 31, 2018 to $262.47 at March 31, 2019. No performance share awards were granted in the first ~~nine~~three months of ~~2017, the Company's closing stock price further increased to $349.00 at September 30, 2017. For~~2020 and 2019. Ozark National compensation expenses were $0.8 million and $0.4 million in the three months ended ~~September 30, 2017 share-based compensation expense was $1.3 million while for~~March 31, 2020 and 2019, respectively.

Real estate expenses pertain to the ~~comparable period in 2016 share-based compensation expense was $1.7 million. For the nine months ended September 30, 2017 share-based compensation was $5.6 million versus $(1.1) million~~commercial building operated by Braker P III. Expense increases in the ~~same period for 2016.~~first quarter of 2020 relative to 2019 reflects the addition of new tenants during the past year.

Taxes, licenses and fees include premium taxes and licensing fees paid to state insurance departments, guaranty fund assessments, the company portion of social security and Medicare taxes, real estate taxes, state income taxes, and other state and municipal taxes. State income taxes are generally determined by apportioning the company's federal taxable income based upon premiums generated from a particular state as a percentage of total premiums. Federal taxable income is principally derived from the company's statutory financial results. ThroughNIS brokerage expense in the first ~~nine~~quarter of 2020 reflects three months of ~~2017, the company's statutory earnings are significantly higher causing estimated state income tax payments~~activity as compared to ~~be correspondingly higher. In the nine~~two months ~~ended September 30, 2017 and 2016, taxes, licenses and fees include state income tax expense of $1.9 million and $0.4 million, respectively. In addition, included~~ in the ~~nine months ended September 30, 2017, is $0.8 million for real estate tax expense pertaining~~first quarter of 2019, subsequent to the ~~new home office facility acquired in December~~acquisition of ~~2016.~~NIS effective January 31, 2019.

Federal Income Taxes. Federal income taxes on earnings from operations reflect an effective tax rate of ~~34.5%~~30.8%for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 compared to ~~32.7%~~20.5% for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2019. The Federal corporate tax rate decreased to 21% effective in 2018 under the Tax Cuts and Jobs Act ("Tax Act") passed in December 2017. The Company's effective tax rate is typically lower than the Federal statutory rate ~~of 35%~~ due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from ~~stocks.~~stocks, absent other permanent tax items.

While the Company's overall effective tax rate remains close to the statutory rate level, the Company's current tax expense is elevated due to a provision of the Tax Act which imposed a limitation on the amount of tax reserves a life insurer is able to deduct in arriving at its taxable income. The limitation is the greater of net surrender value or 92.81% of the reserve method prescribed by the National Association of Insurance Commissioners. Implementation of this provision was required as of January 1, 2018 and the Company ultimately determined that the resultant tax reserve adjustment was a decrease of $332.9 million. The Tax Act provided that this tax reserve adjustment could be brought into taxable income ratably over a period of eight (8) years. Based upon the tax reserve adjustment derived, the effect of the Tax Act limiting the tax reserve deductible in the current tax computation serves to increase the Company's taxable income by approximately $41.6 million per year through 2025. At the Federal statutory rate of 21%, the impact upon current tax expense is an increase of approximately $8.7 million per year or approximately $2.2 million each quarter.

Segment Operations

Summary of Segment Earnings

A summary of segment ~~earnings~~earnings/(losses) for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 is provided below. The segment ~~earnings~~earnings/(losses) exclude realized gains and losses on investments, net of taxes.

Domestic
Life
Insurance

International
Life
Insurance
Annuities
All
Others
Totals
(In thousands)

Segment earnings (losses):
Three months ended:
September 30, 2017 $ 2,037
28,992
(13,718 ) 3,154
20,465
September 30, 2016 $ 3,492
9,936
13,661
3,120
30,209

Nine months ended:
September 30, 2017 $ 1,409
47,850
1,153
13,333
63,745
September 30, 2016 $ 3,811
41,548
14,160
10,878
70,397



	Domestic Life Insurance		International Life Insurance	Annuities		Acquired Businesses	All Others		Totals
	(In thousands)

Segment earnings (losses):
Three months ended:
March 31, 2020	$	634	9,475	(17,976	)	4,887	(1,835	)	(4,815	)
March 31, 2019	$	1,127	11,180	17,015		2,963	4,256		36,541

Domestic Life Insurance Operations

A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below.


	Three Months Ended September 30,				Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016		2017	2016	2020			2019
	(In thousands)						(In thousands)

Premiums and contract revenues:
Premiums and contract charges	$	9,907	8,507		27,822	24,814
Net investment income	17,385		12,294		51,998	28,011
Premiums and other revenues:
Premiums and contract revenues							$	11,228		10,804
Net investment income (loss)							(19,383		)	23,499
Other revenues	11		7		30	37	29			44

Total revenues	27,303		20,808		79,850	52,862
Total premiums and other revenues							(8,126		)	34,347

Benefits and expenses:
Life and other policy benefits	3,483		5,338		13,850	13,629	5,877			3,922
Amortization of deferred policy acquisition costs	2,517		(4,331	)	8,300	989
Amortization of deferred policy acquisition costs and value of business acquired							2,573			3,410
Universal life insurance contract interest	14,119		9,795		41,576	20,855	(21,693		)	21,441
Other operating expenses	4,086		4,847		13,975	11,745	4,295			4,123

Total benefits and expenses	24,205		15,649		77,701	47,218	(8,948		)	32,896

Segment earnings (loss) before Federal income taxes	3,098		5,159		2,149	5,644	822			1,451
Provision (benefit) for Federal income taxes	1,061		1,667		740	1,833	188			324

Segment earnings (loss)	$	2,037	3,492		1,409	3,811	$	634		1,127

Revenues from domestic life insurance operations include life insurance premiums on traditional type products and contract revenues from universal life insurance. Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. A comparative detail of premiums and contract revenues is provided below.


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016		2017		2016		2020			2019
	(In thousands)									(In thousands)

Universal life insurance revenues	$	10,373		9,384		30,656		26,909		$	12,605		12,143
Traditional life insurance premiums	1,793			1,161		3,761		3,825		1,278			1,332
Reinsurance premiums	(2,259		)	(2,038	)	(6,595	)	(5,920	)	(2,655		)	(2,671	)

Totals	$	9,907		8,507		27,822		24,814		$	11,228		10,804

~~The company's~~National Western's domestic life insurance in force, in terms of policy count, has been declining for some time. The pace of new policies issued has lagged the number of policies terminated from death or surrender ~~by roughly a two-to-one rate over the past several years~~ causing a declining level of insurance in force from which contract ~~charge~~ revenue is received. Consequently, the number of domestic life insurance policies in force has declined from ~~54,300~~49,000 at December 31, ~~2015~~2018 to ~~51,600~~47,900 at December 31, ~~2016,~~2019, and to ~~50,500~~47,400 at ~~September 30, 2017~~March 31, 2020. Policy lapse rates in the first three months of 2020 approximated 8.4% compared to 6.2% and 6.5% in 2019 and 2018, respectively. The higher lapse rate in the first quarter of 2020 is indicative of the pandemic induced economic crisis which has caused consumers to access available sources of liquidity.

Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. The number of domestic life policies issued in the first ~~nine~~three months of ~~2017~~2020 was ~~10%~~16% higher than in the comparable period for ~~2016~~2019 and the volume of insurance issued was ~~8% more~~26% greater than that in ~~2016.~~ 2019.

Universal life insurance revenues also include surrender charge income realized on terminating policies and, in the case of domestic universal life, amortization into income of the premium load on single premium policies which is deferred. The net premium load amortization was $0.8 million and $3.1 million in the ~~company began deferring~~three months ended March 31, 2020 and 2019, respectively. The lower net amortization amount in ~~2013.~~the first quarter of 2020 is due to higher premium loads being currently deferred as a result of increased sales activity of single premium products.

Premiums collected on universal life products are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual domestic universal life premiums collected are detailed below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Universal life insurance:
First year and single premiums	$	30,170	30,373	92,495	85,915	$	47,671	35,328
Renewal premiums	5,166		5,135	15,297	15,481	4,338		4,533

Totals	$	35,336	35,508	107,792	101,396	$	52,009	39,861

During the past ~~couple of~~several years, ~~the company has achieved some success in growing its domestic life insurance business. Sales~~sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products are targeting wealth transfer strategies involving the movement of accumulated wealth in alternative investment vehicles, including annuities, into life insurance products. As a result, renewal premium levels have not been exhibiting a corresponding level of increase.

Net investment income for this segment of business, excluding derivative gain/~~(losses)~~(loss), has been gradually increasing due to the increased new business activity described above (single premium policies) and a higher level of investments needed to support the corresponding growth in policy obligations, especially those for single premium policies. The increase in net investment income has been partially muted by lower investment yields from debt security investment purchases during this time frame. Net investment income also includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal products.

A detail of net investment income (loss) for domestic life insurance operations is provided below.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Net investment income (excluding derivatives) $ 9,353
8,329
27,675
25,093
Derivative gain (loss) 8,032
3,965
24,323
2,918

Net investment income $ 17,385
12,294
51,998
28,011



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Net investment income (loss) (excluding derivatives)	$	10,907		10,593
Derivative gain (loss)	(30,290		)	12,906

Net investment income (loss)	$	(19,383	)	23,499

As seen in the above table, reported net investment income (loss) includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal products. The gain or loss on index options follows the movement of the S&P 500 Index (the primary index for the Company's fixed-index products) with realized gains or losses being recognized on the anniversary of each index option based upon the S&P 500 Index level at expiration date relative to the index level at the time the index option was purchased, and unrealized gains and losses being recorded for index options outstanding based upon the S&P 500 Index at the balance sheet reporting date as compared to the index level at the time each respective option was purchased.

Life and policy benefits for a smaller block of business are subject to variation from ~~quarter~~period to ~~quarter.~~period. Claim count activity during the first ~~nine~~three months of ~~2017 was in line with historical trends and was slightly lower compared to the same period for 2016. The number of incurred claims during the first nine months of 2017 decreased 10%~~2020 increased 47% compared to the first ~~nine~~three months of ~~2016~~2019 while the average net claim amount (after reinsurance) decreased to $24,300 from $30,500. The increased ~~to $27,000 from $24,000.~~amount of claims is the result of the Company performing a search during the 1st quarter of 2020 of the Social Security Administration's Master Death data base for unreported death claims. The low face amount per claim relative to current issued amounts of insurance per policy reflects the older block of domestic life insurance policies sold which were final expense type products (i.e. purchased to cover funeral costs). ~~The increase~~Claims on these older blocks of the policies are those most susceptible to not being reported timely to the Company. GAAP reporting requires that claims be recorded net of any cash value amounts that have been accumulated in the ~~average net claim amount reflects claims from more recent policy sales (single premium wealth transfer products) which have much higher face amounts of insurance coverage per policy.~~policies. The ~~company's~~Company's overall mortality experience for this segment has been ~~better than~~consistent with pricing assumptions.

As noted previously in the discussion of Results of Operations, the ~~company~~Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience with the adjustment reflected in current period amortization expense. To the extent required, ~~the company~~unlocking adjustments may also ~~record unlocking adjustments~~be recorded to DPAC balances. The following table identifies the effects of unlocking adjustments on domestic life insurance DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.


