nwli-20220630

Table of Co ntents

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 June 30, 2022

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

OF THE 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)


Delaware									47-3339380
(State or Other Jurisdiction of Incorporation)									(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: Yes ☒ No ☐

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). : Yes ☒ No ☐

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

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. ☐

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

As of August 5, 2022, the number of shares of Registrant's common stock outstanding was: Class A – 3,436,020 and Class B - 200,000.

Table of Co ntents


TABLE OF CONTENTS
			Page

Part I. Financial Information:			3

Item 1. Financial Statements			3

Condensed Consolidated Balance Sheets June 30, 2022 (Unaudited) and December 31, 2021			3

Condensed Consolidated Statements of Earnings For the Three Months Ended June 30, 2022 and 2021 (Unaudited)			5

Condensed Consolidated Statements of Earnings For the Six Months Ended June 30, 2022 and 2021 (Unaudited)			6



Condensed Consolidated Statements of Comprehensive Income (Loss) For the Three Months Ended June 30, 2022 and 2021 (Unaudited)			7

Condensed Consolidated Statements of Comprehensive Income (Loss) For the Six Months Ended June 30, 2022 and 2021 (Unaudited)			8



Condensed Consolidated Statements of Changes in Stockholders' Equity For the Three Months Ended June 30, 2022 and 2021 (Unaudited)			9

Condensed Consolidated Statements of Changes in Stockholders' Equity For the Six Months Ended June 30, 2022 and 2021 (Unaudited)			10



Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2022 and 2021 (Unaudited)			11

Notes to Condensed Consolidated Financial Statements (Unaudited)			13

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			57

Item 3. Quantitative and Qualitative Disclosures About Market Risk			101

Item 4. Controls and Procedures			101

Part II. Other Information:			101

Item 1. Legal Proceedings			101

Item 1A. Risk Factors			101

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			102

Item 4. Removed and Reserved			103

Item 6. Exhibits			103

Signatures			104

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)


	(Unaudited)
ASSETS	June 30, 2022		December 31, 2021

Investments:

Debt securities available-for-sale, at fair value (cost: $8,723,242 and $8,604,250)	$	8,160,952	9,068,946
Debt securities trading, at fair value (cost: $1,055,106 and $1,066,108)	909,647		1,077,438
Mortgage loans, net of allowance for credit losses ($2,573 and $2,987), ($18,738 and 8,469 at fair value)	511,936		487,304
Policy loans	71,443		71,286
Derivatives, index options	6,071		101,622
Equity securities, at fair value (cost: $16,351 and $16,549)	22,121		28,217
Other long-term investments	158,859		137,670


Total investments	9,841,029		10,972,483

Cash and cash equivalents	530,559		714,624
Deferred policy acquisition costs	882,537		569,839
Deferred sales inducements	122,390		78,136
Value of business acquired	149,962		154,499
Cost of reinsurance	84,175		89,686
Accrued investment income	84,920		84,394
Federal income tax receivable	16,855		—
Deferred federal income tax asset	21,245		—
Amounts recoverable from reinsurer	1,452,562		1,539,919
Other assets	116,135		126,609

Total assets	$	13,302,369	14,330,189

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY	June 30, 2022		December 31, 2021

LIABILITIES:

Future policy benefits:
Universal life and annuity contracts	$	8,778,832	9,003,275
Traditional life reserves	912,368		909,712
Other policyholder liabilities	142,181		134,338
Funds withheld liability	1,208,219		1,485,267
Deferred Federal income tax liability	—		101,166
Federal income tax payable	—		2,331
Other liabilities	165,220		154,409

Total liabilities	11,206,820		11,790,498

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS’ EQUITY:

Common stock:
Class A - $0.01 par value; 7,500,000 shares authorized; 3,436,020 issued and outstanding in 2022 and 2021	34		34
Class B - $0.01 par value; 200,000 shares authorized, issued, and outstanding in 2022 and 2021	2		2
Additional paid-in capital	41,716		41,716
Accumulated other comprehensive income (loss)	(295,138)		215,953
Retained earnings	2,348,935		2,281,986

Total stockholders’ equity	2,095,549		2,539,691

Total liabilities and stockholders' equity	$	13,302,369	14,330,189

Note: The Condensed Consolidated Balance Sheet at December 31, 2021 has been derived from the audited Consolidated Financial Statements as of that date.

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Three Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands, except per share amounts)


	2022		2021

Premiums and other revenues:
Universal life and annuity contract charges	$	32,692	34,060
Traditional life premiums	21,647		22,112
Net investment income	55,474		156,544
Other revenues	5,578		6,034
Net realized investment gains:



Other net investment gains	1,766		3,415
Total net realized investment gains	1,766		3,415


Total revenues	117,157		222,165

Benefits and expenses:
Life and other policy benefits	35,177		35,904
Amortization of deferred transaction costs	27,756		25,123
Universal life and annuity contract interest	(13,801)		69,973
Other operating expenses	30,321		28,468

Total benefits and expenses	79,453		159,468

Earnings before Federal income taxes	37,704		62,697

Federal income taxes	6,939		12,798

Net earnings	$	30,765	49,899

Basic earnings per share:
Class A	$	8.70	$	14.11
Class B	$	4.35	$	7.06

Diluted earnings per share:
Class A	$	8.70	$	14.11
Class B	$	4.35	$	7.06

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

For the Six Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands, except per share amounts)



	2022		2021

Premiums and other revenues:
Universal life and annuity contract charges	$	65,343	68,949
Traditional life premiums	43,980		44,696
Net investment income	125,198		322,619
Other revenues	11,375		11,448
Net realized investment gains:



Other net investment gains	5,560		4,831
Total net realized investment gains	5,560		4,831

Total revenues	251,456		452,543

Benefits and expenses:
Life and other policy benefits	77,076		73,793
Amortization of deferred transaction costs	56,772		55,112
Universal life and annuity contract interest	(28,606)		122,818
Other operating expenses	62,903		59,803

Total benefits and expenses	168,145		311,526

Earnings before Federal income taxes	83,311		141,017

Federal income taxes	16,362		28,989

Net earnings	$	66,949	112,028

Basic earnings per share:
Class A	$	18.93	$	31.68
Class B	$	9.47	$	15.84

Diluted earnings per share:
Class A	$	18.93	$	31.68
Class B	$	9.47	$	15.84

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands)


	2022		2021

Net earnings	$	30,765	49,899

Other comprehensive income (loss), net of effects of deferred costs and taxes:
Unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during period	(232,914)		41,396

Reclassification adjustment for net amounts included in net earnings	(1,395)		(3,810)


Net unrealized gains (losses) on securities	(234,309)		37,586

Foreign currency translation adjustments	(22)		(71)

Benefit plans:
Amortization of net prior service cost and net gain	1,134		1,935

Other comprehensive income (loss)	(233,197)		39,450

Comprehensive income (loss)	$	(202,432)	89,349

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Six Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands)



	2022		2021

Net earnings	$	66,949	112,028

Other comprehensive income, net of effects of deferred costs and taxes:
Unrealized gains (losses) on available-for-sale securities:
Net unrealized holding gains (losses) arising during period	(509,523)		(110,799)

Reclassification adjustment for net amounts included in net earnings	(4,127)		(4,929)


Net unrealized gains (losses) on securities	(513,650)		(115,728)

Foreign currency translation adjustments	291		(76)

Benefit plans:
Amortization of net prior service cost and net gain	2,268		3,870

Other comprehensive income (loss)	(511,091)		(111,934)

Comprehensive income (loss)	$	(444,142)	94

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Three Months Ended June 30, 2022 and 2021
(Unaudited)
(In thousands)


	2022		2021

Common stock:
Balance at beginning of period	$	36	36


Balance at end of period	36		36

Additional paid-in capital:
Balance at beginning of period	41,716		41,716


Balance at end of period	41,716		41,716

Accumulated other comprehensive income (loss):
Unrealized gains (losses) on debt securities available-for-sale:
Balance at beginning of period	(53,121)		265,427
Change in unrealized gains (losses) during period, net of tax	(234,309)		37,586


Balance at end of period	(287,430)		303,013

































Foreign currency translation adjustments:
Balance at beginning of period	5,413		5,111
Change in translation adjustments during period	(22)		(71)

Balance at end of period	5,391		5,040

Benefit plan liability adjustment:
Balance at beginning of period	(14,233)		(26,501)
Amortization of net prior service cost and net gain, net of tax	1,134		1,935

Balance at end of period	(13,099)		(24,566)

Accumulated other comprehensive income (loss) at end of period	(295,138)		283,487

Retained earnings:
Balance at beginning of period	2,318,170		2,164,706

Net earnings	30,765		49,899



Balance at end of period	2,348,935		2,214,605

Total stockholders' equity	$	2,095,549	2,539,844

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

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NATIONAL WESTERN LIFE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2022 and 2021 (Unaudited) (In thousands)

	2022		2021

Common stock:
Balance at beginning of period	$	36	36


Balance at end of period	36		36

Additional paid-in capital:
Balance at beginning of period	41,716		41,716


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	226,220		418,741
Change in unrealized gains (losses) during period, net of tax	(513,650)		(115,728)


Balance at end of period	(287,430)		303,013


















Foreign currency translation adjustments:
Balance at beginning of period	5,100		5,116
Change in translation adjustments during period	291		(76)

Balance at end of period	5,391		5,040

Benefit plan liability adjustment:
Balance at beginning of period	(15,367)		(28,436)
Amortization of net prior service cost and net loss, net of tax	2,268		3,870

Balance at end of period	(13,099)		(24,566)

Accumulated other comprehensive income (loss) at end of period	(295,138)		283,487

Retained earnings:
Balance at beginning of period	2,281,986		2,102,577

Net earnings	66,949		112,028

Balance at end of period	2,348,935		2,214,605

Total stockholders' equity	$	2,095,549	2,539,844

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

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NATIONAL WESTERN LIFE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2022 and 2021

(Unaudited)

(In thousands)



	2022		2021

Cash flows from operating activities:
Net earnings	$	66,949	112,028
Adjustments to reconcile net earnings to net cash from operating activities:
Universal life and annuity contract interest	(28,606)		122,818
Surrender charges and other policy revenues	(9,761)		(13,301)
Realized (gains) losses on investments	(5,560)		(4,831)
Accretion/amortization of discounts and premiums, investments	(1,734)		945
Depreciation and amortization	6,896		6,631
Increase (decrease) in estimated credit losses on investments	(413)		752
(Increase) decrease in value of debt securities trading	156,791		(10,271)
(Increase) decrease in value of equity securities	4,600		(3,698)
(Increase) decrease in value of derivative options	76,624		(68,190)
(Increase) decrease in deferred policy acquisition and sales inducement costs, and value of business acquired	24,380		2,876
(Increase) decrease in accrued investment income	(526)		467
(Increase) decrease in reinsurance recoverable	87,357		79,375
(Increase) decrease in cost of reinsurance	5,511		7,131
(Increase) decrease in other assets	434		(2,485)
Increase (decrease) in liabilities for future policy benefits	43,768		(95,970)
Increase (decrease) in other policyholder liabilities	7,843		(4,063)
Increase (decrease) in Federal income tax liability	(19,186)		16,438
Increase (decrease) in deferred Federal income tax	13,449		(635)
Increase (decrease) in funds withheld liability	(277,048)		(103,571)
Increase (decrease) in other liabilities	(12,479)		(36,690)


Net cash provided by operating activities	139,289		5,756

Cash flows from investing activities:
Proceeds from sales of:

Debt securities available-for-sale	39,254		1,099,043
Debt securities trading	17,183		—
Other investments	2,804		10,853
Proceeds from maturities, redemptions, and prepayments of:

Debt securities available-for-sale	565,415		782,008
Debt securities trading	69,983		8,102
Other investments	16,138		9,685
Derivatives, index options	46,412		108,397

Purchases of:

Debt securities available-for-sale	(690,390)		(928,573)



	Continued on Next Page

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the Six Months Ended June 30, 2022 and 2021 (Unaudited) (In thousands)

	2022		2021

Debt securities trading	(75,581)		(1,064,566)
Equity securities	(890)		(10,543)
Derivatives, index options	(26,377)		(22,483)
Other investments	(33,704)		(30,908)
Property, equipment, and other productive assets	(764)		(4,823)
Principal payments on mortgage loans	18,872		8,053
Cost of mortgage loans acquired	(44,139)		(70,308)
Decrease (increase) in policy loans	(157)		2,443
Other (increases) decreases to funds withheld	(424)		(69,377)


Net cash provided by (used in) investing activities	(96,365)		(172,997)

Cash flows from financing activities:

Deposits to account balances for universal life and annuity contracts	210,438		329,742
Return of account balances on universal life and annuity contracts	(437,626)		(347,434)


Principal payments under finance lease obligation	(169)		(197)


Net cash provided by (used in) financing activities	(227,357)		(17,889)

Effect of foreign exchange	368		(96)

Net increase (decrease) in cash, cash equivalents, and restricted cash	(184,065)		(185,226)
Cash, cash equivalents, and restricted cash at beginning of period	714,624		581,059

Cash, cash equivalents and restricted cash at end of period	$	530,559	395,833

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the period for:
Interest	$	37	19
Income taxes	$	22,138	13,085

Noncash operating activities:
Net deferral and amortization of sales inducements	$	(2,213)	3,659

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

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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 complete annual financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments necessary to present fairly the financial position and results of operations of National Western Life Group, Inc. ("NWLGI") and its wholly owned subsidiaries (collectively, the “Company”), on a basis consistent with the prior audited consolidated financial statements, as of June 30, 2022, and for the three and six months ended June 30, 2022 and June 30, 2021. Such adjustments are of a normal recurring nature. Certain reclasses of prior year balances have been made for comparison. The results of operations for the six months ended June 30, 2022 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, 2021 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, 2021 has been derived from the audited consolidated financial statements as of that date.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of NWLGI and its wholly owned subsidiaries: National Western Life Insurance Company ("NWLIC" or "National Western"), Regent Care San Marcos Holdings, LLC, NWL Services, Inc., and N.I.S. Financial Services, Inc. ("NIS"). National Western's wholly owned subsidiaries include The Westcap Corporation, NWL Financial, Inc., NWLSM, Inc., Braker P III, LLC, and Ozark National Life Insurance Company ("Ozark National"). All significant intercorporate transactions and accounts have been eliminated in consolidation.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates in the accompanying Condensed Consolidated Financial Statements include: (1) liabilities for future policy benefits, (2) valuation of derivative instruments, (3) recoverability and amortization of deferred policy acquisition costs ("DPAC"), deferred sales inducements ("DSI"), the value of business acquired ("VOBA"), and the cost of reinsurance ("COR"), (4) valuation allowances for deferred tax assets, (5) goodwill, (6) allowances for credit losses on debt securities and mortgage loans, and (7) commitments and contingencies.