Amortization of DPAC	Three Months Ended September 30,				Nine Months Ended September 30,			Three Months Ended March 31,
	2017		2016		2017	2016
	(In thousands)							2020		2019
								(In thousands)

Unlocking adjustments	$	—	(8,170	)	795	(8,170	)	$	—	—
Other amortization components	2,517		3,839		7,505	9,159		2,573		3,410

Totals	$	2,517	(4,331	)	8,300	989		$	2,573	3,410

~~The company unlocked~~In the Consolidated Operations discussion of amortization of deferred acquisition costs it was noted that interest earned on DPAC balances serves to offset (decrease) amortization expense and that the interest rate used is the crediting rate ~~spread~~experience during the period. The decrease in amortization expense in 2020 relative to 2019 reflects higher interest earned on ~~two of its equity-indexed~~ universal life ~~products during~~DPAC balances due to increased crediting rates resulting from greater realized gains from index options.

Contract interest expense includes the ~~first nine months of 2017. The effect~~fluctuations that are the result of the ~~prospective unlocking was to decrease~~effect upon the ~~DPAC balance by $(0.8) million~~embedded derivative for the performance of underlying equity indices associated with ~~a corresponding increase to amortization expense. In~~fixed-index universal life products. For liability purposes, the ~~three and nine months ended September 30, 2016,~~embedded option in the ~~company unlocked its DPAC balance~~Company's policyholder obligations for this ~~segment~~feature is bifurcated and reserved for ~~favorable mortality. The effect of~~separately. Accordingly, the ~~prospective unlocking was to increase DPAC balances by $8.2 million (and decrease amortization expense).~~impact for the embedded derivative component in the equity-index universal life product is reflected in contract interest expense for approximately the same amounts as in net investment income for each respective period.

International Life Insurance Operations

National Western's international life operations have been a significant factor in the company's overall earnings performance and represents a niche where the company believes it has had a competitive advantage historically. A stable population of distribution relationships has been developed over decades of operations providing the company with a consistent foundation for development of the block of business.

A comparative analysis of results of operations for the ~~company's~~Company's international life insurance segment is detailed below.


	Three Months Ended September 30,				Nine Months Ended September 30,			Three Months Ended March 31,
	2017			2016	2017		2016	2020			2019
	(In thousands)							(In thousands)

Premiums and other revenues:
Premiums and contract revenues	$	30,353		31,066	91,563		95,291	$	22,867		26,063
Net investment income	15,711			12,763	48,581		30,203
Net investment income (loss)								(9,000		)	14,017
Other revenues	26			10	73		50	54			21

Total revenues	46,090			43,839	140,217		125,544	13,921			40,101

Benefits and expenses:
Life and other policy benefits	8,437			5,038	19,399		14,789	3,331			2,162
Amortization of deferred policy acquisition costs	(21,585		)	7,296	(7,874	)	11,720
Amortization of deferred policy acquisition costs and value of business acquired								6,052			7,294
Universal life insurance and annuity contract interest	9,112			11,287	36,871		19,643	(10,837		)	11,993
Other operating expenses	5,661			6,691	18,846		17,867	3,096			4,264

Total benefits and expenses	1,625			30,312	67,242		64,019	1,642			25,713

Segment earnings (losses) before Federal income taxes	44,465			13,527	72,975		61,525	12,279			14,388
Provision (benefit) for Federal income taxes	15,473			3,591	25,125		19,977	2,804			3,208

Segment earnings (loss)	$	28,992		9,936	47,850		41,548	$	9,475		11,180

As with domestic life operations, revenues from the international life insurance segment include both premiums on traditional type products and contract revenues from universal life insurance. A comparative detail of premiums and contract revenues is provided below.


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016		2017		2016		2020			2019
	(In thousands)									(In thousands)

Universal life insurance revenues	$	28,190		29,687		87,134		91,359		$	22,469		25,355
Traditional life insurance premiums	3,494			3,470		9,879		9,896		2,161			2,450
Reinsurance premiums	(1,331		)	(2,091	)	(5,450	)	(5,964	)	(1,763		)	(1,742	)

Totals	$	30,353		31,066		91,563		95,291		$	22,867		26,063

~~In general, universal~~Universal life revenues and operating earnings are ~~anticipated to emerge with growth in~~largely generated from the amount of life insurance in force. The volume of ~~insurance~~ in force for this segment, primarily universal life, has contracted from ~~$19.0~~$15.4 billion at December 31, ~~2015~~2018 to ~~$17.9~~$13.7 billion at December 31, ~~2016~~2019 and ~~further decreased~~ to ~~$16.8~~$13.3 billion at ~~September 30, 2017~~March 31, 2020. The decline in volume of in force reflects the decision at the end of 2015 to begin disengaging from issuing policies to residents of certain countries. During 2018, the Company made the decision to cease accepting international policy applications from residents of all remaining countries.

Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. ~~The number of international life policies issued~~As noted, the Company terminated this revenue source in ~~the first~~ ~~nine~~ ~~months of 2017 was 14% lower than in the first~~ ~~nine~~ ~~months of 2016 while the volume of insurance issued was 18% less than that issued in 2016 during the same period.~~2018.

A third component of international universal life revenues include surrender charges assessed upon surrender of contracts by policyholders. At the height of the financial crisis in 2008 through 2010 National Western's international policyholders exhibited concern regarding the developments in U.S. financial markets. This evidenced itself in the company's termination activity in its international life policies in force. The company incurred higher termination experience than is typical which resulted in recognition of increased surrender charge fee income. This level of termination activity subsequently subsided in 2011 with the termination activity over the following years remaining relatively stable. In 2015, termination activity ~~revisited~~levels increased in conjunction with the ~~levels last seen during the 2008 through 2010 period~~Company's decision to cease accepting application from residents in Brazil and certain other countries resulting in additional surrender charge fee ~~revenues, and this~~revenues. This activity ~~has~~ continued into 2016 and ~~2017.~~2017 but subsided somewhat in 2018. While the termination rate has subsequently edged higher, the resulting additional surrender charge fee revenue has been less due to lower surrender charge fees assessed later in the contract term according to the policy contract provisions. The following table illustrates National Western's recent international life termination experience.

Amount in $'s Annualized Termination Rate
(millions)

Volume In Force Terminations
Nine months ended September 30, 2017 1,823.6
12.9 %
Year ended December 31, 2016 2,340.6
11.6 %
Year ended December 31, 2015 2,659.1
12.3 %
Year ended December 31, 2014 1,825.5
8.4 %
Year ended December 31, 2013 1,838.5
8.6 %
Year ended December 31, 2012 1,828.4
8.7 %



	Amount in $'s	Annualized Termination Rate
	(millions)

Volume In Force Terminations
Three months ended March 31, 2020	390.7	11.4	%
Year ended December 31, 2019	1,671.5	10.9	%
Year ended December 31, 2018	1,706.3	10.0	%
Year ended December 31, 2017	2,309.7	12.2	%
Year ended December 31, 2016	2,340.6	11.6	%
Year ended December 31, 2015	2,659.1	12.3	%

The higher incidence of terminations primarily is occurring with policies to residents of the countries from which the company discontinued accepting applications in late 2015. As a result of the higher termination incidence, the company unlocked its DPAC balances for this segment of the business during 2016 to incorporate a greater lapse assumption, among other things.

As noted previously, premiums collected on universal life products are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual international universal life premiums collected are detailed below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Universal life insurance:
First year and single premiums	$	3,983	5,578	11,367	14,679	$	2	587
Renewal premiums	22,204		23,393	64,392	69,903	14,578		16,872

Totals	$	26,187	28,971	75,759	84,582	$	14,580	17,459

National Western's most popular international products ~~have been~~were its fixed-index universal life products in which the policyholder ~~can~~could elect to have the interest rate credited to their policy account values linked in part to the performance of an outside equity index. These products issued were not generally available in the local markets when sold. Included in the totals in the above table are collected premiums for fixed-index universal life products of approximately ~~$47.9~~$8.6 million and ~~$50.2~~$10.8 million for the first ~~nine~~three months of ~~2017~~2020 and ~~2016~~2019, respectively. The ~~decline~~declining trend in renewal premiums during ~~2017 compared to 2016~~these periods corresponds with the decline in policies in force due to no new sales activity and increased termination activity as discussed above.

As previously noted, net investment income and contract interest include period-to-period changes in fair values pertaining to call options purchased to hedge the interest crediting feature on the fixed-index universal life products. With the growth in the fixed-index universal life block of business, the period-to-period changes in fair values of the underlying options have had an increasingly greater impact on net investment income and universal life contract interest. A detail of net investment income for international life insurance operations is provided below.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)

Net investment income (excluding derivatives) $ 8,837
9,221
26,863
27,738
Derivative gain (loss) 6,874
3,542
21,718
2,465

Net investment income $ 15,711
12,763
48,581
30,203



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Net investment income (loss) (excluding derivatives)	$	6,811		7,984
Derivative gain (loss)	(15,811		)	6,033

Net investment income (loss)	$	(9,000	)	14,017

~~For liability purposes,~~The gain or loss on index options follows the ~~embedded~~movement of the reference indice with realized gains or losses being recognized on the anniversary of each index option inbased upon the ~~company's policyholder obligations~~reference indice level at expiration date relative to the index level at the time the index option was purchased. Unrealized gains and losses are recorded for ~~this feature is bifurcated and reserved for separately. Accordingly,~~index options outstanding based upon their fair values, largely determined by the ~~impact for~~reference indice level, at the ~~embedded derivative component in~~balance sheet reporting date as compared to the ~~equity-index universal life product is reflected in the contract interest expense for~~original purchase cost of each respective ~~period.~~option.

Life and policy benefits primarily consist of death claims on policies. National Western's clientèle for international products are generally wealthy individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased ~~have~~ historically tended to be larger ~~amounts than those for domestic life insurance. In the year ended December 31, 2016, the average face amount of insurance purchased was $336,500, and in the first~~ ~~nine~~ ~~months of 2017, the average was slightly lower at $311,600. While life~~amounts. Life and policy benefit expense for the international life segment reflects the larger policies historically purchased, however mortality due to natural causes is comparable to that in the United States. The ~~company's~~Company's maximum risk exposure per insured life is capped at $500,000 through reinsurance. The average international life net claim amount (after reinsurance) in the first ~~nine~~three months of ~~2017 increased~~2020 decreased to ~~$159,000~~$126,800 from ~~$140,000~~$138,200 in the first ~~nine~~three months of ~~2016.~~2019 while the number of claims incurred declined 6%. Measured over a period of years, the Company's international life mortality experience has generally been better than pricing assumptions.

The ~~company~~Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels, and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on international life insurance DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three ~~and nine~~ months ended~~September 30, 2017~~March 31, 2020 and ~~2016~~2019.


Amortization of DPAC	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016	2017		2016		2020		2019
	(In thousands)								(In thousands)


Unlocking adjustments	$	(28,016	)	—	(27,731	)	(7,270	)	$	—	—
Other amortization components	6,431			7,296	19,857		18,990		6,052		7,294

Totals	$	(21,585	)	7,296	(7,874	)	11,720		$	6,052	7,294

In the three and nine months ended September 30, 2017, the company unlocked its DPAC balance for favorable mortality, lower than expected lapses from disengaged countries, and the implementation of an interest crediting clawback on certain universal life policies. The effect of the prospective unlocking was to increase the DPAC balance by $28.0 million (and decrease amortization expense). During the second quarter of 2017, the company unlocked the interest crediting rate spread on one of its international equity-indexed universal life products the effect of which was to decrease the DPAC balance by $0.3 million with a corresponding increase to amortization expense.

During the nine months ended September 30, 2016, the company unlocked the DPAC balance for this segment for favorable mortality, higher cost of insurance charges which had been implemented, future profit on universal life insurance riders, and increased lapse rates for disengaged countries. These prior year unlockings served to increase the DPAC balance by $7.3 million and reduce the level of amortization by a similar amount during the period shown.

~~As indicated in the discussion concerning net investment income, contract~~Contract interest expense includes fluctuations that are the result of the effect upon the embedded derivative for the performance of underlying equity indices associated with fixed-index universal life products. ~~The~~For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact of the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for approximately the same amounts as the purchased call options are reported in net investment income for each respective period. Amounts realized on ~~purchased~~purchase call options generally approximate the amounts ~~National Western credits~~credited to policyholders.

~~In addition, contract interest expense for this segment includes changes in reserves for excess death benefits. As part~~Operating expenses are allocated to lines of business based upon a functional cost analysis of the DPAC unlocking described above for the three and nine months ended September 30, 2017, the company decreased excess benefit reserves by $4.2 million which decreased contract interest expense in these periods. Similarly, during the second quarter of 2016, as partbusiness activity giving rise to incurred expenses. As a result of the ~~DPAC unlocking described above, universal life excess death benefit reserves were also unlocked. The effect~~Company's decision to cease accepting applications from residents of ~~this prospective unlocking was~~other countries in 2018, a greater proportion of the Company's overall expenses have been allocated to ~~decrease reserves by $6.1 million during~~ the ~~period which served~~Domestic Life segment and away from the International Life and Annuity segments due to ~~concurrently reduce contract interest expense.~~the decreased activity in the latter two segments.

Annuity Operations

National Western's annuity operations are almost exclusively in the United States. Although some of the company's investment contracts are available to international residents, current sales of these are small relative to total annuity sales. A comparative analysis of results of operations for National Western's annuity segment is detailed below.


	Three Months Ended September 30,				Nine Months Ended September 30,		Three Months Ended March 31,
	2017			2016	2017	2016	2020			2019
	(In thousands)						(In thousands)

Premiums and other revenues:
Premiums and contract revenues	$	5,293		5,391	16,583	17,407	$	4,650		4,868
Net investment income	114,123			97,384	346,031	261,579	10,632			103,154
Other revenues	26			139	90	145	4			8

Total revenues	119,442			102,914	362,704	279,131	15,286			108,030

Benefits and expenses:
Life and other policy benefits	9,095			7,054	25,377	20,153	8,189			11,430
Amortization of deferred policy acquisition costs	37,790			21,430	85,566	75,872	19,021			19,712
Annuity contract interest	84,568			46,694	221,415	139,094	4,504			47,482
Other operating expenses	8,714			7,526	28,588	23,044	6,867			7,508

Total benefits and expenses	140,167			82,704	360,946	258,163	38,581			86,132

Segment earnings (loss) before Federal income taxes	(20,725		)	20,210	1,758	20,968	(23,295		)	21,898
Provision (benefit) for Federal income taxes	(7,007		)	6,549	605	6,808	(5,319		)	4,883

Segment earnings (loss)	$	(13,718	)	13,661	1,153	14,160	$	(17,976	)	17,015

Premiums and contract charges primarily consist of surrender charge income recognized on terminated policies. The amount of the surrender charge income recognized is determined by the volume of surrendered contracts as well as the duration of each contract at the time of surrender given the pattern of declining surrender charge rates over time that is common to most annuity contracts. The ~~company's~~Company's lapse rate for annuity contracts in the first ~~nine~~three months of ~~2017~~2020 was ~~6.3%~~9.5% which was ~~marginally lower than~~higher compared to the ~~6.7%~~7.7% rate during the same period in ~~2016.~~2019. In the first quarter of 2020, an outcome of the COVID-19 pandemic crisis was a movement of consumers toward fortifying liquidity positions. This manifested in greater withdrawal and surrender activity. In addition, annuity contracts with fixed interest rates are more prone to terminate during periods of increases in secular interest rate levels and as contracts approach the end of their surrender charge period.

Deposits collected on annuity contracts are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings (Loss) in accordance with GAAP. Actual annuity deposits collected for the three ~~and nine~~ months ended~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 are detailed below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Fixed-index annuities	$	151,894	156,417	439,337	502,386	$	76,268	61,450
Other deferred annuities	4,617		7,555	19,917	31,767	1,688		3,600
Immediate annuities	1,918		1,865	4,984	5,575	4,577		968

Totals	$	158,429	165,837	464,238	539,728	$	82,533	66,018

Fixed-index products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since National Western does not offer variable products or mutual funds, fixed-index products provide an important alternative to the ~~company's~~Company's existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were ~~95%~~92% and 93% for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, respectively. The percentage of fixed-index products to total annuity sales reflects the low interest rate environment and ~~the ongoing~~what had been a long run bull market in equities.

~~As a selling inducement, some~~Some of the Company's deferred products, including fixed-index annuity products, contain a first year interest bonus ranging from 1% to 7% depending upon the product, in addition to the base first year interest rate. Other products include a premium bonus ranging from 2% to 10% which is credited to the account balance when premiums are applied. These ~~bonus rates~~sales inducements are deferred in conjunction with other capitalized policy acquisition costs. The amounts deferred to be amortized over future periods amounted to approximately ~~$13.7~~$1.5 million and ~~$13.6~~$0.9 million during the first ~~nine~~three months of ~~2017~~2020 and ~~2016,~~2019, respectively. Amortization of deferred sales inducements is included as a component of annuity contract interest as described later in this discussion of Annuity Operations.

A detail of net investment income for annuity operations is provided below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020			2019
	(In thousands)					(In thousands)

Net investment income (excluding derivatives)	$	83,898	85,777	253,520	258,655	$	71,160		80,090
Derivative gain (loss)	30,225		11,607	92,511	2,924	(60,528		)	23,064

Net investment income	$	114,123	97,384	346,031	261,579	$	10,632		103,154

As ~~previously described, derivatives are call~~seen in the above table, net investment income also includes the gains and losses on index options purchased to ~~hedge~~back the ~~equity return component~~index crediting mechanism on fixed-index universal products. The gain or loss on index options follows the movement of ~~National Western's fixed-index annuity products~~the reference indice with ~~any~~realized gains or losses ~~from~~being recognized on the ~~sale or~~anniversary of each index option based upon the reference indice at the expiration date relative to the index level at the time the index option was purchased. Unrealized gains and losses are recorded for index options outstanding based upon their fair value, largely determined by the reference indice level, at the balance sheet reporting date as compared to the original purchase cost of ~~the options, as well as period-to-period changes in fair values, reflected in net investment income.~~ each respective option.

Since the embedded derivative option in the policies is bifurcated when determining the contract reserve liability, the impact of the market value change of index options on asset values generally aligns closely with the movement of the embedded derivative liability such that the net effect upon pretax earnings is negligible (i.e. net realized and unrealized gains/(losses) included in net investment income approximate the change in contract interest associated with the corresponding embedded derivative liability change). See further discussion below regarding contract interest activity.

Consistent with the domestic and international life segments, the ~~company~~Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on annuity DPAC balances recorded through amortization expense separate from recurring amortization expense components for the three ~~and nine~~ months ended~~September 30, 2017~~March 31, 2020 and ~~2016~~2019.


Amortization of DPAC	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)


Unlocking adjustments	$	15,080	—	15,080	3,650	$	—	—
Other amortization components	22,710		21,430	70,486	72,222	19,021		19,712

Totals	$	37,790	21,430	85,566	75,872	$	19,021	19,712

Amortization of DPAC balances is proportional to estimated expected gross profits ("EGPs") for a line of business. The ~~Annuity~~EGPs of the block of annuity policies that are not fixed-index have been steadily decreasing with the declining amount of policies in force, as well as DPAC ~~balance was unlocked~~unlocking in recent years for unfavorable experience. In addition, experience which deviates from the EGPs assumed can similarly increase or decrease the amortization of DPAC. The increase in collected asset management fees collected in the first quarter of 2020 served to increase EGPs for the fixed-index block of annuity policies which served to increase DPAC amortization during the three and nine months ended September 30, 2017, for crediting rate spreads and surrender/annuitization assumptions. The effect of the prospective unlocking was to decrease the DPAC balance by $15.1 million (and increase amortization expense). During 2016 the company unlocked the DPAC balance for surrender and annuitization rates. The effect of the prospective unlocking in this period was to decrease the DPAC balance by $3.7 million (and increase amortization expense).period.

Annuity contract interest includes the equity component return associated with the call options purchased to hedge National Western's fixed-index annuities. The detail of fixed-index annuity contract interest as compared to contract interest for all other annuities is as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017			2016		2017		2016		2020			2019
	(In thousands)									(In thousands)

Fixed-index annuities	$	52,008		26,780		146,456		68,373		$	(12,997	)	28,539
All other annuities	26,852			18,140		65,269		63,590		14,141			14,838

Gross contract interest	78,860			44,920		211,725		131,963		1,144			43,377
Bonus interest deferred and capitalized	(4,772		)	(4,243	)	(13,651	)	(13,587	)	(1,507		)	(863	)
Bonus interest amortization	10,480			6,017		23,341		20,718		4,867			4,968

Total contract interest	$	84,568		46,694		221,415		139,094		$	4,504		47,482

The fluctuation in reported contract interest amounts for fixed-index annuities is driven by sales levels, the level of the business in force and the effect of positive or negative market returns of option values on projected interest credits. As noted in the net investment income discussion, onthe amounts shown for contract interest for fixed-index annuities generally align with the derivative gains/(losses) included in net investment income as due to the market change of index options aligning closely with the movement of the embedded derivative liability held for these products.

As noted in the discussion in the Consolidated Operations ~~positive returns on expiring option contracts during the first nine months~~section, collection of ~~2017 led to an increase in collected~~ asset management fees ~~by National Western which are~~on positive returns of expiring options subtracted from contract interest credited to ~~policyholders and lessens~~policyholders. This offset serves to lessen the increase in contract interest expense relative to the option gains reported in the Company's net investment income. Asset management fees collected during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 were ~~$7.5~~$10.2 million ~~and $24.3 million, respectively,~~ compared to ~~$2.5 million and $3.5~~$1.6 million in the corresponding ~~periods~~period of ~~2016.~~2019.