As a result of executing a funds withheld coinsurance agreement at December 31, 2020, the Company implemented accounting policies related to trading debt securities and the embedded derivative on reinsurance in its financial statements. Trading securities represent debt securities that are included in the fund assets withheld as part of the funds withheld coinsurance agreements to support the policyholder liability obligations ceded to the reinsurer. Trading debt securities are reported in the accompanying Condensed Consolidated Financial Statements at their fair values with changes in their fair values reflected as a component of Net investment income in the Condensed Consolidated Statements of Earnings. Since these trading debt securities pertain to investment activities related to coinsurance agreements rather than as an income strategy based on active trading, they are classified as investing activities in the Condensed Consolidated Statements of Cash Flows. Under the terms of the coinsurance funds withheld agreement, while the assets are withheld, the associated interest and credit risk of these assets are transferred to the reinsurer creating an embedded derivative on reinsurance in the funds withheld liability. Accordingly, the Company is required to bifurcate the embedded derivative from the host contract in accordance with ASC 815-15. The bifurcated embedded derivative on reinsurance is computed as the fair value unrealized gain (loss) on the underlying funds withheld assets. This amount is included as a component of the funds withheld liability balance reported on the Condensed Consolidated Balance Sheets, with changes in the embedded derivative on reinsurance reported in Net investment income in the Condensed Consolidated Statements of Earnings.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below shows the net unrealized gains and losses on available-for-sale securities that were reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2022 and June 30, 2021.


Affected Line Item in the Condensed Consolidated Statements of Earnings	Amount Reclassified From Accumulated Other Comprehensive Income
	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Other net investment gains	$	1,766	4,823	5,224	6,239

Earnings before Federal income taxes	1,766		4,823	5,224	6,239
Federal income taxes	371		1,013	1,097	1,310

Net earnings	$	1,395	3,810	4,127	4,929

(2) NEW ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements not yet adopted

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-12 Financial Services-Insurance (Topic 944) - Targeted Improvements to the Accounting for Long-Duration Contracts ("LDTI"). This update pertains to long-duration contracts and improving the timeliness of recognizing changes in the liability for future policy benefits, simplifying accounting for certain market-based options, simplifying the amortization of deferred policy acquisition costs, and improving the effectiveness of required disclosures. Amendments include the following:

A. Require an insurance entity to (1) review and update assumptions used to measure cash flows at least annually (with changes recognized in net income) and (2) update discount rate assumptions at each quarterly reporting date with the impact recognized in other comprehensive income ("OCI").

B. Require an insurance entity to measure all market risk benefits, which are contracts or contract features that provide protection to the policyholder from capital market risk, associated with deposit (i.e. account balance) contracts at fair value. The periodic change in fair value attributable to change in instrument-specific credit risk is recognized in OCI.

C. Simplify amortization of deferred policy acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins and require those balances be amortized on a constant basis over the expected term of the related contracts. Deferred policy acquisition costs are required to be written off for unexpected contract terminations but are not subject to impairment testing.

D. Require an insurance entity to add disclosures of disaggregated rollforwards of significant insurance liabilities and other account balances (i.e. beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs). The insurance entity must also disclose information about significant inputs, judgments, assumptions, and methods used in measurement, including changes in those inputs, judgments, and assumptions, and the effect of those changes on measurement.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In November 2020, the FASB released ASU 2020-11 Financial Services – Insurance (Topic 944). The amendments in this update deferred the effective date of adoption of ASU 2018-12 for all entities by one year. In particular, for publicly traded business entities, adoption of LDTI was made effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Accordingly, the Company's required adoption date is January 1, 2023. To date, the Company has: (1) performed a preliminary gap analysis identifying contracts and contract features in scope of this guidance, (2) identified the actuarial models, systems and processes to be updated, (3) identified and gathered cash flow data to be extracted from the Company's policy administrative systems necessary for implementation of this standard, (4) developed valuation models specific to LDTI for valuation date calculations integrating historical cash flows, and (5) established work streams for evaluating and finalizing key accounting policies, determining the impact to financial reporting charts of account, and developing the format and content of the new required disclosures.

Adoption of this standard will significantly change the accounting and reporting for the Company's insurance and annuity products. As the Company progresses through its implementation of the requirements of the standard, it will be better able to assess the impact to its Consolidated Financial Statements.

In March 2022, the FASB released ASU 2022-02 Financial Instruments – Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The amendments in this Update eliminate the accounting guidance for troubled-debt restructurings (TDRs) by creditors in Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, but enhances disclosure requirements for certain loan modifications in which the debtor is experiencing financial difficulties. Additionally, the amendments in this Update require public business entities to disclose current-period gross write offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. The updates are required to be applied prospectively beginning in fiscal years after December 15, 2022, including interim periods within those fiscal years. The Company does not expect this guidance to have a material impact on the Consolidated Financial Statements and related disclosures upon adoption.

Accounting pronouncements adopted

In December 2019, the FASB issued ASU 2019-12 Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which simplified various aspects of the income tax accounting guidance and is applied using different approaches depending on the specific amendment. The amendments were effective for fiscal periods beginning after December 15, 2020. Earlier adoption was permitted. The adoption of this ASU in 2021 did not have a material effect on the results of operations or financial position of the Company.

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.

(3) STOCKHOLDERS' EQUITY

Robert L. Moody, Sr., through the Robert L. Moody Revocable Trust, controls 99.0% of the total outstanding shares of the Company's Class B common stock as of June 30, 2022. 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 limited to 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.

As the sole owner of National Western, all dividends declared by National Western are payable entirely to NWLGI and are eliminated in consolidation. 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, or 10% of statutory surplus of National Western as of the previous year-end. Under these guidelines, the maximum dividend payment which may be made without prior approval in 2022 is $64.4 million. During the six months ended June 30, 2022, National Western declared and paid a $2.0 million dividend to NWLGI. National Western did not declare or pay cash dividends to NWLGI during the six months ended June 30, 2021.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Ozark National is similarly restricted under the state insurance laws of Missouri as to dividend amounts which may be paid 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 payment which may be made in 2022 without prior approval is $18.6 million. All dividends declared by Ozark National are payable entirely to NWLIC as the sole owner and are eliminated in consolidation. Ozark National did not declare or pay cash dividends to NWLIC during the six months ended June 30, 2022 and 2021.

NWLGI did not declare or pay cash dividends on its common shares during the six months ended June 30, 2022 and 2021.

(4) EARNINGS PER SHARE

Basic earnings per share of common stock are computed by dividing net earnings available to each class of common stockholders on an as if distributed basis by the weighted-average number of common shares outstanding for the period. Diluted earnings per share, by definition, 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 stock, that then shared in the distributed earnings of each class of common stock. U.S. GAAP requires a two-class presentation for the Company's two classes of common stock. The Company currently has no share-based compensation awards outstanding that could be redeemed for shares of common stock.

Net earnings for the periods shown below are 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).

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Three Months Ended June 30,
	2022			2021
	Class A		Class B	Class A	Class B

	(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings Per Share:
Net earnings	$	30,765		49,899
Dividends - Class A shares	—			—
Dividends - Class B shares	—			—

Undistributed earnings	$	30,765		49,899

Allocation of net earnings:
Dividends	$	—	—	—	—
Allocation of undistributed earnings	29,895		870	48,488	1,411

Net earnings	$	29,895	870	48,488	1,411

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	$	8.70	4.35	14.11	7.06

Diluted earnings per share	$	8.70	4.35	14.11	7.06

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Six Months Ended June 30,
	2022			2021
	Class A		Class B	Class A	Class B

	(In thousands except per share amounts)

Numerator for Basic and Diluted Earnings Per Share:
Net earnings	$	66,949		112,028
Dividends - Class A shares	—			—
Dividends - Class B shares	—			—

Undistributed earnings	$	66,949		112,028

Allocation of net earnings:
Dividends	$	—	—	—	—
Allocation of undistributed earnings	65,056		1,893	108,860	3,168

Net earnings	$	65,056	1,893	108,860	3,168

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	$	18.93	9.47	31.68	15.84

Diluted earnings per share	$	18.93	9.47	31.68	15.84

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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 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 year. The following table summarizes the components of net periodic benefit cost.


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2022		2021	2022	2021

	(In thousands)

Service cost	$	33	30	66	60
Interest cost	145		131	290	263
Expected return on plan assets	(393)		(356)	(787)	(712)

Amortization of net loss	33		135	67	269

Net periodic benefit cost	$	(182)	(60)	(364)	(120)

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 minimum required contribution for the 2022 plan year is $0.0 million. There was $0.3 million in planned contributions remaining for the 2021 plan year as of June 30, 2022. There was up to $0.3 million in planned contributions remaining for the 2022 plan year as of June 30, 2022. As of June 30, 2022, the Company has made $0.0 million in contributions to the plan for the 2021 plan year and $0.0 million in contributions to the plan for the 2022 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.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

National Western also sponsors three non-qualified defined benefit pension plans. The first plan covers certain senior 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 Group, Inc. ("American National"), previously a related party. In the second quarter of 2022, American National was acquired by Brookfield Asset Management Reinsurance Partners Ltd. American National 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 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 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. As previously mentioned, these additional obligations are a liability to the 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 in order to comply with law changes under the American Jobs Creation Act of 2004 ("Act").

Effective July 1, 2005, National Western established a second non-qualified defined benefit plan for the benefit of the then Chairman of the 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. 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 non-qualified defined benefit plans.


	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2022		2021	2022	2021

	(In thousands)

Service cost	$	259	309	519	618
Interest cost	279		260	557	521
Amortization of prior service cost	15		15	30	30
Amortization of net loss	585		1,283	1,169	2,565

Net periodic benefit cost	$	1,138	1,867	2,275	3,734

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 $2.0 million to these plans in 2022. As of June 30, 2022, the Company had contributed $0.9 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.

Ozark National and NIS have no defined benefit plans.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(B)Postretirement Employment Plans Other Than Pension

National Western sponsors two 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			Six Months Ended
	June 30,			June 30,
	2022		2021	2022	2021

	(In thousands)

Interest cost	$	43	37	86	74

Amortization of net loss	52		73	104	146

Net periodic benefit cost	$	95	110	190	220

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 2022. 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.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(6)SEGMENT AND OTHER OPERATING INFORMATION

The Company defines its reportable operating segments as domestic life insurance, international life insurance, annuities, and ONL & Affiliates. These segments are organized based on product types, geographic marketing areas, and business groupings. Ozark National and NIS have been combined into a separate segment 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. In accordance with GAAP guidance for segment reporting, the Company excludes or segregates realized investment gains and losses.

A summary of segment information as of June 30, 2022 and December 31, 2021 for the Condensed Consolidated Balance Sheet items and for the three and six months ended June 30, 2022 and June 30, 2021 for the Condensed Consolidated Statements of Earnings is provided below.

Condensed Consolidated Balance Sheet Items:


	June 30, 2022
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Deferred transaction costs	$	226,309	252,411	597,292	163,052	—	1,239,064
Total segment assets	1,664,706		1,036,021	8,493,969	1,017,599	342,880	12,555,175
Future policy benefits	1,469,661		774,622	6,658,366	788,551	—	9,691,200
Other policyholder liabilities	21,174		15,646	90,927	14,434	—	142,181
Funds withheld liability	—		—	1,208,219	—	—	1,208,219


	December 31, 2021
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Deferred transaction costs	$	150,688	152,340	423,318	165,814	—	892,160
Total segment assets	1,791,017		975,942	9,187,610	1,115,380	356,716	13,426,665
Future policy benefits	1,537,482		749,537	6,843,457	782,511	—	9,912,987
Other policyholder liabilities	20,950		14,268	82,650	16,470	—	134,338
Funds withheld liability	—		—	1,485,267	—	—	1,485,267

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Condensed Consolidated Statements of Earnings:


	Three Months Ended June 30, 2022
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Premiums and contract revenues	$	13,218	19,129	3,098	18,894	—	54,339
Net investment income (loss)	(5,888)		(3,156)	57,155	7,209	154	55,474
Other revenues	25		22	1,365	2,873	1,293	5,578

Total revenues	7,355		15,995	61,618	28,976	1,447	115,391

Life and other policy benefits	4,776		5,486	8,995	15,920	—	35,177
Amortization of deferred transaction costs	3,334		4,844	16,821	2,757	—	27,756
Universal life and annuity contract interest	(8,979)		(4,622)	(200)	—	—	(13,801)
Other operating expenses	6,457		4,353	12,702	5,090	1,719	30,321
Federal income taxes	322		1,106	4,261	1,044	(165)	6,568

Total expenses	5,910		11,167	42,579	24,811	1,554	86,021

Segment earnings (loss)	$	1,445	4,828	19,039	4,165	(107)	29,370


	Six Months Ended June 30, 2022
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Premiums and contract revenues	$	28,107	36,240	6,650	38,326	—	109,323
Net investment income (loss)	(8,232)		(7,403)	117,366	14,137	9,330	125,198
Other revenues	51		39	2,598	6,088	2,599	11,375

Total revenues	19,926		28,876	126,614	58,551	11,929	245,896

Life and other policy benefits	11,164		10,187	23,039	32,686	—	77,076
Amortization of deferred transaction costs	6,164		9,994	35,637	4,977	—	56,772
Universal life and annuity contract interest	(14,399)		(10,343)	(3,864)	—	—	(28,606)
Other operating expenses	13,510		9,213	26,872	10,071	3,237	62,903
Federal income taxes	678		1,911	8,741	2,172	1,692	15,194

Total expenses	17,117		20,962	90,425	49,906	4,929	183,339

Segment earnings	$	2,809	7,914	36,189	8,645	7,000	62,557

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Three Months Ended June 30, 2021
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Premiums and contract revenues	$	12,475	20,656	3,742	19,299	—	56,172
Net investment income	28,247		13,847	100,199	6,780	7,471	156,544
Other revenues	31		44	1,389	3,273	1,297	6,034

Total revenues	40,753		34,547	105,330	29,352	8,768	218,750

Life and other policy benefits	5,007		5,302	9,829	15,766	—	35,904
Amortization of deferred transaction costs	153		6,163	16,378	2,429	—	25,123
Universal life and annuity contract interest	25,466		12,226	32,281	—	—	69,973
Other operating expenses	5,482		4,646	11,864	4,933	1,543	28,468
Federal income taxes	958		1,268	7,115	1,258	1,481	12,080

Total expenses	37,066		29,605	77,467	24,386	3,024	171,548

Segment earnings	$	3,687	4,942	27,863	4,966	5,744	47,202


	Six Months Ended June 30, 2021
	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Premiums and contract revenues	$	26,373	40,836	7,672	38,764	—	113,645
Net investment income	52,090		25,963	219,923	13,354	11,289	322,619
Other revenues	52		72	2,763	6,199	2,362	11,448

Total revenues	78,515		66,871	230,358	58,317	13,651	447,712

Life and other policy benefits	11,117		9,677	19,830	33,169	—	73,793
Amortization of deferred transaction costs	5,613		11,555	32,825	5,119	—	55,112
Universal life and annuity contract interest	47,087		23,025	52,706	—	—	122,818
Other operating expenses	12,929		9,420	24,794	9,679	2,981	59,803
Federal income taxes	364		2,711	20,591	2,115	2,193	27,974

Total expenses	77,110		56,388	150,746	50,082	5,174	339,500

Segment earnings	$	1,405	10,483	79,612	8,235	8,477	108,212

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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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Premiums and Other Revenues:
Premiums and contract revenues	$	54,339	56,172	109,323	113,645
Net investment income	55,474		156,544	125,198	322,619
Other revenues	5,578		6,034	11,375	11,448
Realized gains on investments	1,766		3,415	5,560	4,831

Total condensed consolidated premiums and other revenues	$	117,157	222,165	251,456	452,543


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Federal Income Taxes:
Total segment Federal income taxes	$	6,568	12,080	15,194	27,974
Taxes on realized gains on investments	371		718	1,168	1,015

Total condensed consolidated Federal income taxes	$	6,939	12,798	16,362	28,989


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Net Earnings:
Total segment earnings	$	29,370	47,202	62,557	108,212
Realized gains on investments, net of taxes	1,395		2,697	4,392	3,816

Total condensed consolidated net earnings	$	30,765	49,899	66,949	112,028

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	June 30,		December 31,
	2022		2021

	(In thousands)

Assets:
Total segment assets	$	12,555,175	13,426,665
Other unallocated assets	747,194		903,524

Total condensed consolidated assets	$	13,302,369	14,330,189

(7) SHARE-BASED PAYMENTS

The Company's shareholders approved an Incentive Plan in 2016 which provides 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 number of shares of Class A, $1.00 par value, common stock allowed to be issued under the Incentive Plan, or as to which SARs or other awards are allowed to be granted, cannot exceed 300,000. The Incentive Plan includes additional provisions, most notably regarding the definition of performance objectives which can be used in the issuance of the fourth type of award noted above (performance awards). The term of the Incentive Plan is for ten years from the date of stockholder approval.