As previously noted, accounting rules require the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year as an offset to projected policyholder interest credits. The projections are based upon the recent performance of options as of balance sheet reporting dates. The change in this projection, plus or minus, is included in contract interest for the period being reported on. In the three month periods ended March 31,2020 and 2019, contract interest was increased $29.3 million and decreased $15.7 million, respectively, for these projection changes. The increase to contract interest expense reflects lower estimated asset management fees to be collected while the decrease to contract interest expense represents an increase to the amount of asset management fees estimated to be collected. The Annuity segment contains the products which charge asset management fees.

Annuity contract interest includes ~~unlocking~~true-up adjustments for the deferred sales inducement balance ~~and annuity reserves. In conjunction~~which are done each period similar to that done with respect to DPAC balances with the ~~DPAC~~adjustment reflected in current period contract interest expense. To the extent required, the Company may also record unlocking ~~during the three and nine months ended September 30, 2017, as discussed previously, the company unlocked its~~adjustments to deferred sales inducement balances in conjunction with DPAC balance ~~decreasing it~~unlockings. The Company had no unlocking adjustments in the first quarters of 2020 and 2019.

Acquired Businesses

Effective January 31, 2019, Ozark National and NIS were acquired and their results included in the Condensed Consolidated Financial Statements of the Company. Ozark National and NIS have been combined into a separate segment "Acquired Businesses" given their inter-related marketing and sales approach which consists of a coordinated sale of a non-participating whole life insurance product (Ozark National) and a mutual fund investment product (NIS). An analysis of results of operations for the Company's acquired businesses segment is detailed below. The results for the quarter ended March 31, 2019 include the two months of activity subsequent to the acquisition date.



	Three Months Ended March 31,
	2020		2019
	(In thousands)

Premiums and contract revenues:
Premiums and contract charges	$	20,083	13,801
Net investment income	6,301		3,976
Other revenues	2,422		1,441

Total revenues	28,806		19,218

Benefits and expenses:
Life and other policy benefits	16,237		10,675
Amortization of deferred policy acquisition costs and value of business acquired	2,391		1,748
Other operating expenses	4,069		3,085

Total benefits and expenses	22,697		15,508

Segment earnings (loss) before Federal income taxes	6,109		3,710
Provision (benefit) for Federal income taxes	1,222		747

Segment earnings (loss)	$	4,887	2,963

Revenues from acquired businesses principally include life insurance premiums on traditional type products. Unlike universal life, revenues from traditional products are simply life premiums recognized as income over the premium-paying period of the related policies. The detail of premiums is provided below.



	Three Months Ended March 31,
	2020			2019
	(In thousands)

Traditional life insurance premiums	$	20,682		13,767
Other insurance premiums and considerations	118			83
Reinsurance premiums	(717		)	(49	)

Totals	$	20,083		13,801

Ozark National's traditional life block of business at March 31, 2020 included approximately 182,200 policies in force representing nearly $6.2 billion of life insurance coverage. The repetitive pay nature of Ozark National's business promotes a higher level of persistency with an annualized lapse rate of 4.6% through March 31, 2020 matching the rate experienced in 2019. Traditional life premiums by ~~$4.3~~first year and renewal are detailed below.



	Three Months Ended March 31,
	2020		2019
	(In thousands)

Traditional life insurance premiums:
First year premiums	$	1,215	793
Renewal premiums	19,467		12,974

Totals	$	20,682	13,767

Other revenues consists primarily of brokerage revenue of NIS. Brokerage revenues of $2.4 million ~~(and increasing contract interest expense). Similarly, National Western also unlocked its deferred sales inducement~~and $1.4 million for the three months ended March 31, 2020 and 2019, respectively had associated brokerage expense of $1.2 million and $0.7 million which is included in Other operating expenses.

The average face value of Ozark National's policies in force at March 31, 2020 was approximately $34,000. Consequently, life and policy benefits for smaller face amounts are subject to variation from quarter to quarter. Incurred net death claims, after reinsurance, for the first three months of 2020 were $7.7 million representing an average net claim of $15,700. Incurred net death claims in the quarter ended March 31, 2019 were $5.5 million representing a net average claim of $14,800. Ozark National's maximum retention on any single insured life is $200,000 with limited exceptions related to the conversion of child protection and guaranteed insurability riders. The balance of life and policy benefits during the ~~second quarter~~quarters ended March 31, 2020 and 2019 consisted of ~~2016 for surrender~~increases in insurance reserves and ~~annuitization rates~~payments of other policy benefits.

As part of the purchase accounting required with the ~~prospective unlocking reducing~~acquisition of Ozark National effective January 31, 2019, the ~~sales inducement~~Company recorded an intangible asset of $145.8 million referred to as the value of business acquired ("VOBA"). VOBA represents the difference between the acquired assets and liabilities of Ozark National measured in accordance with the Company's accounting policies and the fair value of these same assets and liabilities. The VOBA balance sheet amount is amortized following a methodology similar to that used for amortizing deferred policy acquisition costs.

Subsequent to its acquisition effective January 31, 2019, Ozark National began deferring policy acquisition costs and amortizing these deferrals similar to the methodology employed by ~~$1.6 million~~National Western. The following table identifies the amortization expense of Ozark National's DPAC and ~~increasing contract interest expense.~~VOBA for the three months ended March 31, 2020 and 2019.

These unlocking adjustments also increased two-tier annuity reserves in each respective period the change of which increased contract interest expense. The two-tier annuity reserve unlocking amounted to $13.6 million in the 2017 reporting periods and $12.2 million during 2016.



Amortization of DPAC and VOBA	Three Months Ended March 31,
	2020		2019
	(In thousands)


Unlocking	$	—	—
VOBA amortization expense	2,193		1,623
DPAC amortization expense	198		125

Totals	$	2,391	1,748

Other Operations

The Company's primary business encompasses its domestic and international life insurance operations, ~~and~~ its annuity operations, ~~of National Western.~~and its acquired businesses. However, ~~NWLGI and National Western~~the Company also ~~have small~~has real estate ~~nursing home,~~ and other investment operations through ~~their~~its wholly owned ~~subsidiaries.~~ subsidiaries, and owned nursing operations through early part of 2019.

Pre-tax operating amounts include the results of BP III, the entity owning and operating the Company's home office facility in Austin, Texas. BP III incurred pre-tax losses of $(0.3) million and $(0.4) million for the three months ended March 31, 2020 and 2019, respectively. National Western maintains its home office in this facility leasing approximately 40% of the space available. The lease payments made by National Western to BP III have been eliminated in consolidation.

Nursing home operations generated ~~$0.9~~$(0.1) million and ~~$(0.1)~~$1.4 million of pre-tax operating earnings in the first ~~nine~~three months of ~~2017~~2020 and ~~2016,~~2019, respectively. As discussed in the Consolidated Operations section, the Company closed on the sale of its Reno, Nevada nursing home operations effective February 1, 2019, and on the sale of its San Marcos, Texas nursing home operations effective May 1, 2019. Pre-tax operating earnings in the first three months of 2019 include Reno operating results for the month of January and net gains from the sale of personal property and equipment of $1.4 million.

The remaining pre-tax earnings (loss) of ~~$19.4~~$(2.0) million and ~~$16.2~~$3.4 million in Other Operations during the ~~nine month~~three-month periods ~~represent~~includes investment income from real estate, municipal bonds, and common and preferred equities held in subsidiary company portfolios principally for ~~tax advantage~~tax-advantage purposes. ~~Included~~One of these subsidiaries holds a modest portfolio of equity securities whose fair value changes are recorded in net investment income. In the quarters ended March 31, 2020 and 2019, the market value changes for these ~~amounts are semi-annual distributions from a life interest~~securities were $(6.0) million and $1.7 million, respectively. Pretax earnings in the ~~Libby Shearn Moody Trust~~first quarter of 2019 also include expenses of $3.3 million related to the purchase of Ozark National and NIS which ~~is held in NWLSM, Inc. Pretax distributions from this trust~~ were ~~$3.1 million and $2.9 million~~not eligible for inclusion in the nine month periods ended September 30, 2017 and 2016, respectively. The remaining increase in investment income during the first nine months of 2017 compared to 2016 reflects payoffs on certain loans having profit participation provisions in the agreements with borrowers.purchase price.

INVESTMENTS

General

The Company's investment philosophy emphasizes the careful handling of policyowners' and stockholders' funds to achieve security of principal, to obtain the maximum possible yield while maintaining security of principal, and to maintain liquidity in a measure consistent with current and long-term requirements of the Company.

The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below. The Company emphasizes investment grade debt securities.


	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
	Carrying Value		%	Carrying Value		%	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)			(In thousands)			(In thousands)

Debt securities	$	10,290,622	95.5	$	10,201,309	96.0	$	10,164,301	95.7	$	10,463,190	94.7
Mortgage loans	188,623		1.8	174,534		1.6	276,083		2.6	272,422		2.5
Policy loans	57,466		0.5	58,699		0.6	78,036		0.7	80,008		0.7
Derivatives, index options	163,536		1.5	120,644		1.1	24,335		0.2	157,588		1.4
Real estate	31,298		0.3	31,761		0.3	34,443		0.3	34,588		0.3
Equity securities	19,976		0.2	18,313		0.2	15,984		0.2	23,594		0.2
Other	17,635		0.2	22,193		0.2	31,709		0.3	27,502		0.2

Totals	$	10,769,156	100.0	$	10,627,453	100.0	$	10,624,891	100.0	$	11,058,892	100.0

Invested assets at March 31, 2020 include Ozark National and NIS amounts as follows: Debt securities of $712.7 million; Policy loans of $26.7 million; and Real estate of $4.6 million. These invested asset amounts at December 31, 2019 were: Debt securities of $722.9 million; Policy loans of $27.1 million; and Real Estate of $4.6 million.

Debt ~~and Equity~~ Securities

The Company maintains a diversified portfolio which consists mostly of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities primarily include U.S. Government agency pass-through securities and collateralized mortgage obligations ("CMO"). The Company's investment guidelines prescribe limitations by type of security as a percent of the total investment portfolio and all holdings were within these threshold limits. As of ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, the Company's debt securities portfolio consisted of the following classes of securities:


	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
	Carrying Value		%	Carrying Value		%	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)			(In thousands)			(In thousands)

Corporate	$	7,270,804	70.7	$	7,097,692	69.6	$	7,446,057	73.3	$	7,668,483	73.3
Residential mortgage-backed securities	1,316,921		12.8	1,396,426		13.7	1,051,281		10.3	1,080,674		10.3
Public utilities	1,217,939		11.8	1,218,870		11.9	956,821		9.4	959,815		9.2
State and political subdivisions	456,021		4.4	456,643		4.5	514,134		5.1	533,962		5.1
U.S. agencies							89,902		0.9	100,910		1.0
Asset-backed securities	17,188		0.2	20,009		0.2	61,677		0.6	71,260		0.7
Commercial mortgage-backed							29,365		0.3	32,974		0.3
Foreign governments	10,413		0.1	10,336		0.1	11,277		0.1	11,330		0.1
U.S. Treasury	1,336		—	1,333		—	3,787		—	3,782		—

Totals	$	10,290,622	100.0	$	10,201,309	100.0	$	10,164,301	100.0	$	10,463,190	100.0

The Company holds minimal levels of U.S. Treasury securities due to their low yields and deposits most of these holdings with various state insurance departments in order to meet security deposit on hand requirements in these jurisdictions.

~~Substantially all~~The Company has deemphasized mortgage-backed securities for a number of years given the ~~Company's investable cash flows are directed toward~~low interest rate environment and the ~~purchase~~lack of ~~long-term~~incremental yield relative to other classes of debt securities. The Company's investment policy calls for investing in debt securities that are investment grade, meet quality and yield objectives, and provide adequate liquidity for obligations to policyholders. Debt securities with intermediate maturities are targeted by the Company as they more closely match the intermediate nature of the Company's policy liabilities and provide an appropriate strategy for managing cash flows. Long-term debt securities purchased to fund insurance company operations are summarized below.

Nine Months Ended September 30, Year Ended December 31,
2017 2016
($ In thousands)

Cost of acquisitions $ 592,064
$ 700,248
Average credit quality A-
BBB+
Effective annual yield 3.57 % 3.38 %
Spread to treasuries 1.20 % 1.54 %
Effective duration 8.2 years
8.4 years

Rating agencies generally view mortgage-backed securities as having additional risk for insurers holding interest sensitive liabilities given the potential for asset/liability disintermediation. Consequently, the Company holds predominantly agency mortgage-backed securities. Because mortgage-backed securities are subject to prepayment and extension risk, the Company has substantially reduced these risks by investing in collateralized mortgage obligations ("CMO"), which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I ("PAC I"), very accurately defined maturity ("VADM"), and sequential tranches, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. The Company does not purchase tranches, such as PAC II and support tranches, that subject the portfolio to greater than average prepayment risk. Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.

The majority of the Company's investable cash flows are directed toward the purchase of long-term debt securities. The Company's investment policy calls for investing in debt securities that are investment grade, meet quality and yield objectives, and provide adequate liquidity for obligations to policyholders. Particular attention is paid to avoiding concentration in any one industry classification or in large singular credit exposures. Debt securities with intermediate maturities are targeted by the Company as they more closely match the intermediate nature of the Company's policy liabilities and provide an appropriate strategy for managing cash flows. Long-term debt securities purchased to fund National Western insurance company operations are summarized below.



	Three Months Ended March 31,			Year Ended December 31,
	2020			2019
	($ In thousands)

Cost of acquisitions	$	132,281		$	299,442
Average credit quality	BBB+			BBB
Effective annual yield	3.76		%	4.06		%
Spread to treasuries	1.94		%	1.79		%
Effective duration	12.5 years			12.0 years

Beginning in 2019, the Company began purchasing a greater proportion of longer maturity debt securities to match the increased duration of its growing life insurance policy liabilities. Purchases in prior periods were concentrated in effective durations between eight and nine years.

In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investment in debt securities. Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks. This emphasis is reflected in the high average credit rating of the Company's debt securities portfolio with ~~98.8%~~98.1%, as of ~~September 30, 2017,~~March 31, 2020, held in investment grade securities. In the table below, investments in debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.


	September 30, 2017			December 31, 2016			March 31, 2020			December 31, 2019
	Carrying Value		%	Carrying Value		%	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)			(In thousands)			(In thousands)

AAA	$	108,963	1.1	$	97,421	1.0	$	115,439	1.1	$	113,875	1.1
AA	2,128,202		20.7	2,225,606		21.8	2,003,535		19.7	2,112,238		20.2
A	3,232,971		31.4	3,288,882		32.2	3,125,540		30.8	3,347,199		32.0
BBB	4,692,405		45.6	4,409,873		43.2	4,724,019		46.5	4,806,181		45.9
BB and other below investment grade	128,081		1.2	179,527		1.8	195,768		1.9	83,697		0.8

Totals	$	10,290,622	100.0	$	10,201,309	100.0	$	10,164,301	100.0	$	10,463,190	100.0

~~The~~Although the Company's investment guidelines ~~do not~~ allow for the purchase of below investment grade ~~securities.~~securities up to an aggregate amount of $10 million, it has been the Company's practice to only purchase debt securities which are investment grade at the time of acquisition. The investments held in debt securities below investment grade are the result of subsequent downgrades of the securities. These holdings are further summarized below.

Below Investment Grade Debt Securities

Amortized
Cost

Carrying
Value

Fair
Value

% of
Invested
Assets
(In thousands, except percentages)

September 30, 2017 $ 127,407
128,081
130,244
1.2 %

December 31, 2016 $ 180,943
179,527
180,732
1.7 %



	Below Investment Grade Debt Securities
	Amortized Cost		Carrying Value	Fair Value	% of Invested Assets
	(In thousands, except percentages)

March 31, 2020	$	223,573	195,768	177,940	1.8	%

December 31, 2019	$	85,493	83,697	84,516	0.8	%

The Company's percentage of below investment grade securities as of ~~September 30, 2017~~March 31, 2020 compared with the percentage at December 31, ~~2016~~ ~~decreased~~2019 increased due to ~~the maturity and disposal~~net downgrades of several ~~securities~~credit issuers, most notably in the oil and ~~credit rating upgrades of~~gas/energy sector as well as certain ~~holdings.~~retail industry issuers. These industries in particular were affected by the economic slowdown invoked by the global pandemic crisis. The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets remain low compared to industry averages.

Holdings in below investment grade securities ~~by category~~ as of ~~September 30, 2017~~March 31, 2020 are summarized below by category, including their comparable fair value as of December 31, ~~2016~~ ~~for those debt securities rated below investment grade at September 30, 2017.~~2019. The Company continually monitors developments in these industries for issues that may affect security valuation.


	Below Investment Grade Debt Securities					Below Investment Grade Debt Securities
	Amortized Cost		Carrying Value	Fair Value	Fair Value	Amortized Cost			Carrying Value		Fair Value	Fair Value
Industry Category	September 30, 2017		September 30, 2017	September 30, 2017	December 31, 2016	March 31, 2020			March 31, 2020		March 31, 2020	December 31, 2019
	(In thousands)					(In thousands)

Retail						$	21,955		15,243		15,243	22,133
Asset-backed securities	$	7,554	7,715	8,996	8,840	3,343			3,355		3,360	3,473
Residential mortgage-backed	1,170		1,115	1,115	1,093	768			577		577	659
Oil & gas	35,063		33,701	33,701	32,465	83,037			65,688		47,908	62,553
Manufacturing	57,340		58,014	58,896	57,161	102,916			99,649		99,283	103,556
Other	26,280		27,536	27,536	26,772	11,867			11,569		11,569	12,219

Total before Allowance for credit losses						223,886			196,081		177,940	204,593

Allowance for credit losses						(313		)	(313	)	—	—

Totals	$	127,407	128,081	130,244	126,331	$	223,573		195,768		177,940	204,593

The Company closely monitors its below investment grade holdings by reviewing investment performance indicators, including information such as issuer operating performance, debt ratings, analyst reports and other economic factors that may affect these specific investments. As a result of the investment downgrades which occurred in the first quarter of 2020 due to the economic stresses caused by the COVID-19 pandemic, additional analyses were performed of the individual credits whose market values were most significantly impacted. While additional losses are not currently anticipated, based on the existing status and condition of these securities, continued credit deterioration of some securities or the markets in general is possible, which may result in ~~further~~future write-downs.

In the energy sector, oil prices declined over the past several years. Since then, prices have bottomed and come off of their lows, and the credit quality of individual companies that was affected during this downturn has begun to improve. At September 30, 2017 and December 31, 2016, the Company's aggregate holdings in this sector approximated $941 million and $951 million, respectively. These holdings represented debt securities issued by approximately forty companies in the oil and gas industry. The Company's oil and gas debt securities were 96.4% investment grade as of the balance sheet date and had an overall investment credit rating of BBB+. Further mitigating the risk of the Company's holdings in this sector are ample diversification by subsector (integrated, independent, pipeline, servicer, and equipment).

Generally accepted accounting principles ~~require~~through the end of 2019 required that investments in debt securities be written down to fair value when declines in value ~~are~~were judged to be other-than-temporary. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Refer to Note 10, Fair Values of Financial Instruments, of the accompanying Condensed Consolidated Financial Statements for further discussion.

~~During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~the~~The Company recorded no other-than-temporary impairment credit related write-downs ~~on debt or equity securities. See Note 9, Investments, of~~in the ~~accompanying Condensed Consolidated Financial Statements for further discussion. Since the Company's adoption of the~~quarter ended March 31, 2019. Under this prior GAAP guidance onpertaining to the recognition and accounting for other-than-temporary impairments due to credit loss versus non-credit loss, the Company ~~has~~ recognized a cumulative total of $~~2.0~~8.5 million of other-than-temporary impairments of which $~~1.4~~8.5 million was deemed credit related and recognized as realized investment losses in earnings, and $~~0.6~~0.0 million, net of amortization, which was deemed a non-credit related impairment and recognized in other comprehensive income.

As disclosed in Note (2) New Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements, the Company adopted new accounting guidance effective January 1, 2020 for credit loss recognition of certain financial assets, including debt securities classified in the "held to maturity" category. The Company employed a cohort cumulative loss rate method in estimating current expected credit losses with respect to its held to maturity debt securities as of January 1, 2020 and March 31, 2020. This method applies publicly available industry wide statistics of default incidence by defined segmentations of debt security investments combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term. The following table presents the allowance for credit losses for the periods shown.



	Three Months Ended March 31,
	2020
	(In thousands)

Debt Securities Allowance for Credit Allowances:
Balance, beginning of the period	$	—
Provision at January 1, 2020 for adoption of new accounting guidance	3,334
Provision during the period	2,705
Releases	—

Balance, end of period	$	6,039

The Company is required to classify its investments in debt ~~and equity~~ securities into one of three categories: (a) trading securities; (b) securities available for sale; or (c) securities held to maturity. The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities. Of the remaining two categories, available for sale and held to maturity, the Company makes a determination on categorization based on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. As shown in the table below ~~28.9%~~at March 31, 2020, 30.7% of the Company's total debt ~~and equity~~ securities, based on fair values, were classified as securities available for ~~sale at September 30, 2017.~~sale. These holdings in available for sale provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs.

September 30, 2017

Fair
Value

Amortized
Cost

Unrealized
Gains (Losses)
(In thousands)

Securities held to maturity:
Debt securities $ 7,498,922
7,264,995
233,927
Securities available for sale:

Debt securities 3,025,627
2,927,787
97,840
Equity securities 19,976
14,807
5,169

Totals $ 10,544,525
10,207,589
336,936



	March 31, 2020
	Fair Value		Amortized Cost	Allowance for Credit Losses		Unrealized Gains (Losses)
	(In thousands)

Debt securities held to maturity	$	7,175,648	6,996,080	(6,039	)	185,607
Debt securities available for sale	3,174,260		3,206,357	—		(32,097	)

Totals	$	10,349,908	10,202,437	(6,039	)	153,510

~~Asset-Backed Securities~~

The Company holds approximately $17.2 million in asset-backed securities as of September 30, 2017. This portfolio includes $1.1 million of manufactured housing bonds and $16.1 million of home equity loans (also referred to as subprime securities). The Company does not have any holdings in collateralized bond obligations (“CBO”s), collateralized debt obligations (“CDO”s), or collateralized loan obligations (“CLO”s). Principal risks in holding asset-backed securities are structural, credit, and capital market risks. Structural risks include the securities' priority in the issuer's capital structure, the adequacy of and ability to realize proceeds from collateral and the potential for prepayments. Credit risks include corporate credit risks or consumer credit risks for financing such as subprime mortgages. Capital market risks include the general level of interest rates and the liquidity for these securities in the marketplace.