All of the employees of the Company and its subsidiaries are eligible to participate in the 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. SARs granted prior to 2016 vest 20% annually following three years of service following the grant date. Employee SARs granted 2016 and thereafter vest 33.3% annually following one year of service from the date of the grant. Directors' SARs grants vest 20% annually following one year of service from the date of grant.

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") provide solely for cash settlement based upon the market price of the Company's Class A 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 3 years from the grant date. RSUs granted prior to 2019 were payable in cash at the vesting date equal to the closing price of the Company's Class A common share on the three year anniversary date. RSUs granted in 2019 and forward are payable in cash at the 3 years vesting date equal to the 20-day moving average closing price of the Company’s Class A common share at that time.

Other awards may involve performance share units ("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 for 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 were paid at the closing price of the Company's Class A common share on the vesting date. PSUs granted in 2019 and forward are payable at the 20-day moving average closing price of the Company’s Class A common share at the vesting date.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

PSU awards covering the three year measurement period ended December 31, 2021 were paid out in the first quarter of 2022. The performance factor during the measurement period used to determine compensation payouts was 110.19% of the pre-defined metric target.

PSU awards covering the three year measurement period ended December 31, 2020 were paid out in April 2021. The performance factor during the measurement period used to determine compensation payouts was 85.16% of the pre-defined metric target.

Directors of the Company are eligible to receive RSUs under the Incentive Plan. Unlike RSUs granted to officers, the RSUs granted to directors vest one year from the date of grant and are payable in cash at the vesting date equal to the 20-day moving average closing price of the Company’s Class A common share at that time.

The following table shows all grants issued to officers and directors during the three and six months ended June 30, 2022 and 2021. These grants were made based upon the 20-day moving average closing market price of the Company's Class A common share at the grant date.


	Three Months Ended
	June 30, 2022		June 30, 2021
	Officers	Directors	Officers	Directors

SARs	—	—	—	—
RSUs	—	3,710	—	—
PSUs	—	—	—	—


	Six Months Ended
	June 30, 2022		June 30, 2021
	Officers	Directors	Officers	Directors

SARs	—	—	—	—
RSUs	—	3,710	—	—
PSUs	—	—	—	—

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Company uses the current fair value method to measure compensation costs for awards granted under the share-based plans. As of June 30, 2022 and December 31, 2021, the liability balance was $9.3 million and $7.9 million, respectively. A summary of awards by type and related activity is detailed below.


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

Stock Options:
Balance at January 1, 2022	291,000	—	$	—
Exercised	—	—	$	—
Forfeited	—	—	$	—
Expired	—	—	$	—
Stock options granted	—	—	$	—

Balance at June 30, 2022	291,000	—	$	—


	Liability Awards
	SAR	RSU	PSU

Other Share/Unit Awards:
Balance at January 1, 2022	186,994	18,955	24,485
Exercised	(209)	(353)	(4,213)
Forfeited	(3,985)	(668)	(805)
Granted	—	3,710	—

Balance at June 30, 2022	182,800	21,644	19,467

SARs, RSUs, and PSUs shown as forfeited in the above tables represent vested and unvested awards not exercised by plan participants upon their termination from the Company in accordance with the expiration provisions of the awards.

The total intrinsic value of share-based compensation exercised and paid was $1.1 million and $2.0 million for the six months ended June 30, 2022 and 2021, respectively. The total fair value of SARs, RSUs, and PSUs vested during the six months ended June 30, 2022 and 2021 was $0.1 million and $0.0 million, respectively. No cash amounts were received from the exercise of stock options under the Plans during the periods reported.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following table summarizes information about SARs outstanding at June 30, 2022.


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

Exercise prices:
$210.22	22,750		1.4 years	22,750
$216.48	11,086		3.6 years	11,086
$311.16	9,295		4.5 years	9,295
$310.55	203		4.8 years	203
$334.34	8,880		5.3 years	8,880
$303.77	10,764		6.2 years	10,764
$252.91	18,444		7.3 years	12,408
$192.10	38,706		8.4 years	12,981
$218.44	62,672		9.5 years	—

Totals	182,800			88,367

Aggregate intrinsic value (in thousands)	$	410		$	138

The aggregate intrinsic value in the table above is based on the closing Class A stock price of $202.70 per share on June 30, 2022.

In estimating the fair value of the SARs outstanding at June 30, 2022 and December 31, 2021, the Company employed the Black-Scholes option pricing model with assumptions detailed below.


	June 30, 2022		December 31, 2021

Expected term	1.4 to 9.5 years		1.9 to 10.0 years
Expected volatility weighted-average	34.85	%	35.05	%
Expected dividend yield	0.18	%	0.17	%
Risk-free rate weighted-average	2.96	%	1.01	%

The Company reviewed the contractual term relative to the 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 SARs by expected exercise date.

The pre-tax compensation cost/(benefit) recognized in the financial statements related to these plans was $1.0 million and $2.5 million for the three and six months ended June 30, 2022, and $(0.5) million and $3.9 million for the three and six months ended June 30, 2021, respectively. The related tax expense/(benefit) recognized was $(0.2) million and $(0.5) million for the three and six months ended June 30, 2022 and $0.1 million and $(0.8) million for the three and six months ended June 30, 2021, respectively.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of June 30, 2022, the total pre-tax compensation expense related to non-vested share-based awards not yet recognized was $8.5 million. This amount is expected to be recognized over a weighted-average period of 1.2 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.

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 appealed this ruling. On June 11, 2021, the appellate court reversed the judgment and directed the trial court to enter judgment in favor of NWLIC. Plaintiff has filed an appeal with the Supreme Court of California. On September 22, 2021, the California Supreme Court granted review and transferred the case back to the appellate court with instructions to vacate its decision and reconsider its finding that Mr. Pantaleoni did not have an agency relationship with NWLIC. On March 4, 2022, the appellate court filed an opinion completely striking the award of punitive damages that had been in the amount of $2.5 million, affirming economic damages of $14,949 and non-economic damages of $420,000, and awarding Plaintiff costs on appeal. The appellate court remanded the case to the trial court to reconsider the attorney fee award of $1.26 million in light of the reversal of punitive damages. Upon petitions for rehearing separately filed by both parties, the appellate court vacated its March 4th decision. On May 10, 2022, the appellate court filed its new opinion once again completely striking the award of punitive damages that had been in the amount of $2.5 million, affirming economic damages of $14,949 and non-economic damages of $420,000, and awarding Plaintiff costs on appeal. The appellate court again remanded the case to the trial court to reconsider the attorney fee award of $1.26 million in light of the reversal of punitive damages. National Western has filed a petition for review with the California Supreme Court.

In the Form 10-Q for the period ended September 30, 2020, the Company reported that it experienced a data event in which an intruder accessed and exfiltrated certain data from the Company's network. As a result of this event, the Company reported in its Form 10-K for the year ended December 31, 2020, that it was aware of two proposed class actions filed against National Western, Mildred Baldwin, on behalf of herself and others similarly situated vs. National Western Life Insurance Company, Missouri Circuit Court for the 18th Judicial Circuit (Pettis County) filed February 16, 2021, and Douglas Dyrssen Sr., individually and on behalf of all others similarly situated vs. National Western Life Insurance Company and National Western Life Group, Inc., United States District Court for the Eastern District of California filed March 8, 2021. The parties agreed to consolidate those two proposed class actions into a single proposed class action, Mildred Baldwin, on behalf of herself and others similarly situated vs. National Western Life Insurance Company, United States District Court for the Western District of Missouri. At a mediation held on October 12, 2021, the parties agreed on preliminary terms to settle the litigation. The parties filed a Joint Notice of Settlement and Motion to Stay Deadlines with the court on October 20, 2021. The Court issued an order granting final approval of the settlement on June 16, 2022. The Company previously accrued amounts sufficient to cover the ultimate payments due under the settlement terms.

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.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 NWLIC to provide information relating to such possible violations. National Western cooperated with the relevant governmental authorities in regard to this matter. 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.

(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 no commitments to fund new loans and $11.3 million commitments to extend credit relating to existing loans at June 30, 2022. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company had commitments to make capital contributions to alternative investment debt and equity funds of $355.0 million as of June 30, 2022. The Company had no commitments to extend credit relating to revolving credit facilities at June 30, 2022.

(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 for the periods indicated.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Available-for-sale debt securities:
Realized gains on disposal	$	1,766	4,823	5,224	6,239
Realized losses on disposal	—		—	—	—




Real estate gains (losses)	—		(1,407)	336	(1,407)

Other	—		(1)	—	(1)

Totals	$	1,766	3,415	5,560	4,831

For the three months ended June 30, 2022 and 2021 the percentage of total gains on bonds due to the call of securities was 77.7% and 100.0%, respectively. For the six months ended June 30, 2022 and 2021 the percentage of total gains on bonds due to the call of securities was 92.5% and 100.0%, respectively.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(B)Debt Securities

The table below presents amortized costs and fair values of debt securities available-for-sale at June 30, 2022.


	Debt Securities Available-for-Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	Allowance for Credit Losses

	(In thousands)

U.S. agencies	$	31,289	23	(90)	31,222	—
U.S. Treasury	1,807		—	(4)	1,803	—
States and political subdivisions	491,283		1,917	(43,637)	449,563	—
Foreign governments	62,973		1	(14,439)	48,535	—
Public utilities	739,559		576	(44,322)	695,813	—
Corporate	6,372,616		4,734	(403,546)	5,973,804	—
Commercial mortgage-backed	26,994		—	(932)	26,062	—
Residential mortgage-backed	382,814		1,877	(5,813)	378,878	—
Asset-backed	613,907		24	(58,659)	555,272	—

Totals	$	8,723,242	9,152	(571,442)	8,160,952	—

The table below presents amortized costs and fair values of debt securities available-for-sale at December 31, 2021.


	Debt Securities Available-for-Sale
	Amortized Cost		Gross Unrealized Gains	Gross Unrealized Losses	Fair Value	Allowance for Credit Losses

	(In thousands)

U.S. agencies	$	43,472	1,071	—	44,543	—
U.S. Treasury	2,469		21	—	2,490	—
States and political subdivisions	479,148		27,733	(921)	505,960	—
Foreign governments	62,979		293	(881)	62,391	—
Public utilities	745,359		39,919	(309)	784,969	—
Corporate	6,322,471		391,287	(12,805)	6,700,953	—
Commercial mortgage-backed	27,016		741	—	27,757	—
Residential mortgage-backed	530,702		18,921	—	549,623	—
Asset-backed	390,634		2,123	(2,497)	390,260	—

Totals	$	8,604,250	482,109	(17,413)	9,068,946	—

Unrealized losses for debt securities available-for-sale increased at June 30, 2022 from comparable balances at December 31, 2021 primarily due to increases in interest rate levels during the period.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Debt securities balances at June 30, 2022 and December 31, 2021 include Ozark National holdings of $709.3 million and $823.0 million, respectively, 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 available-for-sale debt securities by investment category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2022.


	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)

U.S. agencies	$	21,185	(90)	—	—	21,185	(90)
U.S. Treasury	1,803		(4)	—	—	1,803	(4)
States and political subdivisions	317,551		(40,145)	12,753	(3,492)	330,304	(43,637)
Foreign governments	41,847		(12,197)	5,599	(2,242)	47,446	(14,439)
Public utilities	553,099		(44,157)	476	(165)	553,575	(44,322)
Corporate	4,762,723		(336,373)	232,011	(67,173)	4,994,734	(403,546)
Commercial mortgage-backed	26,062		(932)	—	—	26,062	(932)
Residential mortgage-backed	240,379		(5,813)	—	—	240,379	(5,813)
Asset-backed	506,435		(57,208)	13,871	(1,451)	520,306	(58,659)

Totals	$	6,471,084	(496,919)	264,710	(74,523)	6,735,794	(571,442)

The following table shows the gross unrealized losses and fair values of the Company's available-for-sale debt securities by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2021.


	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	$	38,853	(779)	1,790	(142)	40,643	(921)
Foreign governments	31,862		(881)	—	—	31,862	(881)
Public utilities	15,286		(309)	—	—	15,286	(309)
Corporate	541,974		(11,378)	25,319	(1,427)	567,293	(12,805)

Asset-backed	188,960		(2,497)	—	—	188,960	(2,497)


Totals	$	816,935	(15,844)	27,109	(1,569)	844,044	(17,413)

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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 930 individual issues, or 76.6% of the total debt securities held available-for-sale by the Company at June 30, 2022. The market value of these bonds as a percent of amortized cost approximates 92.2%. Of the 930 securities, 37, or 4.0%, fall in the 12 months or greater aging category and 914 were rated investment grade at June 30, 2022.

The amortized cost and fair value of investments in debt securities available-for-sale at June 30, 2022, 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
	Amortized Cost		Fair Value

	(In thousands)

Due in 1 year or less	$	47,535	47,549
Due after 1 year through 5 years	3,008,773		2,980,577
Due after 5 years through 10 years	2,269,752		2,127,532
Due after 10 years	2,373,467		2,045,082
	7,699,527		7,200,740

Mortgage and asset-backed securities	1,023,715		960,212

Totals before allowance for credit losses	8,723,242		8,160,952

Allowance for credit losses	—		—

Totals	$	8,723,242	8,160,952

The Company determines current expected credit losses for available-for-sale debt securities when fair value is less than amortized cost, interest payments are missed, and the security is experiencing credit issues. Provisions to and releases from the allowance for credit losses are recorded in net investment income in the Condensed Consolidated Statements of Earnings. Based on its review, the Company determined none of these investments required an allowance for credit loss at June 30, 2022 or 2021. 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.

(C)Transfer of Securities

During the three and six months ended June 30, 2022 and 2021, the Company made no transfers between debt securities available-for-sale and trading. The Company does not classify any debt securities as held-to-maturity.