The Company's exposure to the subprime sector has been limited to investments in the senior tranches of subprime residential mortgage loans. The subprime sector is generally categorized under the asset-backed sector. This sector lends to borrowers who do not qualify for prime interest rates due to poor or insufficient credit history. The slowing housing market, rising interest rates, and relaxed underwriting standards for loans originated after 2005 resulted in higher delinquency rates and losses beginning in 2007. These events caused illiquidity in the market and volatility in the market prices of subprime securities. The housing market subsequently stabilized and an improvement in the prices of subprime securities occurred as the bond market regained more liquidity. All of the loans classified as subprime in the Company's portfolio as of ~~September 30, 2017~~ ~~were underwritten prior to 2005 as noted in the table below.~~

September 30, 2017 December 31, 2016
Investment Origination Year Carrying Value Fair Value Carrying Value Fair Value
(In thousands)

Subprime:
1998 $ 1,692
1,753
2,074
2,145
2003 2,719
3,964
2,997
4,369
2004 11,633
11,632
13,382
13,401

Total $ 16,044
17,349
18,453
19,915

~~During the third quarter of 2017, the Company's exposure to the subprime sector decreased due to principal repayments. As of~~ ~~September 30, 2017, the Company held nine subprime issues of which one was rated AA, one was rated A, two were rated BBB, one was rated BB, one was rated B, one was rated CCC, one was rated D and one was not rated.~~

Mortgage Loans and Real Estate

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,~~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 proved over time 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 targets 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~~along with a competitive marketplace, resulted in fewer loan opportunities being available that ~~meet~~met the Company's required rate of return. ~~Beginning in 2016, the Company initiated a concerted effort to grow this part of its investment portfolio.~~ Mortgage loans originated by the Company totaled ~~$84.6~~$121.4 million for the year ended December 31, ~~2016~~ ~~and~~ 2019 but were $~~38.2~~7.0 million for the ~~nine~~three months ended ~~September 30, 2017~~.March 31, 2020 reflecting the Company's increased underwriting of mortgage loan credits. Principal repayments on mortgage loans for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 were $~~24.2~~2.1 million.

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 Condensed Consolidated Statements of ~~Earnings.~~Earnings (Loss). 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 currently has no loans past due 90 days which are accruing interest.

The Company held net investments in mortgage loans, after allowances for possible losses, totaling $~~188.6~~276.1 million and $~~174.5~~272.4 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, respectively. The diversification of the portfolio by geographic region and by property type was as follows:



	March 31, 2020					December 31, 2019
	Amount			%		Amount			%
	(In thousands)					(In thousands)

Mortgage Loans by Geographic Region:
West South Central	$	196,859		70.8		$	191,089		70.0
South Atlantic	35,416			12.7		35,698			13.1
East North Central	16,851			6.1		17,248			6.3
West North Central	12,442			4.5		12,505			4.6
East South Central	7,977			2.9		8,063			2.9
Pacific	6,385			2.3		6,436			2.4
Middle Atlantic	2,038			0.7		2,058			0.7
Gross balance	277,968			100.0		273,097			100.0

Allowance for credit losses	(1,885		)	(0.7	)	(675		)	(0.2	)

Totals	$	276,083		99.3		$	272,422		99.8

September 30, 2017 December 31, 2016
Amount % Amount %
(In thousands) (In thousands)

Mortgage Loans by Geographic Region:
West South Central $ 118,123
62.4
$ 102,531
58.5
East North Central 31,066
16.4
26,717
15.3
East South Central 14,373
7.6
6,512
3.7
South Atlantic 13,796
7.3
14,130
8.1
Pacific 8,065
4.3
9,872
5.6
Middle Atlantic 2,234
1.2
2,288
1.3
Mountain 1,616
0.8
1,646
0.9
New England —
—
11,488
6.6
Gross balance 189,273
100.0
175,184
100.0

Allowance for possible losses (650 ) (0.3 ) (650 ) (0.4 )

Totals $ 188,623
99.7
$ 174,534
99.6



	March 31, 2020					December 31, 2019
	Amount			%		Amount			%
	(In thousands)					(In thousands)

Mortgage Loans by Property Type:
Retail	$	91,226		32.8		$	91,790		33.6
Office	94,857			34.1		95,362			34.9
Apartments	30,000			10.8		30,000			11.0
Hotel	8,854			3.2		8,997			3.3
Land/Lots	4,751			1.7		4,829			1.8
All other	48,280			17.4		42,119			15.4
Gross balance	277,968			100.0		273,097			100.0

Allowance for credit losses	(1,885		)	(0.7	)	(675		)	(0.2	)

Totals	$	276,083		99.3		$	272,422		99.8

As disclosed in Note (2) New Accounting Pronouncements in the Notes to Condensed Consolidated Financial Statements, the Company adopted new accounting guidance for credit loss recognition of certain financial assets, including mortgage loans. The Company employed the Weighted Average Remaining Maturity ("WARM") method in estimating current expected credit losses with respect to mortgage loan investments as of January 1, 2020 and March 31, 2020. The WARM method applies publicly available data of default incidence of commercial real estate properties by several defined segmentations combined with future assumptions regarding economic conditions (i.e. GDP forecasts) both in the near term and the long term. The following table presents the allowance for credit losses for the periods shown.

September 30, 2017 December 31, 2016
Amount % Amount %
(In thousands) (In thousands)

Mortgage Loans by Property Type:
Retail $ 86,108
45.5
$ 89,947
51.3
Office 56,299
29.7
57,095
32.6
Hotel/Motel 13,734
7.3
9,708
5.6
Land/Lots 10,537
5.6
4,946
2.8
All other 22,595
11.9
13,488
7.7
Gross balance 189,273
100.0
175,184
100.0

Allowance for possible losses (650 ) (0.3 ) (650 ) (0.4 )

Totals $ 188,623
99.7
$ 174,534
99.6



	Three Months Ended March 31,
	2020		2019
	(In thousands)

Mortgage Loans Allowance for Credit Allowances:
Balance, beginning of the period	$	675	$	675
Provision January 1, 2020 for adoption of new accounting guidance	504		—
Provision during the period	706		—
Releases	—		—

Balance, end of period	$	1,885	$	675

The Company's direct investments in real estate are not a significant portion of its total investment ~~portfolio. The Company also participates in several real estate joint ventures, limited partnerships,~~portfolio and ~~other loans that invest~~consist primarily inof income-producing ~~retail properties. These investments have enhanced the Company's overall investment portfolio returns.~~properties which are being operated by a wholly owned subsidiary of National Western. The Company's real estate investments totaled approximately $~~31.3~~34.4 million and $~~31.8~~34.6 million at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, respectively.

The Company recognized operating income of approximately $~~2.1~~0.7 million and ~~$2.0~~$0.6 million on real estate properties in the first ~~nine~~three months of ~~2017~~2020 and ~~2016,~~2019, 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.

Market Risk

Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices. The most significant market risk exposure for ~~National Western~~the Company is interest rate risk. Substantial and sustained increases and decreases in market interest rates can affect the profitability of insurance products and fair value of investments. The yield realized on new investments generally increases or decreases in direct relationship with interest rate changes. The fair values of fixed income debt securities correlate to external market interest rate conditions as market values typically increase when market interest rates decline and decrease when market interest rates rise. However, market values may fluctuate for other reasons, such as changing economic conditions, market dislocations or increasing event-risk concerns.

Interest Rate Risk

A gradual increase in interest rates from current levels would generally be a positive development for the Company. Rate increases would be expected to provide incremental net investment income, produce increased sales of fixed rate products, and limit the potential erosion of the Company's interest rate spread on products due to minimum guaranteed crediting rates in products. Alternatively, a rise in interest rates would reduce the fair value of the Company's investment ~~portfolio. Should~~portfolio and if long-term rates rise dramatically within a relatively short time period the Company could be exposed to disintermediation risk. Disintermediation risk is the risk that policyholders will surrender their policies in a rising interest rate environment forcing the Company to liquidate assets when they are in an unrealized loss position.

A decline in interest rates could cause certain mortgage-backed securities in the Company's portfolio to be more likely to pay down or prepay. In this situation, the Company typically will be unable to reinvest the proceeds at comparable yields. Lower interest rates will likely also cause lower net investment income, subject the Company to reinvestment rate risks, and possibly reduce profitability through reduced interest rate margins associated with products with minimum guaranteed crediting rates. Alternatively, the fair value of the Company's investment portfolio will increase when interest rates decline.

The correlation between fair values and interest rates for debt securities is reflected in the tables below.


	September 30, 2017			June 30, 2017		December 31, 2016		March 31, 2020			December 31, 2019
	(In thousands except percentages)							(In thousands except percentages)

Debt securities - fair value	$	10,524,549		10,489,280		10,379,661		$	10,355,947		10,764,648
Debt securities - amortized cost	$	10,192,782		10,159,005		10,136,279		$	10,202,437		10,312,365
Fair value as a percentage of amortized cost	103.25		%	103.25	%	102.40	%	101.50		%	104.39	%
Net unrealized gain balance	$	331,767		330,275		243,382
Net unrealized gain (loss) balance								$	153,510		452,283
Ten-year U.S. Treasury bond – (decrease) increase in yield for the period	0.03		%	(0.08	)%	0.18	%	(1.25		)%	(0.77	)%

The Company's unrealized gain (loss) balance for debt securities held at March 31, 2020 and December 31, 2019 is shown in the following table.


								Net Unrealized Gain (Loss) Balance
	Net Unrealized Gain Balance							At March 31, 2020			At December 31, 2019	Year-to-date Change in Unrealized Balance
	At September 30, 2017		At June 30, 2017	At December 31, 2016	Quarter Change in Unrealized Balance		Year-to-date Change in Unrealized Balance	(In thousands)

Debt securities held to maturity	$	233,927	235,953	178,352	(2,026	)	55,575	$	185,607		301,458	(115,851	)
Debt securities available for sale	97,840		94,322	65,030	3,518		32,810	(32,097		)	150,825	(182,922	)

Totals	$	331,767	330,275	243,382	1,492		88,385	$	153,510		452,283	(298,773	)

Debt securities held to maturity are recorded at their amortized cost. Accordingly, the unrealized amounts shown in the table above for Debt securities held to maturity are not incorporated into the Company's Condensed Consolidated Financial Statements at March 31, 2020 and December 31, 2019, respectively.

Changes in interest rates ~~typically~~can have a sizable effect on the fair values of the Company's debt securities. The market interest rate of the ten-year U.S. Treasury bond decreased approximately 12(125) basis points from ~~2.45%~~1.92% at year-end ~~2016~~2019 to ~~2.33%~~0.67% by the end of the first ~~nine~~three months of ~~2017~~ ~~and~~2020. Therefore the ~~Company's~~decrease in the unrealized ~~gain~~balance position ~~increased~~ of $~~88.4~~298.8 million year-to-date was due to the widening in interest rate spreads that occurred during the period as a result of COVID-19 effects on ~~a portfolio with an amortized cost basis of approximately~~ ~~$10.2 billion~~.financial markets. Given that the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have a ~~relatively small~~lesser effect on the Company's Condensed Consolidated Balance Sheet.

The Company manages interest rate risk principally through ongoing cash flow testing as required for insurance regulatory purposes. Computer models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows. Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities. The Company seeks to minimize the impact of interest risk through surrender charges that are imposed to discourage policy surrenders. Interest rate changes can be anticipated in ~~the~~ computer models and the corresponding risk addressed by management actions affecting asset and liability instruments. However, potential changes in the values of financial instruments indicated by hypothetical interest rate changes will likely be different from actual changes experienced, and the differences could be significant.

The Company has the ability to adjust interest rates, participation rates, and asset management fees and caps, as applicable, in response to changes in investment portfolio yields for a substantial portion of its business in force. The ability to adjust these rates is subject to competitive forces in the market for the Company’s products. Surrender rates could increase and new sales could be negatively affected if crediting rates are not competitive with the rates on competing products offered by other insurance companies and financial service entities. The Company designs its interest sensitive and annuity products with features encouraging ~~persistency. Interest sensitive life and annuity products have~~persistency, such as surrender and withdrawal penalty provisions. Typically, surrender charge rates gradually decrease each year the contract is in force.

The Company performed detailed sensitivity analysis as of December 31, ~~2016~~2019, for its interest rate-sensitive assets and liabilities. The changes in market values of the Company's debt securities in the first ~~nine~~three months of ~~2017~~2020 were reasonable given the expected range of results of this analysis.

Credit Risk

The Company is exposed to credit risk through counterparties and within its investment portfolio. Credit risk relates to the uncertainty associated with an obligor's continued ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. As previously discussed, the Company manages credit risk through established investment credit policies and guidelines which address the quality of creditors and counterparties, concentration limits, diversification practices and acceptable risk levels. These policies and guidelines are regularly reviewed and approved by senior management and ~~National Western's~~the Company's Board of Directors.

In connection with the Company’s use of call options to hedge the equity return component of its fixed-indexed annuity and life products, the Company is exposed to the risk that a counterparty fails to perform under terms of the option contract. The Company purchases one-year option contracts from multiple counterparties and evaluates the creditworthiness of all counterparties prior to the purchase of the contracts. For consideration in contracting with a counterparty, the rating required by the Company is a credit rating of “A” or higher. Accordingly, all options are purchased from nationally recognized financial institutions with a demonstrated performance for honoring their financial obligations and possessing substantial financial capacity. In addition, each counterparty is required to execute a credit support agreement obligating the counterparty to provide collateral to the Company when the fair value of the Company’s exposure to the counterparty exceeds specified amounts. Counterparty credit ratings and credit exposure are monitored continuously by ~~the Company’s~~National Western’s Investment Department with adjustments to collateral levels managed as incurred under the credit support agreements.

The Company is also exposed to credit spread risk related to market prices of investment securities and cash flows associated with changes in credit spreads. Credit spread tightening will reduce net investment income associated with new purchases of fixed debt securities and will increase the fair value of the investment portfolio. Credit spread widening will reduce the fair value of the investment portfolio and will increase net investment income on new purchases.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds. To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. ~~The Company (National Western) may also borrow up to $40 million on its bank~~National Western maintains a line of credit facility of $75 million which it may access for short-term cash needs. ~~There~~As part of the acquisition of Ozark National and NIS effective January 31, 2019, National Western borrowed $75 million to partly fund the closing cash purchase price of $205.4 million. The amounts borrowed were subsequently repaid during the first quarter of 2019 and there were no borrowings outstanding under the line of credit at ~~September 30, 2017~~March 31, 2020.

A primary liquidity concern for life insurers is the risk of an extraordinary level of early policyholder withdrawals, particularly with respect to annuity products ~~whose funds tend to~~which can move more rapidly with interest rate changes. The Company includes provisions within its annuity and universal life insurance policies, such as surrender and market value adjustments, that help limit and discourage early withdrawals.

The actual amounts paid by product line in connection with surrenders and withdrawals for the three ~~and nine~~ months ended ~~September 30,~~March 31, for each respective year, are noted in the table below.


	Three Months Ended September 30,			Nine Months Ended September 30,		Three Months Ended March 31,
	2017		2016	2017	2016	2020		2019
	(In thousands)					(In thousands)

Product Line:
Traditional Life	$	1,037	1,636	3,400	4,616	$	4,471	4,170
Universal Life	28,488		27,831	93,121	82,781	28,597		21,317
Annuities	122,697		126,275	393,743	388,102	175,963		173,977

Total	$	152,222	155,742	490,264	475,499	$	209,031	199,464

The above contractual withdrawals, as well as the level of surrenders experienced, were generally consistent with the Company's assumptions in asset/liability management, and the associated cash outflows did not have an adverse impact on overall liquidity. Individual life insurance policies are typically less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may ~~incur surrender charges and~~need to undergo a new underwriting process in order to obtain a new insurance policy. The increase in Universal Life payments year-to-date reflects the increased termination activity associated with policyholder residents of international countries from which the Company ceased accepting new applications from in the fourth quarter of 2015.policy elsewhere. Cash flow projections and tests under various market interest rate scenarios and assumptions are ~~also~~ performed to assist in evaluating liquidity needs and adequacy. ~~The~~Given the economic decline precipitated by the COVID-19 pandemic, Company management conducted additional liquidity scenario testing during the first quarter of 2020 using more severe assumptions and concluded that liquid assets were more than adequate under these scenarios. Accordingly, the Company currently expects available liquidity sources and future cash flows to be more than adequate to meet the demand for funds.

Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $~~193.4~~105.7 million and $~~246.2~~89.4 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $~~525.9~~281.3 million and $~~438.4~~193.3 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019, respectively. Operating and investing activity cash flow items could be reduced if interest rates rise at an accelerated rate in the future. Net cash inflows/(outflows) from the Company's universal life and investment annuity deposit product operations totaled $~~(140.1)~~(144.7) million and $~~(49.3)~~(156.7) million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019, ~~respectively.~~respectively, reflecting the trend in declining annuity sales during these periods and a higher incidence of annuity cash surrenders and withdrawals.

Capital Resources

The Company relies on stockholders' equity for its capital resources as there is no long-term debt outstanding and the Company does not anticipate the need for any long-term debt in the near future. As of ~~September 30, 2017~~March 31, 2020, the Company ~~had no~~maintained commitments ~~beyond~~for its normal operating and investment activities. During the first quarter of 2020, National Western became a member of the Federal Home Loan Bank of Dallas (FHLB) through an initial minimum required stock investment of $4.3 million. Through this membership, National Western will have a borrowing capacity based upon the amount of collateral it establishes.

The Company has declared and paid an annual dividend on its common shares since 2005. The Company's practice has been to take a conservative approach to dividends, and the Board of Directors has adopted a strategic position to substantially reinvest earnings internally. This conservative approach yields the following benefits: (1) providing capital to finance the development of new business; (2) enabling the Company to take advantage of potential acquisitions and other competitive situations as they arise; (3) building a strong capital base to support the Company's financial strength ratings; (4) maintaining the Company's liquidity and solvency during difficult economic and market conditions; and (5) enhancing the Company's regulatory capital position. For similar reasons, despite the fact the Company's market price of its Class A common shares has been trading at a discount to the book value per share for some time, there are no imminent plans for the Company to repurchase its shares.

The capacity of National Western to pay dividends to NWLGI is limited by law in the state of Colorado to earned profits (statutory unassigned surplus). At December 31, 2019, the maximum amount legally available for distribution without further regulatory approval is $152.8 million.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

It is ~~not~~ Company practice to not enter into off-balance sheet arrangements or to issue guarantees to third parties, other than in the normal course of issuing insurance contracts. Commitments related to insurance products sold are reflected as liabilities for future policy benefits. Insurance contracts guarantee certain performances by ~~the Company.~~National Western and Ozark National.

Insurance reserves are the means by which life insurance companies determine the liabilities that must be established to assure that future policy benefits are provided for and can be paid. These reserves are required by law and based upon standard actuarial methodologies to ensure fulfillment of commitments guaranteed to policyholders and their beneficiaries, even though the obligations may not be due for many years. Refer to Note 1 in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019 for a discussion of reserving methods.

The table below summarizes future estimated cash payments under existing contractual obligations.


	Payment Due by Period						Payment Due by Period
	Total		Less Than 1 Year	1 - 3 Years	3 - 5 Years	More Than 5 Years	Total		Less Than 1 Year	1 - 3 Years	3 - 5 Years	More Than 5 Years
	(In thousands)						(In thousands)

Loan commitments	$	16,300	16,300	—	—	—	$	—	—	—	—	—
Operating lease obligations	844		72	675	97	—
Life claims payable (1)	61,295		61,295	—	—	—
Lease obligations							1,118		394	724	—	—
Claims payable (1)							73,584		73,584	—	—	—
Other long-term reserve liabilities reflected on the balance sheet (2)	10,852,980		940,025	1,869,465	1,692,646	6,350,844	13,281,563		1,057,136	1,936,696	1,714,437	8,573,294

Total	$	10,931,419	1,017,692	1,870,140	1,692,743	6,350,844	$	13,356,265	1,131,114	1,937,420	1,714,437	8,573,294

(1) ~~Life claims~~Claims payable include benefit and claim liabilities for life, accident and health policies which the Company believes the amount and timing of the payment is essentially fixed and determinable. Such amounts generally relate to incurred and reported death, ~~and~~ critical illness, accident and health claims including an estimate of claims incurred but not reported.

(2) Other long-term liabilities include estimated life and annuity obligations related to death claims, policy surrenders, policy withdrawals, maturities and annuity payments based on mortality, lapse, annuitization, and withdrawal assumptions consistent with the Company's historical experience. These estimated life and annuity obligations are undiscounted projected cash outflows that assume interest crediting and market growth consistent with assumptions used in amortizing deferred acquisition costs. They do not include any offsets for future premiums or deposits. Other long-term liabilities also include determinable payout patterns related to immediate annuities. Due to the significance of the assumptions used, the actual cash outflows will differ both in amount and timing, possibly materially, from these estimates.

Subsequent to acquiring a commercial office building at the end of 2016 through its wholly owned subsidiary Braker P III, LLC ("BP III"), the Company entered into lease agreements with various tenants for available space not occupied by the Company. Total revenues recorded pertaining to these leases for the three month periods ended March 31, 2020 and 2019 amounted to $1.2 million and $0.9 million, respectively. Under their respective terms these leases expire at various dates from 2023 through 2026.

The table below summarizes future estimated cash receipts under all existing lease agreements, including those in addition to the BP III lease agreements discussed above.