(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. The Company's mortgage, participation and mezzanine loans on real estate are the only financing receivables included in the Condensed Consolidated Balance Sheets.

Credit and default risk are 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 supported by the lease payments. This approach has proven to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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. Over the past several years, a low interest rate environment and a competitive marketplace have resulted in fewer loan opportunities being available that met the Company's required rate of return. Mortgage loan originations were further impeded by the COVID-19 pandemic and its effects upon the commercial real estate market. As stabilization returned to the commercial real estate market, the Company directed resources and effort towards expanding its mortgage loan investment portfolio. In the first six months of 2022, the rapid rise in interest rate levels has caused potential mortgage loan opportunities to fall outside the Company's underwriting criteria resulting in a lower level of originations. Mortgage loans originated by the Company totaled $44.1 million in the six months ended June 30, 2022 compared with $70.3 million in the six months ended June 30, 2021 and $183.6 million in the year ended December 31, 2021.

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. 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 June 30, 2022 or 2021 and as a result all interest income was recognized at June 30, 2022 and 2021.

Included in the mortgage loan investment balance at June 30, 2022 and December 31, 2021 are mortgage loan investments made by the reinsurer under the funds withheld reinsurance agreement totaling $18.7 million and $8.5 million, respectively. Similar to trading debt securities, these loans are reported at fair market values in order to allow the market value fluctuation to be recorded directly in the Condensed Consolidated Statements of Earnings and to offset the embedded derivative liability change due to market value fluctuations.

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


	June 30, 2022			December 31, 2021
	Amount		%	Amount		%
	(In thousands)			(In thousands)

Mortgage Loans by Loan-to-Value Ratio (1):
Less than 50%	$	116,614	22.6	$	100,806	20.6
50% to 60%	140,427		27.3	128,191		26.2
60% to 70%	225,199		43.7	202,670		41.3
70% to 80%	32,985		6.4	58,212		11.9


Gross balance	515,225		100.0	489,879		100.0

Market value adjustment	(716)		(0.1)	412		0.1
Allowance for credit losses	(2,573)		(0.5)	(2,987)		(0.6)

Totals	$	511,936	99.4	$	487,304	99.5

(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.

Market value adjustments are recorded for mortgage loan investments for which the Company has elected to measure the loan at fair value. Beginning in 2021, the investment manager associated with the funds withheld coinsurance arrangement executed mortgage loan investments for the funds withheld assets under the reinsurance treaty. The Company has elected fair value measurement for these mortgage loans, which are included in the funds withheld portfolio.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

All mortgage loans are analyzed quarterly in order to monitor the financial quality of these assets. Based on ongoing monitoring, mortgage loans with a likelihood of becoming delinquent are identified and placed on an internal “watch list.” Among the criteria that 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.

The Company employs a current expected credit loss recognition model (“CECL”) on its mortgage loans held at amortized cost for purposes of establishing a valuation allowance. 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 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. Changes in the allowance for current expected credit losses for mortgage loans are reported in net investment income in the Condensed Consolidated Statements of Earnings.

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


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Balance, beginning of the period	$	2,816	3,033	2,987	2,486

Provision (release) during the period	(243)		205	(414)	752


Total ending allowance for credit losses	$	2,573	3,238	2,573	3,238

The Company's direct investments in real estate are reported in Other long-term investments in the Consolidated Balance Sheets. These amounts are not a significant portion of the total investment portfolio and totaled approximately $28.2 million and $28.6 million at June 30, 2022 and December 31, 2021, respectively. This consists primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western. The Company recognized operating income on real estate properties of approximately $1.5 million and $1.4 million for the first six months of 2022 and 2021, respectively.

Net real estate gains for the six months ended June 30, 2022, are related to the sale of land located in Freeport, Texas and Houston, Texas which generated a net realized gain of $0.3 million.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(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") and the lowest priority to unobservable inputs ("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). The Company's Level 2 liabilities include the embedded derivative on reinsurance. 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 debt securities available-for-sale, trading securities, over-the-counter derivative contracts and mortgage loans. The Company’s Level 3 liabilities consist of share-based compensation obligations, certain equity-index product-related embedded derivatives, and an embedded derivative on reinsurance. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques.

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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:


	June 30, 2022
	Total		Level 1	Level 2	Level 3

	(In thousands)

Debt securities, available-for-sale	$	8,160,952	—	7,786,995	373,957
Debt securities, trading	909,647		—	809,878	99,769
Equity securities	22,121		18,433	3,688	—
Mortgage loans	18,738		—	—	18,738
Derivatives, index options	6,071		—	—	6,071


Total assets	$	9,117,529	18,433	8,600,561	498,535

Policyholder account balances (a)	$	45,342	—	—	45,342
Other liabilities (b)	(261,282)		—	(264,080)	2,798

Total liabilities	$	(215,940)	—	(264,080)	48,140

During the three and six months ended June 30, 2022, the Company made no transfers from Level 2 to Level 3 for debt securities available-for-sale. During the three months ended June 30, 2022, the Company made no transfers from Level 2 to Level 3 for liabilities. During the six months ended June 30, 2022, a portion of the funds withheld embedded derivative liability was reclassified from Level 2 into Level 3 due to the presence of unobservable inputs in its valuation.


	December 31, 2021
	Total		Level 1	Level 2	Level 3

	(In thousands)

Debt securities, available-for-sale	$	9,068,946	—	8,741,984	326,962
Debt security, trading	1,077,438		—	1,002,616	74,822
Equity securities	28,217		23,795	4,422	—
Mortgage loans	8,469		—	—	8,469
Derivatives, index options	101,622		—	—	101,622


Total assets	$	10,284,692	23,795	9,749,022	511,875

Policyholder account balances (a)	$	142,761	—	—	142,761
Other liabilities (b)	(76,856)		—	(84,725)	7,869

Total liabilities	$	65,905	—	(84,725)	150,630

(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 and the embedded derivative for funds withheld.

Table of Contents

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:


	June 30, 2022
	Total			Level 1		Level 2		Level 3

	(In thousands)

Debt securities, available-for-sale:
Priced by third-party vendors	$	8,115,980		—		7,786,995		328,985
Priced internally	44,972			—		—		44,972
Subtotal	8,160,952			—		7,786,995		373,957

Debt securities, trading:
Priced by third-party vendors	909,647			—		809,878		99,769
Priced internally	—			—		—		—
Subtotal	909,647			—		809,878		99,769

Equity securities:
Priced by third-party vendors	22,121			18,433		3,688		—
Priced internally	—			—		—		—
Subtotal	22,121			18,433		3,688		—

Mortgage loans:
Priced by third-party vendors	—			—		—		—
Priced internally	18,738			—		—		18,738
Subtotal	18,738			—		—		18,738

Derivatives, index options:
Priced by third-party vendors	6,071			—		—		6,071
Priced internally	—			—		—		—
Subtotal	6,071			—		—		6,071






Total	$	9,117,529		18,433		8,600,561		498,535

Percent of total	100.0		%	0.2	%	94.3	%	5.5	%

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	December 31, 2021
	Total			Level 1		Level 2		Level 3

	(In thousands)

Debt securities, available-for-sale:
Priced by third-party vendors	$	8,955,678		—		8,741,984		213,694
Priced internally	113,268			—		—		113,268
Subtotal	9,068,946			—		8,741,984		326,962

Debt securities, trading:
Priced by third-party vendors	1,077,438			—		1,002,616		74,822
Priced internally	—			—		—		—
Subtotal	1,077,438			—		1,002,616		74,822

Equity securities:
Priced by third-party vendors	28,217			23,795		4,422		—
Priced internally	—			—		—		—
Subtotal	28,217			23,795		4,422		—

Mortgage loans:
Priced by third-party vendors	—			—		—		—
Priced internally	8,469			—		—		8,469
Subtotal	8,469			—		—		8,469

Derivatives, index options:
Priced by third-party vendors	101,622			—		—		101,622
Priced internally	—			—		—		—
Subtotal	101,622			—		—		101,622






Total	$	10,284,692		23,795		9,749,022		511,875

Percent of total	100.0		%	0.2	%	94.8	%	5.0	%

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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


	Three Months Ended June 30, 2022
	Assets
	Debt Securities, Available-for-Sale		Trading Securities	Derivatives, Index Options	Mortgage Loans	Total Assets

	(In thousands)

Beginning balance, April 1, 2022	$	338,201	101,504	44,861	11,120	495,686
Total realized and unrealized gains (losses):
Included in net earnings	—		(3,235)	(38,425)	(670)	(42,330)
Included in other comprehensive income (loss)	(15,689)		—	—	—	(15,689)
Purchases, sales, issuances and settlements, net:
Purchases	57,979		1,500	13,800	8,319	81,598
Sales	—		—	—	—	—
Issuances	—		—	—	—	—
Settlements	(6,534)		—	(14,165)	(31)	(20,730)
Transfers into (out of) Level 3	—		—	—	—	—

Balance at end of period	$	373,957	99,769	6,071	18,738	498,535

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income	$	—	(3,235)	(26,975)	(670)	(30,880)
Benefits and expenses	—		—	—	—	—

Total	$	—	(3,235)	(26,975)	(670)	(30,880)

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Three Months Ended June 30, 2022
	Other Liabilities
	Embedded Derivative on Funds Withheld Liability		Policyholder Account Balances	Share-based Comp	Total Other Liabilities

	(In thousands)

Beginning balance, April 1, 2022	$	(2,636)	84,894	8,444	90,702
Total realized and unrealized gains (losses):
Included in net earnings	(3,898)		(39,187)	936	(42,149)
Included in other comprehensive income (loss)	—		—	—	—
Purchases, sales, issuances and settlements, net:
Purchases	—		13,800	—	13,800
Sales	—		—	—	—
Issuances	—		—	29	29
Settlements	—		(14,165)	(77)	(14,242)
Transfers into (out of) Level 3	—		—	—	—

Balance at end of period	$	(6,534)	45,342	9,332	48,140

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income	$	(3,898)	—	—	(3,898)
Benefits and expenses	—		(26,975)	936	(26,039)

Total	$	(3,898)	(26,975)	936	(29,937)

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Three Months Ended June 30, 2021
	Assets		Other Liabilities
	Derivatives, Index Options		Mortgage Loans	Total Assets	Policyholder Account Balances	Stock Options	Total Other Liabilities

	(In thousands)

Beginning balance, April 1, 2021	$	137,130	—	137,130	168,902	9,899	178,801
Total realized and unrealized gains (losses):
Included in net earnings	40,166		35	40,201	48,819	(461)	48,358
Included in other comprehensive income	—		—	—	—	—	—
Purchases, sales, issuances and settlements, net:
Purchases	10,974		2,694	13,668	10,974	—	10,974
Sales	—		—	—	—	—	—
Issuances	—		—	—	—	—	—
Settlements	(73,430)		—	(73,430)	(73,430)	(1,294)	(74,724)
Transfers into (out of) Level 3	—		—	—	—	—	—

Balance at end of period	$	114,840	2,729	117,569	155,265	8,144	163,409

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income	$	24,767	35	24,802	—	—	—
Benefits and expenses	—		—	—	24,767	(461)	24,306

Total	$	24,767	35	24,802	24,767	(461)	24,306

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	Six Months Ended June 30, 2022
	Assets
	Debt Securities, Available-for-Sale		Trading Securities	Derivatives, Index Options	Mortgage Loans	Total Assets

	(In thousands)

Beginning balance, January 1, 2022	$	326,962	74,822	101,622	8,469	511,875
Total realized and unrealized gains (losses):
Included in net earnings	—		(6,603)	(76,624)	(1,128)	(84,355)
Included in other comprehensive income (loss)	(30,693)		—	—	—	(30,693)
Purchases, sales, issuances and settlements, net:
Purchases	95,984		31,550	26,257	11,459	165,250
Sales	—		—	—	—	—
Issuances	—		—	—	—	—
Settlements	(18,296)		—	(45,184)	(62)	(63,542)
Transfers into (out of) Level 3	—		—	—	—	—

Balance at end of period	$	373,957	99,769	6,071	18,738	498,535

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income	$	—	(6,603)	(59,382)	(1,128)	(67,113)
Benefits and expenses	—		—	—	—	—

Total	$	—	(6,603)	(59,382)	(1,128)	(67,113)

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


		Six Months Ended June 30, 2022
	Other Liabilities
		Embedded Derivative on Funds Withheld Liability		Policyholder Account Balances	Share-based Comp	Total Other Liabilities

		(In thousands)

Beginning balance, January 1, 2022		$	—	142,761	7,869	150,630
Total realized and unrealized gains (losses):
Included in net earnings		(7,703)		(78,492)	2,511	(83,684)
Included in other comprehensive income (loss)		—		—	—	—
Purchases, sales, issuances and settlements, net:
Purchases		—		26,257	—	26,257
Sales		—		—	—	—
Issuances		—		—	29	29
Settlements		—		(45,184)	(1,077)	(46,261)
Transfers into (out of) Level 3		1,169		—	—	1,169

Balance at end of period		(6,534)		45,342	9,332	48,140

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income		$	(7,703)	—	—	(7,703)
Benefits and expenses		—		(59,382)	2,511	(56,871)

Total		$	(7,703)	(59,382)	2,511	(64,574)

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	For the Six Months Ended June 30, 2021
	Assets		Other Liabilities
	Derivatives, Index Options		Mortgage Loans	Total Assets	Policyholder Account Balances	Stock Options	Total Other Liabilities

	(In thousands)

Beginning balance, January 1, 2021	$	132,821	—	132,821	161,351	6,202	167,553
Total realized and unrealized gains (losses):
Included in net earnings	68,190		35	68,225	80,085	3,918	84,003
Included in other comprehensive income	—		—	—	—	—	—
Purchases, sales, issuances and settlements, net:
Purchases	22,183		2,694	24,877	22,183	—	22,183
Sales	—		—	—	—	—	—
Issuances	—		—	—	—	—	—
Settlements	(108,354)		—	(108,354)	(108,354)	(1,976)	(110,330)
Transfers into (out of) Level 3	—		—	—	—	—	—

Balance at end of period	$	114,840	2,729	117,569	155,265	8,144	163,409

Change in unrealized gains or losses for the period included in earnings (or changes in net assets) for assets/liabilities held at the end of the reporting period:
Net investment income	$	51,361	35	51,396	—	—	—
Benefits and expenses	—		—	—	51,361	3,917	55,278

Total	$	51,361	35	51,396	51,361	3,917	55,278

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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:

June 30, 2022

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(In thousands)

Assets:

Debt securities available-for-sale

44,972

Discounted cash flows

Discount rate

2.76% - 6.14% (4.58%)

Derivatives, index options

6,071

Broker prices

Implied volatility

12.07% - 18.40% (15.92%)

Mortgage loans

18,738

Discounted cash flows

Spread

175 - 275 bps

Total assets

69,781

Liabilities:

Policyholder account balances

45,342

Deterministic cash flow model

Projected option cost

0.00% - 4.63% (0.16%)

Share-based compensation

9,332

Black-Scholes model

Expected term

1.4 to 9.5 years

Expected volatility

34.85%

Total liabilities

54,674

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

December 31, 2021

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(In thousands)

Assets:

Debt securities available-for-sale

113,268

Discounted cash flows

Discount rate

2.40% - 6.14% (4.06%)

Derivatives, index options

101,622

Broker prices

Implied volatility

11.76% - 16.54% (14.55%)

Mortgage loans

8,469

Discounted cash flows

Spread

100 - 250 bps

Total assets

223,359

Liabilities:

Policyholder account balances

142,761

Deterministic cash flow model

Projected option cost

0.03% - 14.49% (2.65%)

Share-based compensation

7,869

Black-Scholes model

Expected term

1.9 to 10.0 years

Expected volatility

35.05%

Total liabilities

150,630

Realized gains (losses) on debt securities are reported in the Condensed Consolidated Statements of Earnings as Net realized investment gains (losses) with liabilities reported as expenses. Unrealized gains (losses) on available-for-sale debt securities are reported as Other comprehensive income (loss) within the stockholders' equity section of the Condensed Consolidated Balance Sheets. Unrealized gains (losses) on trading debt securities are reported in the Condensed Consolidated Statements of Earnings as Net investment income.

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.

Table of Contents

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:


	June 30, 2022
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3

	(In thousands)
ASSETS

Debt securities, available-for-sale	$	8,160,952	8,160,952	—	7,786,995	373,957
Debt securities, trading	909,647		909,647	—	809,878	99,769
Cash and cash equivalents	530,559		530,559	530,559	—	—
Mortgage loans	511,936		483,367	—	—	483,367
Real estate	28,242		48,077	—	—	48,077
Policy loans	71,443		94,526	—	—	94,526
Other loans	21,652		22,688	—	—	22,688
Derivatives, index options	6,071		6,071	—	—	6,071
Equity securities	22,121		22,121	18,433	3,688	—

Life interest in Libbie Shearn Moody Trust	8,254		12,775	—	—	12,775
Other investments	4,513		26,192	—	—	26,192

LIABILITIES
Deferred annuity contracts	$	6,287,489	5,002,438	—	—	5,002,438
Immediate annuity and supplemental contracts	411,053		410,039	—	—	410,039

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	December 31, 2021
				Fair Value Hierarchy Level
	Carrying Values		Fair Values	Level 1	Level 2	Level 3

	(In thousands)
ASSETS

Debt securities, available-for-sale	$	9,068,946	9,068,946	—	8,741,984	326,962
Debt securities, trading	1,077,438		1,077,438	—	1,002,616	74,822
Cash and cash equivalents	714,624		714,624	702,632	11,992	—
Mortgage loans	487,304		513,246	—	—	513,246
Real estate	28,606		47,027	—	—	47,027
Policy loans	71,286		110,492	—	—	110,492
Other loans	24,266		25,085	—	—	25,085
Derivatives, index options	101,622		101,622	—	—	101,622
Equity securities	28,217		28,217	23,795	4,422	—
Life interest in Libbie Shearn Moody Trust	8,254		12,775	—	—	12,775
Other investments	4,537		24,876	—	—	24,876

LIABILITIES
Deferred annuity contracts	$	6,463,314	4,703,331	—	—	4,703,331
Immediate annuity and supplemental contracts	422,209		457,787	—	—	457,787

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) DERIVATIVES

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.

The 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 depending on the performance of the underlying index or indices and terms of the contract.

Table of Contents

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. Any changes relative to the embedded derivatives associated with policy contracts are reflected in contract interest in the Condensed Consolidated Statements of Earnings. 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.

Although there is credit risk in the event of nonperformance by counterparties to the index options, the 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 credit exposure.

Effective December 31, 2020, the Company entered into a coinsurance funds withheld reinsurance agreement under which identified assets are maintained in a funds withheld account. While the assets are withheld, the associated interest and credit risk of these assets are transferred to the reinsurer, creating an embedded derivative on reinsurance in the funds withheld liability. Accordingly, the Company is required to bifurcate the embedded derivative from the host contract in accordance with GAAP. The fair value of the embedded derivative on reinsurance is computed as the unrealized gain (loss) on the underlying funds withheld assets. This amount is included as a component of the funds withheld liability balance on the Condensed Consolidated Balance Sheets with changes in the embedded derivative on reinsurance reported in Net investment income in the Condensed Consolidated Statements of Earnings. Changes in the funds withheld liability are reported in operating activities in the Condensed Consolidated Statements of Cash Flows.

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The tables below present the fair value of derivative instruments as of June 30, 2022 and December 31, 2021, respectively.

June 30, 2022

Asset Derivatives

Liability Derivatives

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

(In thousands)

Derivatives not designated as hedging instruments

Equity index options

Derivatives, Index Options

6,071

Fixed-index products

Universal life and annuity contracts

45,342

Embedded derivative on reinsurance contract

Funds withheld liability

(270,614)

Total

6,071

(225,272)

December 31, 2021

Asset Derivatives

Liability Derivatives

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

(In thousands)

Derivatives not designated as hedging instruments

Equity index options

Derivatives, Index Options

101,622

Fixed-index products

Universal life and annuity contracts

142,761

Embedded derivative on reinsurance contract

Funds withheld liability

(84,725)

Total

101,622

58,036

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below presents the effect of derivative instruments in the Condensed Consolidated Statements of Earnings for the three months ended June 30, 2022 and 2021.


		June 30, 2022		June 30, 2021
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	$	(38,425)	40,166

Fixed-index products	Universal life and annuity contract interest	39,187		(48,819)
Embedded derivative on reinsurance contract	Net investment income	94,984		1,970

		$	95,746	(6,683)

The table below presents the effect of derivative instruments in the Condensed Consolidated Statements of Earnings for the six months ended June 30, 2022 and 2021.



		June 30, 2022		June 30, 2021
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	$	(76,623)	68,190

Fixed-index products	Universal life and annuity contract interest	78,491		(80,085)
Embedded derivative on reinsurance contract	Net investment income	185,889		72,340

		$	187,757	60,445

The embedded derivative liability on fixed-index products, the change of which is recorded in universal life and annuity contract interest in the Condensed Consolidated Statements of Earnings, includes projected interest credits that are offset by the 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 June 30, 2022 and 2021, the change in the embedded derivative liability due to the expected collectability of asset management fees increased contract interest expense by $0.0 million and $2.1 million, respectively. For the six months ended June 30, 2022 and 2021, the change in the embedded derivative liability due to the expected collectability of asset management fees increased/(decreased) contract interest expense by $0.0 million and $6.5 million, respectively.

Table of Contents

NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Beginning in the second quarter of 2020, the Company changed its budget for purchasing these options to match the collection of asset management fees with the payoff from out-of-the-money options, thereby removing the option premium that was previously being paid for the probability or expectation of collecting asset management fees ("out-of-the-money" hedging). Consequently, for annuity products having asset management fee features the remaining one year options purchased under the prior method expired and were replaced by out-of-the-money hedges as of June 30, 2021. Accordingly, the embedded derivative liability component due to the projected collectability of asset management fees no longer exists in 2022.

(12) INTANGIBLES, VALUE OF BUSINESS ACQUIRED, AND GOODWILL

Identifiable Intangible Assets

The gross carrying amounts and accumulated amortization for intangible assets are as follows for the dates shown.


		June 30, 2022			December 31, 2021
	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization

		(In thousands)

Trademarks/trade names	15	$	2,800	(638)	2,800	(545)
Internally developed software	7	3,800		(1,855)	3,800	(1,583)
Insurance licenses	N/A	3,000		—	3,000	—

		$	9,600	(2,493)	9,600	(2,128)

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 of insurance licenses at each reporting period to determine whether the useful life remains indefinite.

As of June 30, 2022, expected amortization expense relating to purchased intangible assets for each of the next 5 years and thereafter is as follows:


	Expected Amortization
	(In thousands)
Remainder of 2022	$	365
2023	729
2024	729
2025	730
2026	232
Thereafter	1,322

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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. Changes in VOBA were as follows for the periods shown:


	June 30,		December 31,
	2022		2021

	(In thousands)

Balance, beginning of year	$	154,499	162,968


Amortization:
Amortization, excluding unlocking	(4,537)		(8,469)


Balance as of end of period	$	149,962	154,499

Estimated future amortization of VOBA, net of interest (in thousands), as of June 30, 2022, is as follows:


	Expected Amortization
	(In thousands)

Remainder of 2022	$	4,234
2023	8,117
2024	7,789
2025	7,587
2026	7,436

Goodwill

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


	June 30,		December 31,
	2022		2021

	(In thousands)

Gross goodwill as of beginning of year	$	13,864	13,864
Goodwill resulting from business acquisition	—		—
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

Goodwill is evaluated for impairment annually, or more frequently if indicators of impairment arise.

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NATIONAL WESTERN LIFE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(13) SUBSEQUENT EVENTS

On July 27, 2022, National Western entered into a Funds Withheld Coinsurance Agreement (the “Agreement”) with Aspida Life Re Ltd. (“Aspida"), a reinsurer organized under the Laws of Bermuda. Pursuant to the Agreement, the Company agreed to cede, on a coinsurance with funds withheld basis, a specified quota share of certain liabilities pertaining to an in-force block of annuity contracts issued by the Company before July 1, 2022. The amount of statutory reserve liabilities ceded by the Company to Aspida under the Agreement approximates $250.0 million. In addition, pursuant to the Agreement, the Company has agreed to cede, on a coinsurance with funds withheld basis, a specified quota share of certain annuity contracts issued or to be issued by the Company on or after July 1, 2022.

As consideration for Aspida’s agreement to provide reinsurance pursuant to the Agreement, the Company transferred into a funds withheld account permitted assets approximating the statutory reserve liabilities ceded to Aspida. In accordance with the Agreement and in order to provide additional security for Aspida’s obligations under the Agreement, the parties will establish a trust account for the benefit of the Company in which Aspida will maintain certain assets and grant the Company a first priority security interest in such assets.

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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 Securities and Exchange Commission (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 six months ended June 30, 2022 follows. Where appropriate, discussion specific to the insurance operations of National Western Life Insurance Company is denoted by "National Western" or "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 2021 Annual Report filed on Form 10-K with the SEC.

Overview

National Western provides life insurance products for the savings and protection needs of policyholders and annuity contracts for the asset accumulation and retirement needs of contract holders. The Company accepts funds from policyholders or contract holders and establishes a liability representing future obligations to pay the policy or contract holders and their beneficiaries. To ensure the 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. National Western maintains its home office in Austin, Texas where substantially all of its 273 employees at June 30, 2022 are located.

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 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
●			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

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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 six months ended June 30, 2022, incorporating required disclosures in accordance with the rules and regulations of the SEC.

Insurance Operations - Domestic

National Western is currently licensed to do business in all states, except New York, and the District of Columbia. Products marketed are annuities, universal life insurance, fixed-index universal life, and traditional life insurance, which include both term and whole life products. Domestic sales in terms of premium levels have historically been more heavily weighted toward annuities. Most of these annuities can be sold either as tax qualified or 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, nearly all of National Western's domestic life premium sales come from single premium life products. At June 30, 2022, National Western maintained approximately 102,840 annuity contracts in force and 45,480 domestic life insurance policies in force representing $3.7 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 in recruiting, contracting, and managing independent agents. National Western's agents are independent contractors who are compensated on a commission basis. It currently has approximately 30,190 domestic independent agent contracts.

Effective January 31, 2019, the Company acquired Ozark National Life Insurance Company ("Ozark National") and N.I.S. Financial Services, Inc. ("NIS"). All of the outstanding stock of Ozark National is owned by National Western while NIS is wholly owned by NWLGI. Although reported separately for segment disclosure purposes, domestic insurance operations include the activities of Ozark National. Ozark National is a Missouri domiciled, stock life insurance company 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 unique distribution system to 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 NIS, its affiliated broker-dealer. Due to Ozark National's coordinated sale, their agents hold a securities license in addition to an insurance license. At June 30, 2022, Ozark National maintained 173,630 life insurance policies in force representing $5.8 billion in face amount of coverage. It maintains its home office facility in Kansas City, Missouri along with NIS where most of their combined employees are located.

Insurance Operations - International

National Western's international operations consists of a closed block of in force policies. The Company had progressively discontinued accepting applications from various countries ultimately ceasing applications for new policies from all remaining countries in 2018. At June 30, 2022, National Western had approximately 39,310 international life insurance policies in force representing $10.8 billion in face amount of coverage. The Company did not conduct business or maintain offices or employees in any other country, but historically did accept applications at its home office in Austin, Texas, and issued policies from there to foreign nationals in upper socioeconomic classes of other countries. Insurance products, issued primarily to residents of countries in South America, consisted almost entirely of universal life and traditional life insurance products not available in the local markets.

Issuing universal life and traditional life insurance policies to residents of countries in different regions provided diversification that helped to minimize large fluctuations that could arise due to various economic, political, and competitive pressures occurring from one country to another. These policies also provided diversification of earnings relative to the Company's domestic life insurance segment. Although there were some inherent risks of accepting international applications not present within the domestic market, they were reduced substantially by the Company in several ways. Most notably National Western's customer profile consisted of foreign nationals of other countries in upper socioeconomic classes who had substantial financial resources. This, coupled with National Western's conservative underwriting practices, has historically resulted in claims experience, due to natural causes, similar to that in the United States. Foreign currency risks were minimized by requiring payment of premiums and claims in United States dollars. In addition, the Company adopted an extensive anti-money laundering compliance program in order to fully comply with all applicable U.S. monitoring and reporting requirements pertaining to money laundering and other illegal activities. All of the above served to minimize risks.

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SALES

Life Insurance

The following table sets forth information regarding life insurance sales activity as measured by total premium for single premium life insurance products and annualized first year premiums for all other universal life and traditional 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 an 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			Six Months Ended
	June 30,			June 30,
	2022		2021	2022	2021

	(In thousands)

Single premium life	$	37,515	52,522	75,219	104,446
Traditional life	1,007		1,086	1,941	1,933
Universal life	1		—	1	—

Totals	$	38,523	53,608	77,161	106,379

Life insurance sales, as measured by total and annualized first year premiums, decreased (29)% in the second quarter of 2022 as compared to the second quarter of 2021 reflecting a pullback in consumer spending in the current period. Sales for the three months ended June 30, 2022, included $1.0 million from Ozark National, slightly below the $1.1 million reported in the second quarter of 2021, representing their traditional life sales activity. Ozark National's business model, which is heavily dependent upon in person contact for agent recruiting and obtaining applications for coverage from prospective policyholders, has been steadily recovering from the disruption of the pandemic effects upon its business. For the six months ended June 30, 2022, total life insurance sales decreased (27)% from the level in 2021. Included in these six month amounts were $1.9 million in sales from Ozark National in both 2022 and 2021.

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 have been the predominant product sold in the domestic life 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 targeting the accumulated savings of the segment of the population entering their retirement years. The wealth transfer life products have been valuable offerings for the Company's distributors as evidenced by their comprising over 97% of total life sales in the first six months of 2022.

The average new policy face amounts, excluding insurance riders, since 2018 are as shown in the following table.