	Estimated Cash Receipts by Period
	Total		Less Than 1 Year	1 - 3 Years	3 - 5 Years	More Than 5 Years
	(In thousands)

Real estate revenue	$	44,322	6,125	11,037	9,476	17,684

CHANGES IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES

Changes in Accounting Principles

In the first quarter of 2020 the Company implemented ASU 2016-13, Financial Instruments - Credit Losses. This standard replaced the previous incurred loss recognition model with an expected loss recognition model for certain financial assets. Adoption of the standard resulted in an incremental allowance for credit losses as of January 1, 2020 of $3.8 million, and a charge to retained earnings, net of tax, of $3.0 million as a change in accounting. There were no other changes in accounting principles during the periods reported in this Form 10-Q.

REGULATORY AND OTHER ISSUES

Statutory Accounting Practices

Regulations that affect the Company and the insurance industry are often the result of ~~efforts~~actions taken by the National Association of Insurance Commissioners ("NAIC"). The NAIC routinely publishes new regulations as model acts or laws which states subsequently adopt as part of their insurance regulations. Currently, the Company is not aware of any NAIC regulatory matter material to its operations or reporting of financial results.

Risk-Based Capital Requirements

The NAIC established risk-based capital ("RBC") requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks.

Statutory laws prohibit public dissemination of certain RBC information. However, both National Western and Ozark National's current statutory capital and surplus isare significantly in excess of the current threshold RBC requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK

This information is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Investments ~~in Debt and Equity Securities~~ section.

ITEM 4. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Effective January 1, 2017, the Company converted its annuity in force policies to its previously implemented internally developed policy administration system and began processing of policy transactions on such business (the Company had previously converted its annuity new business processing and related payment of commissions to the new system during 2016). This constitutes a changeThere were no changes in the Company's internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(e) under the Exchange Act. Prior to implementation of the annuity in force policies, the Company performed model office testing encompassing the new processes and procedures to be employed using the new system and defined its internal controls with respect to such processing in this environment. During the course ofAct, during the quarter ~~and nine months~~ ended ~~September 30, 2017, management continued~~March 31, 2020 that materially affected, or are reasonably likely to ~~perform post-implementation testing and analysis of the processing and internal controls implemented and determined that the change did not~~ materially affect, the Company's internal controls over financial reporting. With respect to the COVID-19 pandemic crisis, the Company's businesses were included in the financial services sector categorized as a Critical Infrastructure Sector by the Department of Homeland Security and mandated to maintain normal work schedules. While the Company adopted working remote for a sizable portion of its home office employees, existing internal controls over financial reporting ~~such that~~were maintained and augmented where necessary given the ~~information required to reported and disclosed~~unique situation presented in ~~its reports under the Exchange Act was adversely impacted.~~ this environment.

Internal controls over financial reporting change as the Company modifies or enhances its systems and processes to meet business needs. Any significant changes in controls are evaluated prior to implementation to help ensure continued effectiveness of internal controls and the control environment.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 8(A) "Legal Proceedings" of the accompanying Condensed Consolidated Financial Statements included in this Form 10-Q.

ITEM 1A. RISK FACTORS

~~There have been no substantial changes relative to the~~The risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2019 included a discussion of the potential ramifications of natural or man-made disasters and catastrophes including pandemic disease. As a business identified as being part of a Critical Infrastructure Security by the Department of Homeland Security, our companies and businesses have retained normal operations and business hours throughout the COVID-19 pandemic crisis. Although the majority of our home office staff was redeployed to remote work sites following social distancing protocols, our companies continued to accept applications for insurance, issue policies, invest and manage assets, pay policy benefits and expenses, maintain information technology operations, and adhere to a sound system of internal controls over financial reporting. Since operations were not interrupted or suspended, the Company did not activate the business continuity plans that it has in place. The exposure to adverse mortality experience has been evaluated and deemed to not significantly impact the Company's financial position. As the global and U.S. financial markets and economies undergo contraction and a restarting process, the exposure to financial service companies falls principally upon degradations in asset values, management of adequate liquidity and capital resources, and successfully maintaining competitiveness and product profitability in an exceptionally low interest rate environment. No conclusion can be drawn at this time whether the affects of COVID-19 upon the global economy will have a material effect on our business, results of operations and financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective August 22, 2008, National Western adopted and implemented a limited stock buy-back program associated with the ~~company's~~ 2008 Incentive Plan which provides Option Holders the additional alternative of selling shares acquired through the exercise of options directly back to the ~~company.~~Company. This plan and was assumed by NWLGI from National Western in 2015 pursuant to the terms of the holding company reorganization. The program ~~succeeded a similar buy-back program implemented March 10, 2006 associated~~provides Option Holders with the ~~company's 1995 Stock Option and Incentive Plan. Option Holders may~~ability to elect to sell such acquired shares back to the ~~company~~Company at any time within ninety (90) days after the exercise of options at the prevailing market price as of the date of notice of election. ~~These plans and programs were assumed by National Western Life Group, Inc. from National Western in 2015 pursuant to~~As of March 31, 2020, there are no options outstanding under the ~~terms of the holding company reorganization.~~plan.

Purchased shares are reported in the Company's Condensed Consolidated Financial Statements as authorized and unissued. ~~The following table sets forth the Company's repurchase of its Class A common shares from Option Holders for the quarter ended~~ ~~September 30, 2017~~.At December 31, 2019 and March 31, 2020 there were no stock options vested or unvested and outstanding under these plans.



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May yet Be Purchased Under the Plans or Programs

~~July~~January 1, ~~2017~~2020 through ~~July~~January 31, ~~2017~~2020	—	$	—	N/A	N/A
~~August~~February 1, ~~2017~~2020 through ~~August 31, 2017~~February 29, 2020	—	$	—	N/A	N/A
~~September~~March 1, ~~2017~~2020 through ~~September 30, 2017~~March 31, 2020	—	$	—	N/A	N/A

Total	—	$	—	N/A	N/A

At September 30, 2017, there were 13,018 stock options vested and outstanding under a grant dated April 18, 2008, and 6,000 stock options vested and outstanding under a grant dated June 20, 2008. These options expire on their respective dates in 2018 and will be forfeited by the option holders (officers and directors) unless exercised prior to those dates.

ITEM 4. Removed and Reserved.

ITEM 6. EXHIBITS


(a)	Exhibits



Exhibit 31(a)	-	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31(b)	-	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32(a)	-	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATIONAL WESTERN LIFE GROUP, INC.

(Registrant)



Date:	~~November 3, 2017~~May 11, 2020	/S/ Ross R. Moody
		Ross R. Moody
		Chairman of the Board, President and
		Chief Executive Officer
		(Authorized Officer)




Date:	~~November 3, 2017~~May 11, 2020	/S/ Brian M. Pribyl
		Brian M. Pribyl
		Senior Vice President,
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)
		(Principal Accounting Officer)

8996



	Nine Months Ended September 30, 2017
	Domestic Life Insurance		International Life Insurance		Annuities	All Others	Totals
					(In thousands)

Premiums and contract revenues	$	27,822	91,563		16,583	—	135,968
Net investment income	51,998		48,581		346,031	19,435	466,045
Other revenues	30		73		90	13,521	13,714

Total revenues	79,850		140,217		362,704	32,956	615,727

Life and other policy benefits	13,850		19,399		25,377	—	58,626
Amortization of deferred acquisition costs	8,300		(7,874	)	85,566	—	85,992
Universal life and annuity contract interest	41,576		36,871		221,415	—	299,862
Other operating expenses	13,975		18,846		28,588	12,622	74,031
Federal income taxes (benefit)	740		25,125		605	7,001	33,471

Total expenses	78,441		92,367		361,551	19,623	551,982

Segment earnings (loss)	$	1,409	47,850		1,153	13,333	63,745



	Nine Months Ended September 30, 2016
	Domestic Life Insurance		International Life Insurance	Annuities	All Others	Totals
				(In thousands)

Premiums and contract revenues	$	24,814	95,291	17,407	—	137,512
Net investment income	28,011		30,203	261,579	15,939	335,732
Other revenues	37		50	145	13,818	14,050

Total revenues	52,862		125,544	279,131	29,757	487,294

Life and other policy benefits	13,629		14,789	20,153	—	48,571
Amortization of deferred acquisition costs	989		11,720	75,872	—	88,581
Universal life and annuity contract interest	20,855		19,643	139,094	—	179,592
Other operating expenses	11,745		17,867	23,044	13,650	66,306
Federal income taxes (benefit)	1,833		19,977	6,808	5,229	33,847

Total expenses	49,051		83,996	264,971	18,879	416,897

Segment earnings (loss)	$	3,811	41,548	14,160	10,878	70,397



	Nine Months Ended
	September 30, 2017		September 30, 2016
	Officer	Director	Officer	Director

SARs	11,715	—	14,643	—
RSUs	2,725	1,660	3,661	2,563
PSUs	4,526	—	5,727	—



	Liability Awards
	SAR		RSU		PSU

Balance at January 1, 2017	77,178		6,029		5,426
Exercised	(1,862	)	(2,563	)	—
Forfeited	(400	)	(238	)	—
Granted	11,715		4,385		4,526

Balance at September 30, 2017	86,631		7,613		9,952



	Options/SARs Outstanding
	Number Outstanding		Weighted- Average Remaining Contractual Life	Number Exercisable

Exercise prices:
255.13 (options)	13,018		0.5 years	13,018
208.05 (options)	6,000		0.6 years	6,000
114.64 (SARs)	11,900		1.3 years	11,900
132.56 (SARs)	21,968		4.0 years	13,962
210.22 (SARs)	28,050		6.1 years	6,850
216.48 (SARs)	12,998		8.4 years	3,962
311.16 (SARs)	11,512		9.4 years	—
310.55 (SARs)	203		9.6 years	—

Totals	105,649			55,692

Aggregate intrinsic value (in thousands)	$	15,670		$	9,354



	September 30, 2017		December 31, 2016

Expected term of options	0.5 to 9.6 years		1.3 to 9.1 years
Expected volatility weighted-average	23.52	%	23.83	%
Expected dividend yield	0.10	%	0.12	%
Risk-free rate weighted-average	1.60	%	1.03	%



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017	Year Ended December 31, 2016
	(In thousands)

Beginning balance, cumulative credit losses related to other-than-temporary impairments	$	1,440	1,440	2,278
Reductions for securities sold during current period	—		—	(838	)
Additions for credit losses not previously recognized in other-than-temporary impairments	—		—	—

Ending balance, cumulative credit losses related to other-than-temporary impairments	$	1,440	1,440	1,440



	Average New Policy Face Amount
	Domestic	International

Year ended December 31, 2011	178,500	363,600
Year ended December 31, 2012	254,900	380,200
Year ended December 31, 2013	286,000	384,000
Year ended December 31, 2014	286,600	382,600
Year ended December 31, 2015	274,500	342,500
Year ended December 31, 2016	308,700	336,500
Nine months ended September 30, 2017	307,200	311,600



	September 30, 2017			December 31, 2016
Investment Origination Year	Carrying Value		Fair Value	Carrying Value	Fair Value
	(In thousands)

Subprime:
1998	$	1,692	1,753	2,074	2,145
2003	2,719		3,964	2,997	4,369
2004	11,633		11,632	13,382	13,401

Total	$	16,044	17,349	18,453	19,915