	Average New Policy Face Amount
	NWLIC Domestic	Ozark National	NWLIC International

Year ended December 31, 2018	162,600	—	290,900
Year ended December 31, 2019	179,900	45,200	—
Year ended December 31, 2020	209,900	46,230	—
Year ended December 31, 2021	221,300	47,620	—
Six Months Ended June 30, 2022	216,500	47,050	—

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Contracts issued to international residents historically had larger face amounts of life insurance coverage per policy compared to those issued to domestic policyholders as National Western's efforts were directed toward accepting applications from upper socioeconomic residents of international countries. The average face amount of insurance coverage per policy for domestic life insurance contracts reflects the sales of single premium life products, primarily fixed-index, as part of its wealth transfer strategy for domestic life sales.

The table below sets forth information regarding life insurance in force for each date presented.


	Insurance In Force as of
	June 30,		December 31,
	2022		2021

	($ in thousands)

National Western

Universal life:
Number of policies	27,504		28,640
Face amounts	$	3,794,547	3,966,160

Traditional life:
Number of policies	23,557		24,500
Face amounts	$	2,177,608	2,257,490

Fixed-index life:
Number of policies	33,730		34,200
Face amounts	$	8,570,559	8,772,280

Total life insurance:
Number of policies	84,791		87,340
Face amounts	$	14,542,714	14,995,930

Ozark National

Total life insurance (all traditional):
Number of policies	173,626		175,610
Face amounts	$	5,802,101	5,892,500

At June 30, 2022, National Western’s face amount of life insurance in force was comprised of $10.8 billion from the international line of business and $3.7 billion from the domestic line of business. At December 31, 2021, these amounts were $11.3 billion and $3.7 billion for the international and domestic lines of business, respectively.

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Annuities

The following table sets forth information regarding the 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 the Company's sales productivity.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Fixed-index annuities	$	70,481	113,887	155,965	230,824
Other deferred annuities	228		341	1,353	1,957
Immediate annuities	652		3,700	2,398	14,080

Totals	$	71,361	117,928	159,716	246,861

Annuity sales decreased (39)% in the second quarter of 2022 compared to 2021 and were (35)% lower in the six months ended June 30, 2022 relative to the comparable period of 2021. Sales activity in the first half of 2022 was dampened by current economic conditions, including increasing inflation and expectations for rising interest rates, in combination with competitor product pricing adjustments which were more attractive than the Company's product offerings. In addition, 2021 sales activity reflects expansion of sales in conjunction with an overall increase in market demand as the economy emerged from the COVID-19 constraints present in 2020.

The 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, fixed-index products have comprised the majority of annuity sales, generally accounting for 90% or more of all annuity sales over this span. During the first six months of 2022, this percentage approximated 98% reflecting the ongoing narrative of historically low levels in interest rates and the overall continuing upward trend in equities. For all fixed-index products, the 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 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.

While National Western does not subsidize its interest crediting rates on new policies in order to obtain market share, similar to some other annuity product providers, the Company has 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 depressed interest rate environments. 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.

As a result of the foregoing, the Company entered into a coinsurance funds withheld reinsurance arrangement at December 31, 2020 under which 100% of the policyholder obligations associated with its fixed rate and payout annuity block of policies at that time were reinsured with a third party. With the transfer of the risk of these policies experiencing compression on interest rate margins, the Company has redirected its attention on rebuilding sales momentum in its annuity sales by developing products targeting new channels of distribution to supplement its current partnerships with national marketing organizations and focusing its offerings away from fixed interest rate products.

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The following table sets forth information regarding annuities in force for each date presented. These amounts include the policies and reserves associated with the funds withheld reinsurance transaction discussed above.


	Annuities In Force as of
	June 30,		December 31,
	2022		2021

	($ in thousands)

Fixed-index annuities:
Number of policies	63,373		64,860
GAAP annuity reserves	$	5,013,171	5,151,890

Other deferred annuities:
Number of policies	28,883		30,260
GAAP annuity reserves	$	1,061,281	1,119,207

Immediate annuities:
Number of policies	10,584		10,930
GAAP annuity reserves	$	367,915	376,667

Total annuities:
Number of policies	102,840		106,050
GAAP annuity reserves	$	6,442,367	6,647,764

Impact of Recent Business Environment

The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by improving employment data and increases in personal income. Important metrics indicating sustained economic growth over the longer term principally revolve around employment and confidence, both consumer and business sentiment. Rising interest rates in 2022 overall have been a welcomed development for insurers from a spread margin standpoint. However, the raid rise in interest rates has significantly flipped fair market values of investments in debt securities from unrealized gain positions to unrealized loss positions.

There currently exist macroeconomic conditions which cause a tremendous amount of uncertainty. In addition to the lingering effects of COVID-19 and concerns of potential reemergence through new strains, the Federal Reserve has commenced a series of aggressive interest rate increases intended to curtail surging inflation. Market watchers are concerned with the ability of the Federal Reserve to effectively control inflation without precipitating a recessionary environment. This concern is evident with the inversion of the yield curve resulting in two-year Treasury note yields surpassing and remaining above ten-year Treasury notes yields, a frequent harbinger of imminent contractions in economic activity. Should the U.S. economy enter a recession, the outlook for growth would be significantly hampered. In addition, in the quest for incremental investment yield, relaxed credit and liquidity risk position taken could be exposed.

Industry analysts and observers generally agree that a sudden and sizable jump in interest rate levels 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. While not desirable, life insurance carriers have managed to adjust to an ultra low interest environment over time incorporating lower minimum guaranteed interest rates. These products may become uncompetitive or undesirable by current policyholders if there is a rapid shift to higher interest rate levels and newer products priced for these higher rates. A slow and steady upward movement in rates would provide insurers with the ability to adjust over time. Ultimately, a mix of monetary policy adjustments, fiscal policy, and economic fundamentals will determine the future direction of interest rate movements and the speed of such shifts. It is uncertain 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.

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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 focused on maintaining capital levels substantially above regulatory and rating agency requirements. In addition, its business model is predicated upon steady growth in invested assets while managing the block of business within profitability objectives. A key premise of the Company's 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

Premiums and other revenues. The following details Company revenues.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Universal life and annuity contract charges	$	32,692	34,060	65,343	68,949
Traditional life premiums	21,647		22,112	43,980	44,696
Net investment income (excluding index option derivatives)	93,899		116,378	201,821	254,429
Other revenues	5,578		6,034	11,375	11,448
Index option derivative gain (loss)	(38,425)		40,166	(76,623)	68,190
Net realized investment gains	1,766		3,415	5,560	4,831

Total revenues	$	117,157	222,165	251,456	452,543

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Universal life and annuity contract charges - Revenues for universal life and annuity contracts were lower for the first six months in 2022 compared to 2021 with the component sources shown below. Revenues for universal life and annuity products consist of policy charges for the cost of insurance, administration charges, 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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Contract Revenues:
Cost of insurance and administrative charges	$	31,421	30,669	62,102	61,262
Surrender charges	4,551		7,167	9,562	13,301
Other charges	1,757		616	3,585	3,364

Gross contract revenues	37,729		38,452	75,249	77,927

Reinsurance premiums	(5,037)		(4,392)	(9,906)	(8,978)

Net contract revenues	$	32,692	34,060	65,343	68,949

Cost of insurance charges were $24.6 million in the quarter ended June 30, 2022 compared to $24.1 million in the second quarter of 2021, and were $48.5 million for the six months ended June 30, 2022 compared to $48.4 million for the same period of 2021. 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. The volume of universal life insurance in force at June 30, 2022 declined to $12.4 billion from approximately $12.7 billion at December 31, 2021 and $13.5 billion at December 31, 2020. Administrative charges pertaining to new business issued increased to $6.9 million for the three months ended June 30, 2022 from $6.6 million for the same period in 2021, and to $13.6 million for the first six months of 2022 compared to $12.9 million for the first six months of 2021.

Surrender charges assessed against policyholder account balances upon withdrawal decreased in the three and six months ended June 30, 2022 versus the comparable prior year periods. While the Company earns surrender charge income that is assessed upon policy terminations, the Company's overall profitability is enhanced when policies remain in force and additional contract revenues are realized and the Company continues to make an interest rate spread equivalent to the difference it earns on its investments and the amount that it credits to policyholders. In the three and six months ended June 30, 2022, lapse rates on annuity products were comparable with that of the similar prior year periods. However, surrender charge income recognized is also dependent upon the duration of policies at the time of surrender (i.e. later duration policy surrenders have lower surrender charges assessed and earlier policy surrenders having a higher surrender charge assessed). The lower surrender charge revenue reflects later duration policies terminating having lower surrender charges.

Other charges include the net amount between amortization into income of the premium load on single premium life insurance products (which is deferred at the inception of the policy) and the current period premium load amounts on new sales which are deferred. These products have become a substantial portion of domestic life insurance sales. The increase in Other charges in the three and six month periods ended June 30, 2022 versus the comparable 2021 periods reflects lower current period premium loads deferred due to decreased sales levels.

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Traditional life premiums - Traditional life premiums include the activity of Ozark National. Ozark National's principal product is a non-participating whole life insurance 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. A sizable portion of National Western's traditional life business resided in the International Life segment. However, National Western's overall life insurance sales focus has historically been primarily centered around universal life 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 amount for the quarter ended June 30, 2022 is $17.8 million of life insurance renewal premium from Ozark National compared to $18.4 million in the second quarter of 2021. For the six months ended June 30, 2022 and 2021, Ozark National life insurance renewal premium amounts were $36.2 million and $37.1 million, respectively. Universal life products, especially 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.

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 is provided below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Gross investment income:
Debt and equity securities	$	69,278	79,541	144,217	156,904
Mortgage loans	6,811		4,167	11,751	7,798
Policy loans	585		613	1,246	1,302
Short-term investments	625		66	683	195
Other invested assets	6,126		6,481	16,201	7,086

Total investment income	83,425		90,868	174,098	173,285
Less: investment expenses	664		683	1,375	1,467

Net investment income (excluding derivatives and trading securities)	82,761		90,185	172,723	171,818
Index option derivative gain (loss)	(38,425)		40,166	(76,623)	68,190
Embedded derivative on reinsurance	94,984		1,970	185,889	72,340
Trading securities market adjustment	(83,846)		24,223	(156,791)	10,271

Net investment income	$	55,474	156,544	125,198	322,619

The Company's strategy has been to invest a substantial portion of its cash flows in fixed debt securities within its guidelines for credit quality, duration, and diversification. As a result of an asset allocation strategy study that was conducted, new investment activity has included increased allotments toward mortgage loans and alternative investments. Investment yields on new bond purchases during the first six months of 2022 approximated 3.94% as compared to the 3.02% yield achieved during the full year 2021. During the first six months of 2022, the ten-year treasury bond, a proxy for National Western's corporate bond purchases, increased approximately 150 basis points. National Western's weighted average bond portfolio yield was 3.65% at June 30, 2022 increasing from 3.62% at December 31, 2021. Ozark National's weighted average portfolio yield at June 30, 2022 was 3.66%.

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Changes in fair values of equity securities are included in net investment income in the Condensed Consolidated Statements of Earnings. For the three months ended June 30, 2022 and 2021, unrealized gains/(losses) of $(5.2) million and $2.0 million, respectively, are included in investment income reflecting the change in fair value of equity securities during the periods. For the six months ended June 30, 2022, unrealized gains/(losses) were $(5.9) million and $3.4 million, respectively. The carrying value of the Company's portfolio of equity securities was $22.1 million at June 30, 2022.

Prior to 2020, the Company's mortgage loan activity had been challenged by the low interest rate levels and highly competitive underwriting of commercial properties. The COVID-19 pandemic crisis further impeded the underwriting of new loan applications until clarity regarding the impacts of the closing down the economy upon commercial real estate became discernible. Eventually the volume of new mortgage loan originations resumed a pace closer to that of the pre-pandemic environment. Additional resources were added with the goal of increasing mortgage loan investments to a more appreciable percentage of total invested assets. As a result, the mortgage loan portfolio balance has increased to $511.9 million at June 30, 2022 from $487.3 million at December 31, 2021 and $332.5 million at December 31, 2020. During the six months ended June 30, 2022 the Company originated new mortgage loans in the amount of $44.1 million compared to $70.3 million in the comparable period of 2021. As interest rate levels have increased appreciably in the first six months of 2022, mortgage loan opportunities meeting the Company's underwriting standards have become less prevalent.

In order to obtain incremental investment yield, the Company expanded its invested asset vehicles to include alternative investments. These assets are typically capital pools with specific investment objectives managed by investment firms having specific expertise in designated asset opportunities. The Company held balances of $91.9 million, $67.7 million, and $28.9 million at June 30, 2022, December 31, 2021, and December 31, 2020, respectively, in this investment category, excluding any associated structured note amounts. Other invested assets investment income for the six months ended June 30, 2022 includes a non-recurring $6.8 million profit participation payment on a mezzanine loan.

Beginning January 1, 2021, the Company's net investment income is reduced for amounts ceded to the reinsurer under the funds withheld reinsurance agreement associated with funds withheld assets. In the quarters ended June 30, 2022 and 2021, the Company ceded net investment income of $14.9 million and $14.1 million, respectively. For the six months ended June 30, 2022 and 2021, these amounts were $27.6 million and $27.2 million, respectively.

The Company is required to maintain an allowance pertaining to current expected credit losses on financial instruments ("CECL") under GAAP. Remeasurement of the CECL allowance for mortgage loans is performed quarterly and for the three months ended June 30, 2022 resulted in a decrease in the allowance of $(0.2) million which is included in gross investment income. The provision for the quarter ended June 30, 2021 increased the mortgage loan allowance by $0.2 million. For the six months ended June 30, 2022 and 2021, the change in the CECL allowance included in gross investment income for mortgage loans was a decrease of $(0.4) million and an increase of $0.8 million, respectively.

Credit loss allowances for available-for-sale debt securities are recorded when unrealized losses and missed payments indicate a credit loss has occurred and a full recovery of the investment principal is not expected. Credit loss allowances are recorded through net investment income in the Condensed Consolidated Statements of Earnings. No credit loss allowances for available-for-sale debt securities were recorded for the three and six months ended June 30, 2022 or 2021.

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In order to evaluate underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding index option derivative gain (loss), embedded derivative on reinsurance, and trading securities market adjustments, 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:


	Six Months Ended June 30,
	2022			2021

	(In thousands)

Excluding derivatives and funds withheld securities:
Net investment income	$	172,723		171,818
Average invested assets, at amortized cost	$	9,435,503		10,191,372
Annual yield on average invested assets	3.66		%	3.37	%

Including derivatives and funds withheld securities:
Net investment income	$	125,198		322,619
Average invested assets, at amortized cost	$	11,098,111		11,135,544
Annual yield on average invested assets	2.26		%	5.79	%

The increase in average invested asset yield, excluding derivatives and trading securities, for the first six months of 2022 compared to 2021 is due to the Company obtaining incremental yield on newly invested cash flows into debt securities, mortgage loans, and alternative investments. In addition, the first six months of 2022 includes the $6.8 million non-recurring profit participation payment related to a mezzanine loan.

The average yield on bond purchases during the six months ended June 30, 2022 to fund National Western insurance operations was 3.94% representing a 1.65% spread over treasury rates. The weighted average quality of new purchases during the first six months of 2022 was "A-" which was consistent with purchases during 2021. The composite duration of purchases during the first six months of 2022 was 8.1 years which is less than the duration of purchases made in 2019 through 2021. 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 2021 at a rate of 1.51%, the daily closing yield of the ten-year treasury bond steadily increased during the first six months of 2022 finishing the period at 3.02%.

The pattern in average invested asset yield, including derivatives and trading securities, incorporates increases and decreases in the fair value of index options purchased by National Western to support its fixed-index products as well as net investment income from the embedded derivative funds withheld liability. Fair values of the purchased call options recorded a net loss during the first six months of 2022 while a net gain was recorded during the first six months of 2021, corresponding to the movement in the S&P 500 Index during these periods (the primary index the fixed-index products employ). Refer to the derivatives discussion below for a more detailed explanation. In addition, the funds withheld reinsurance agreement executed December 31, 2020 introduced embedded derivative accounting with respect to the policyholder obligations reinsured. During the six months ended June 30, 2022 and 2021, the embedded derivative liability for reinsurance decreased by $185.9 million and $72.3 million, respectively, which was recorded as investment income. Debt securities supporting the funds withheld policyholder obligations classified as trading incurred a $(156.8) million fair market value decline in the first six months of 2022 and $10.3 million market value increase in the corresponding period for 2021, respectively, which are recorded as a component of net investment income. The aggregate of these two amounts increased net investment income during the six months ended June 30, 2022 and 2021 by $29.1 million and $82.6 million, respectively.

Other revenues - Other revenues pertain to NIS, the broker-dealer affiliate of Ozark National; the operations of Braker P III ("BP III"), a subsidiary which owns and manages a commercial office building which includes the home office operations of National Western; and a maintenance expense allowance earned by National Western for administering the funds withheld block of annuity policies ceded to a third party reinsurer.

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NIS revenues were $2.8 million and $3.2 million for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, NIS revenues were $6.0 million and $6.1 million, respectively. NIS revenues generally correlate with equity market performance.

Third party revenues associated with BP III were $1.3 million and $1.3 million for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, revenues were $2.6 million and $2.6 million, respectively. Rental income received from National Western is eliminated in reporting consolidated results. The facility is currently fully leased.

Under terms of the funds withheld reinsurance contract, National Western earns a monthly expense allowance equal to the average policy count of the funds withheld reinsured block of business multiplied by a stated amount per policy. The Company reported maintenance expense allowance revenue of $1.4 million and $1.4 million in the three months ended June 30, 2022 and 2021 respectively, and $2.6 million and $2.8 million in the six months ended June 30, 2022 and 2021, respectively.

Derivative gain (loss) - Index options are derivative financial instruments used to hedge the equity return component of 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 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 fixed-index products also fluctuates in a similar manner and direction. For the three and six months ended June 30, 2022 and 2021, the Company recorded realized and unrealized gains/(losses) from index options as shown below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Index option derivatives:
Unrealized gain (loss)	$	(41,616)	(16,807)	(99,624)	(1,304)
Realized gain	3,191		56,973	23,001	69,494

Total gain (loss) included in net investment income	$	(38,425)	40,166	(76,623)	68,190

Total contract interest	$	(13,801)	69,973	(28,606)	122,818

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.

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The financial statement investment spread, the difference between investment income and interest credited to contract holders, 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 spread by increasing option realized gains reported as investment income in an amount greater than interest credited to policy contractholders which is reported as contract interest expense. Asset management fees collected in the second quarter of 2022 and 2021 were approximately $0.0 million and $1.9 million, respectively. For the six months ended June 30, 2022 and 2021, asset management fees collected were $0.0 million and $5.8 million, respectively. The Company changed its option hedging to an "out-of-the-money" basis during 2020 for those annuity products containing asset management fee provisions and as of the end of the second quarter of 2021, all options outstanding for annuity products having asset management fee features were acquired on an out-of-the-money basis. Accordingly, no asset management fees have been collected since that time. While asset management fees are no longer being collected, the costs to purchase the out-of-the-money options similarly decreases.

Net realized investment gains (losses) - Realized gains (losses) on investments generally include proceeds from bond calls, sales and impairment write-downs, as well as gains and losses on the sale of real estate property. The net gains reported for the six months ended June 30, 2022 consisted of gross gains of $5.6 million, primarily related to bond calls of debt securities in the available-to-sale category, offset by gross losses of $0.0 million. The net gains reported for the six months ended June 30, 2021 consisted of gross gains of $6.2 million offset by gross losses of $(1.4) million. The gross loss in the 2021 period pertains to property that was held by Ozark National which recorded a valuation allowance to reflect the property at its estimated fair value less anticipated costs to sell.

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


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Life and other policy benefits	$	35,177	35,904	77,076	73,793
Amortization of deferred transaction costs	27,756		25,123	56,772	55,112
Universal life and annuity contract interest	(13,801)		69,973	(28,606)	122,818
Other operating expenses	30,321		28,468	62,903	59,803

Totals	$	79,453	159,468	168,145	311,526

Life and other policy benefits - Death claim benefits, the largest component of policy benefits, were $37.9 million in the first six months of 2022 compared to $47.5 million for the first six months of 2021. Of the amount included in the six months ended June 30, 2022, $18.9 million was associated with National Western business and $19.0 million pertained to Ozark National. In the first six months of 2021, these amounts were $27.5 million and $20.0 million for National Western and Ozark National, respectively. Death claim amounts are subject to variation from period to period. For the first six months of 2022, the number of National Western life insurance claims decreased 22% versus the comparable period in 2021 while the average dollar amount per net claim increased to $68,600 from approximately $52,500. 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 2022 and 2021 six-month periods was $15,700 and $17,100, respectively. 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.

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Both National Western and Ozark National have established specific coding to track the death claim experience associated with COVID-19. During the six months ended June 30, 2022, National Western incurred 55 death claims on life insurance policies in which the reported cause of death was due to the coronavirus (COVID-19) totaling a net claim amount (after reinsurance) of $3.4 million. For the comparable six-month period in 2021, National Western incurred 133 COVID-19 related death claims on life insurance policies totaling a net amount after reinsurance of $10.6 million. The industry has noted that designation of COVID-19 as the cause of death has not been consistent during the pandemic. Accordingly, the Company's disclosures reporting death claims due to COVID-19 are updated as more information is obtained. During the six months ended June 30, 2022, Ozark National incurred 90 confirmed COVID-19 death claims aggregating to a net claim amount of approximately $2.3 million. For the six months ended June 30, 2021, Ozark National reported 201 COVID-19 death claims totaling to a net claim amount of $4.8 million. The Company's COVID-19 death claim experience peaked in the third quarter of 2021 and has incurred successive quarterly decrements in activity since that time. The COVID-19 claim activity is included in the claim disclosures made in the preceding paragraph.

Life and other policy benefits also includes policy liabilities held associated with the Company's traditional life products, policies with life contingencies, and riders such as the guaranteed minimum withdrawal benefit rider ("WBR"), a popular rider to National Western's equity-indexed annuity products. The increases in the WBR liabilities for National Western were $8.0 million and $0.3 million in the quarters ended June 30, 2022 and 2021, respectively, and $17.9 million and $10.7 million, respectively, for the six months ended. During the 3rd quarter of 2021, the Company unlocked its assumptions increasing its WBR liabilities to correspond more closely to actual experience.

Life and other policy benefits in the quarters ended June 30, 2022 and 2021 includes changes in traditional life reserves and miscellaneous benefit payments associated with Ozark National's operations of $6.5 million and $7.3 million, respectively, and $13.6 million an $13.2 million, respectively for the six months then ended.

Amortization of deferred transaction costs - 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 actual experience. DPAC balances are also adjusted each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as 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 six months ended June 30, 2022 and 2021.


Amortization of DPAC	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Unlocking adjustments	$	—	—	—	—
Other amortization components	22,859		19,609	46,724	43,181

Totals	$	22,859	19,609	46,724	43,181

Amortization expense for the three and six months ended June 30, 2022 was comprised of DPAC amortization by National Western of $22.6 million and $46.3 million, respectively, and by Ozark National of $0.3 million and $0.4 million, respectively. Amortization expense for National Western for the three and six months ended June 30, 2022 was reduced by $0.9 million and $2.0 million, respectively, for amounts pertaining to the policies ceded under the funds withheld reinsurance agreement. Ceded amortization expense for the three and six months ended June 20, 2021 was $2.0 million and $3.4 million, respectively. The ceded amounts decline over time with the runoff of the closed block of policies.

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The Company's practice is to annually review during the third quarter its actuarial assumptions regarding the emergence of profits pertaining to its blocks of businesses and to update or "unlock" those assumptions which deviate significantly from actual experience. Accordingly, during the three and six months ended June 30, 2022 and 2021, the Company did not unlock its DPAC balances. 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.

As the DPAC balance is an asset on the Company's Condensed Consolidated Balance 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 universal life and annuity policies in force, including credited interest on equity-indexed policies. The amount of earned interest on DPAC balances recorded for the three months ended June 30, 2022 and 2021 was $3.5 million and $10.9 million, respectively, decreasing other amortization component expense. The amount of interest earned on DPAC balances for the six months ended June 30, 2022 and 2021 was $10.5 million and 15.5 million, respectively. The decreased interest amount in 2022 compared to 2021 reflects lower returns on equity-index products, particularly life insurance products.

As part of the purchase accounting required with the acquisition of Ozark National, the Company recorded an intangible asset of $180.9 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 June 30, 2022 and 2021, the Company's VOBA amortization expense was $2.5 million and $2.3 million, respectively, and $4.5 million and $4.8 million, respectively, for the six months then ended.

At December 31, 2020, the Company recorded as an asset on its Consolidated Balance Sheet a deferred Cost of Reinsurance ("COR") amount of $102.8 million associated with the funds withheld reinsurance transaction. This represents the amount of assets transferred at the closing date of funds withheld agreement (debt securities, policy loans, and cash) in excess of the GAAP liability ceded plus a $48 million ceding commission paid to the reinsurer. The COR balance is amortized commensurate with the runoff of the ceded block of funds withheld business. For the three months ended June 30, 2022 and 2021, COR amortization expense of $2.4 million and $3.3 million, respectively, is included in Amortization of deferred transaction costs. For the six months ended June 30, 2022 and 2021, COR amortization expense of $5.5 million and $7.1 million, respectively, is included in Amortization of deferred transaction costs.

Universal life and annuity contract interest - The 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 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" within the industry.

Contract interest reported in financial statements also encompasses the performance of the index options associated with the 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 $(76.6) million and $68.2 million for the six months ended June 30, 2022 and 2021, respectively. These amounts consisted of realized gains of $23.0 million and unrealized losses of $(99.6) million for the year-to-date 2022 period, and realized gains of $69.5 million and unrealized losses of $(1.3) million for the comparable 2021 time frame. For the three months ended June 30, 2022 and 2021, the net realized and unrealized gains/(losses) from market value changes were $(38.4) million and $40.2 million. In the second quarter of 2022, the figure was comprised of realized gains of $3.2 million and unrealized losses of $(41.6) million. In the second quarter of 2021, this amount was made up of realized gains of $57.0 million and unrealized losses of $(16.8) million. These returns similarly 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.

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Contract interest expense includes other items which increase or decrease reported contract interest in a particular reporting period. for the three and six months ended June 30, 2022 and 2021, these other items include the amounts shown in the table below.


Contract Interest Expense	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Gross reserve changes	$	5,286	9,494	8,521	16,012
Ceded reserve changes under funds withheld	(6,502)		(11,890)	(11,282)	(17,143)
Unlocking adjustments, net	—		—	—	—
Asset management fees collected	—		(1,917)	—	(5,835)
Projected asset management fees	—		2,120	—	6,477
Other embedded derivative components	(1,845)		6,874	(3,512)	7,039

Totals	$	(3,061)	4,681	(6,273)	6,550

Contract interest expense includes gross reserve changes for immediate annuities, two tier annuities, excess death benefit reserves, excess annuitizations, and amortization of deferred sales inducement balances. These gross reserve 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. Netted against gross reserve changes for the first six months of 2022 is $14.8 million for assessed WBR policy charges compared to $12.8 million in the same period for 2021.

Beginning in 2021, reserve changes associated with funds withheld annuity policies are ceded to the reinsurer and no longer reflected in the financial statements of the Company. Accordingly, contract interest expense is adjusted to remove these expense items which are shown in the above table for the three and six months ended June 30, 2022 and 2021. In addition to these amounts, the Company also cedes the fixed interest credited on the funds withheld annuity policies. For the three months ended June 30, 2022 and 2021, the fixed interest credited ceded was $8.8 million and $7.5 million, respectively. For the six months ended June 30, 2022 and 2021, the fixed interest credited ceded was $16.8 million and $15.3 million, respectively.

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 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. As noted in the discussion of net investment income, the collection of asset management fees in a period can cause investment income to increase marginally higher than contract interest expense since these collected fees are deducted from indexed interest credited to policyholders. As shown in the table above, the collection of asset management fees are deductions from contract interest expense.

The Company's historical practice was to purchase options priced to incorporate an expected probability of collecting asset management fees (referred to as "at-the-money hedging"). With this practice accounting rules required the embedded derivative liability to include a projection of asset management fees estimated to be collected in the succeeding fiscal year. This projection was based upon the most recent performance of the reference equity index. Increases in projected asset management fees to be collected reduced contract interest expense while decreases in projected asset management fees to be collected increased contract interest expense. The Company converted to an "out-of-the-money" hedging practice during 2020 which eliminated the need to project collection of future asset management fees as part of the embedded derivative liability when the remaining inventory of annual at-the-money option hedges completed its roll over to out-of-the-money hedges during the second quarter of 2021. Consequently, the embedded derivative liability component for projected asset management fees to be collected progressively diminished and was phased out as of the end of the 2021 second quarter. In the six month periods ended June 30, 2022 and 2021 contract interest was increased by $0.0 million and $6.5 million, respectively, for the projected change in asset management fees to be collected.

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Another contract interest expense component is the amortization of deferred sales inducements (included in Gross reserve changes above). Similar to deferred policy acquisition costs, the 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 ("DSI") 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 unlocking adjustments, plus or minus, are included in contract interest expense. No unlocking adjustments were made in the six months ended June 30, 2022 and 2021.

Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, real estate expenses, brokerage expenses, compensation costs, and reinsurance ceded commission expense. These expenses for the three and six months ended June 30, 2022 and 2021 are summarized in the table that follows.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

General administrative expenses	$	11,746	11,856	25,756	23,632

Compensation expenses	9,497		8,198	19,012	20,728
Commission expenses	2,632		2,615	5,427	5,660
Real estate expenses	1,697		1,525	3,203	2,929
Brokerage expenses (NIS)	1,442		1,570	3,012	2,958
Reinsurance ceded commission expense	2		4	3	10
Taxes, licenses and fees	3,305		2,700	6,490	3,886

Totals	$	30,321	28,468	62,903	59,803

General administrative expenses include software amortization expense associated with National Western's proprietary policy administration systems as well as other acquired software. Expenses pertaining to these items were $3.8 million and $3.8 million in the second quarter of 2022 and 2021, respectively and $7.3 million and $7.4 million in the first half of 2022 and 2021, respectively. This category of expenses also includes legal fees and expenses which were $1.0 million and $1.1 million in the second quarter of 2022 and 2021, respectively, and $2.1 million and $1.8 million in the first half of 2022 and 2021, respectively. Legal fees and expenses include amounts pertaining to the security incident reported in Part II. Item 1. of this filing.

Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock appreciation rights ("SARs"), restricted stock units ("RSUs") and performance share units ("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 SARs, RSUs, and PSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positively or negatively in any given period. In the amounts shown above, share-based compensation expense totaled $1.0 million in the second quarter of 2022 and $(0.5) million in the second quarter of 2021. For the six-month periods shown share-based compensation expenses was $2.5 million in 2022 and $3.9 million in 2021. The Company's Class A common share price decreased from $214.44 at December 31, 2021 to $202.70 at June 30, 2022, compared to increasing from $206.44 at December 31, 2020 to $224.39 at June 30, 2021. Share-based compensation expense in the 2022 periods are also being increased by the significant increments in the risk free interest rate levels used to value the outstanding awards. No performance share awards were granted in the first six months of 2022 and 2021. Ozark National compensation expenses were $1.0 million and $1.0 million in the second quarter of 2022 and 2021, respectively, and $2.0 million and $1.9 million in the six months ended 2022 and 2021, respectively.

Taxes, licenses and fees include premium taxes and licensing fees paid to state insurance departments, the company portion of social security and Medicare taxes, state income taxes, and other state and municipal taxes. Taxes, licenses and fees in the first six months ended June 30, 2021 were reduced by $1.2 million for the release of a tax liability accrual no longer needed. Taxes, licenses and fees in the six months ended June 30, 2022 include National Western premium tax expenses of $3.8 million compared to $2.8 million in the comparable period of 2021 which reflects the increased retaliatory tax burden imposed by a change in Colorado laws with respect to premium taxes.

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Federal Income Taxes. Federal income taxes on earnings from operations reflect an effective tax rate of 19.6% for the six months ended June 30, 2022 compared to 20.6% for the six months ended June 30, 2021. The Federal corporate tax rate was set at 21% under the 2017 Tax Cuts and Jobs Act ("Tax Act"). The Company's effective tax rate is typically slightly lower than the Federal statutory rate due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from 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 for the three and six months ended June 30, 2022 and 2021 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.


	Domestic Life Insurance		International Life Insurance	Annuities	ONL & Affiliates	All Others	Totals

	(In thousands)

Segment earnings:
Three months ended:
June 30, 2022	$	1,445	4,828	19,039	4,165	(107)	29,370
June 30, 2021	$	3,687	4,942	27,863	4,966	5,744	47,202

Six months ended:
June 30, 2022	$	2,809	7,914	36,189	8,645	7,000	62,557
June 30, 2021	$	1,405	10,483	79,612	8,235	8,477	108,212

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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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Premiums and other revenues:
Premiums and contract revenues	$	13,218	12,475	28,107	26,373
Net investment income (loss)	(5,888)		28,247	(8,232)	52,090
Other revenues	25		31	51	52

Total premiums and other revenues	7,355		40,753	19,926	78,515

Benefits and expenses:
Life and other policy benefits	4,776		5,007	11,164	11,117
Amortization of deferred transaction costs	3,334		153	6,164	5,613
Universal life insurance contract interest	(8,979)		25,466	(14,399)	47,087
Other operating expenses	6,457		5,482	13,510	12,929

Total benefits and expenses	5,588		36,108	16,439	76,746

Segment earnings before Federal income taxes	1,767		4,645	3,487	1,769
Provision for Federal income taxes	322		958	678	364

Segment earnings	$	1,445	3,687	2,809	1,405

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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Universal life insurance revenues	$	15,848	14,671	32,775	30,251
Traditional life insurance premiums	832		707	2,048	1,903
Reinsurance premiums	(3,462)		(2,903)	(6,716)	(5,781)

Totals	$	13,218	12,475	28,107	26,373

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Universal life insurance revenues are predominantly earned based upon the amount of life insurance policies that are in force. National Western's pace of new policies issued has lagged the number of policies terminated from death or surrender causing a declining level of policies in force from which contract revenue is received. Consequently, the number of domestic life insurance policies in force has declined from 46,940 at December 31, 2020 to 46,060 at December 31, 2021, and to 45,480 at June 30, 2022. Policy lapse rates in the first six months of 2022 approximated 5.8% compared to 6.0% and 7.0% in the first six months of 2021 and 2020, respectively. While policy count rates have declined, the face amount of life insurance in force has risen steadily from $3.5 billion at December 31, 2020 to $3.7 billion at both December 31, 2021 and June 30, 2022.

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 six months of 2022 was 37% lower than in the comparable period for 2021 and the volume of insurance issued was 38% lower than that in 2021.

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 $3.6 million and $3.4 million in the six months ended June 30, 2022 and 2021, respectively.

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


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Universal life insurance:
First year and single premiums	$	37,497	53,175	75,137	104,815
Renewal premiums	4,429		4,416	9,080	8,283

Totals	$	41,926	57,591	84,217	113,098

Domestic life insurance sales for some time have consisted substantially of single premium policies which do not have much in the way of recurring premium payments. These products utilize 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 generally not been exhibiting substantial increases.

Net investment income for this segment of business, excluding derivative gain/(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. 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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Net investment income (excluding derivatives)	$	13,682	13,007	26,988	25,548
Index option derivative gain (loss)	(19,570)		15,240	(35,220)	26,542

Net investment income (loss)	$	(5,888)	28,247	(8,232)	52,090

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As seen in the above table, reported net investment income includes the gains and losses on index options purchased to back the index crediting mechanism on fixed-index universal life 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 each 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 more exposed to variation from period to period. Claim count activity during the first six months of 2022 decreased 21% compared to the first six months of 2021 while the average net claim amount (after reinsurance) increased to $36,500 from $33,400. Reported claims in the six months ended June 30, 2022 for which the cause of death was identified as COVID-19 were $1.2 million after reinsurance, a decrease from $3.0 million reported in the first half of 2021. 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 consisting of final expense type products (i.e. purchased to cover funeral costs) which typically had smaller face amounts of insurance coverage. Claims on these older blocks of policies are more susceptible to COVID-19 mortality given the higher attained ages of this business. GAAP reporting requires that claims be recorded net of any cash value amounts that have been accumulated in the policies. The Company's overall mortality experience for this segment has been consistent with pricing assumptions.

Included in amortization of deferred transaction costs is DPAC amortization. As noted previously in the discussion of Results of Operations, the 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, unlocking adjustments may also 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 six months ended June 30, 2022 and 2021.


Amortization of DPAC	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Unlocking adjustments	$	—	—	—	—
DPAC amortization expense	3,334		153	6,164	5,613

Totals	$	3,334	153	6,164	5,613

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 experience during the period. The increase in amortization expense in 2022 relative to 2021 reflects lower interest earned on universal life DPAC balances due to decreased realized gains from index options. Credited interest rates during the second quarter of 2022 approximated 4% on universal life as compared to 10% in the second quarter of 2021.

Contract interest expense includes the 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. For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the 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.

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International Life Insurance Operations

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


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Premiums and other revenues:
Premiums and contract revenues	$	19,129	20,656	36,240	40,836
Net investment income (loss)	(3,156)		13,847	(7,403)	25,963
Other revenues	22		44	39	72

Total premiums and other revenues	15,995		34,547	28,876	66,871

Benefits and expenses:
Life and other policy benefits	5,486		5,302	10,187	9,677
Amortization of deferred transaction costs	4,844		6,163	9,994	11,555
Universal life insurance contract interest	(4,622)		12,226	(10,343)	23,025
Other operating expenses	4,353		4,646	9,213	9,420

Total benefits and expenses	10,061		28,337	19,051	53,677

Segment earnings before Federal income taxes	5,934		6,210	9,825	13,194
Provision for Federal income taxes	1,106		1,268	1,911	2,711

Segment earnings	$	4,828	4,942	7,914	10,483

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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Universal life insurance revenues	$	18,784	20,039	35,824	40,004
Traditional life insurance premiums	1,920		2,106	3,606	4,029
Reinsurance premiums	(1,575)		(1,489)	(3,190)	(3,197)

Totals	$	19,129	20,656	36,240	40,836

Universal life revenues and operating earnings are largely generated from the amount of life insurance in force. The volume of in force for this segment, primarily universal life, has contracted from $12.4 billion at December 31, 2020 to $11.3 billion at December 31, 2021 and to $10.8 billion at June 30, 2022. The international life insurance block of business is a closed book that is expected to run off over a number of years.

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Another component of international universal life revenues includes surrender charges assessed upon surrender of contracts by policyholders. In addition to termination rates trending lower, the resulting surrender charge fee revenue has been less due to policy contract provisions which provide for lower surrender charge fees to be assessed later in the contract term. The following table illustrates National Western's recent international life termination experience.


	Amount in $'s		Annualized Termination Rate
	(millions)

Volume In Force Terminations
Six Months Ended June 30, 2022	$	486.2	8.6	%
Year ended December 31, 2021	1,080.1		8.7	%
Year ended December 31, 2020	1,295.2		9.5	%
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	%

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


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Universal life insurance:
First year and single premiums	$	—	—	—	—
Renewal premiums	11,603		12,018	23,603	25,034

Totals	$	11,603	12,018	23,603	25,034

National Western's most popular international products were its fixed-index universal life products in which the policyholder 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 renewal premiums for fixed-index universal life products of approximately $13.3 million and $14.4 million for the first six months of 2022 and 2021, respectively. The declining trend in renewal premiums during these periods corresponds with the decline in policies in force due to elimination of new sales and the 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 relatively large size of the fixed-index universal life block of business, the period-to-period changes in fair values of the underlying options have a significant effect on net investment income and universal life contract interest. A detail of net investment income (loss) for international life insurance operations is provided below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Net investment income (excluding index option derivatives)	$	5,409	5,684	10,823	11,563
Index option derivative gain (loss)	(8,565)		8,163	(18,226)	14,400

Net investment income (loss)	$	(3,156)	13,847	(7,403)	25,963

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The gain or loss on index options follows the movement of the reference indice with realized gains or losses being recognized on the anniversary of each index option based upon the 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 index options outstanding based upon their fair values, largely determined by the reference indice level, at the balance sheet reporting date as compared to the original purchase cost of each respective 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 historically tended to be larger 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 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 six months of 2022 increased to $299,400 from $170,700 in the first six months of 2021 while the number of claims incurred decreased 32%. Net claims, after reinsurance, associated with COVID-19 were $2.2 million in the six months ended June 30, 2022 as compared to $7.8 million reported in the six months ended June 30, 2021.

Included in amortization of deferred transaction costs is DPAC amortization. The 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 six months ended June 30, 2022 and 2021.


Amortization of DPAC	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)


Unlocking adjustments	$	—	—	—	—
DPAC amortization expense	4,844		6,163	9,994	11,555

Totals	$	4,844	6,163	9,994	11,555

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. 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 purchase call options generally approximate the amounts credited to policyholders.

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Annuity Operations

A comparative analysis of results of operations for National Western's annuity segment is detailed below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Premiums and other revenues:
Premiums and contract revenues	$	3,098	3,742	6,650	7,672
Net investment income	57,155		100,199	117,366	219,923
Other revenues	1,365		1,389	2,598	2,763

Total premiums and other revenues	61,618		105,330	126,614	230,358

Benefits and expenses:
Life and other policy benefits	8,995		9,829	23,039	19,830
Amortization of deferred transaction costs	16,821		16,378	35,637	32,825
Annuity contract interest	(200)		32,281	(3,864)	52,706
Other operating expenses	12,702		11,864	26,872	24,794

Total benefits and expenses	38,318		70,352	81,684	130,155

Segment earnings before Federal income taxes	23,300		34,978	44,930	100,203
Provision for Federal income taxes	4,261		7,115	8,741	20,591

Segment earnings	$	19,039	27,863	36,189	79,612

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 lapse rate for annuity contracts in the first six months of 2022 was 8.3% which remained elevated compared to historical measures but was lower than the 9.3% rate during the same period in 2021. An outcome of the COVID-19 pandemic crisis has been movement by consumers toward fortifying liquidity positions. This has manifested in greater withdrawal and surrender activity. In addition, annuity contracts with fixed interest rates are more prone to terminate as contracts approach the end of their surrender charge period and in periods of rising interest rates.

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Deposits collected on annuity contracts are not reflected as revenues in the Company's Condensed Consolidated Statements of Earnings in accordance with GAAP. Actual annuity deposits collected for the three and six months ended June 30, 2022 and 2021 are detailed below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Fixed-index annuities	$	71,500	115,609	157,032	233,729
Other deferred annuities	530		767	1,662	1,961
Immediate annuities	1,108		5,329	5,377	17,181

Totals	$	73,138	121,705	164,071	252,871

Fixed-index products are 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 existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were 96% and 92% for the six months ended June 30, 2022 and 2021, respectively. The percentage of fixed-index products to total annuity sales reflects the historically low interest rate environment and the preference for credited interest linked in part to outside equity market indices given the overall positive performance in the equities market.

Some of the Company's deferred products, including fixed-index annuity products, contain a first year interest bonus, in addition to the base first year interest rate, which is credited to the account balance when premiums are applied. These sales inducements are deferred in conjunction with other capitalized policy acquisition costs. The amounts currently deferred to be amortized over future periods amounted to approximately $5.0 million and $10.7 million during the first six months of 2022 and 2021, 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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Net investment income (excluding derivatives and trading securities)	$	56,307	57,243	111,445	110,064
Index option derivative gain (loss)	(10,290)		16,763	(23,177)	27,248
Embedded derivative on reinsurance	94,984		1,970	185,889	72,340
Trading securities market adjustment	(83,846)		24,223	(156,791)	10,271

Net investment income	$	57,155	100,199	117,366	219,923

For the three months ended June 30, 2022 and 2021, net investment income was reduced by $14.9 million and $14.1 million, respectively for amounts ceded to the reinsurer under the funds withheld reinsurance transaction executed December 31, 2020. For the six months ended June 30, 2022 and 2021, these amounts were $27.6 million and $27.2 million, respectively.

As seen in the above table, net investment income also includes the derivative gains and losses on index options purchased to back the index crediting mechanism on fixed-index products. The derivative gain or loss on index options follows the movement of the reference indice with realized gains or losses being recognized on the 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 each respective option.

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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.

The funds withheld reinsurance agreement executed December 31, 2020 introduced embedded derivative accounting with respect to the annuity policyholder obligations reinsured. During the three and six months ended June 30, 2022, the embedded derivative contra-liability increased by $95.0 million and $185.9 million, respectively, which was recorded as a component of net investment income. Debt securities supporting the funds withheld policyholder obligations classified as trading securities incurred a $(83.8) million market value decrease in the three months ended June 30, 2022 and a $(156.8) million market value decline in the six months ended June 30, 2022, which were also recorded as a component of net investment income. The net of these two amounts, the embedded liability decrease and the change in market value of trading securities, increased net investment income in the Annuity segment by $11.2 million and $29.1 million in the three and six months ended June 30, 2022, respectively.

Other revenues in the three and six months ended June 30, 2022 include $1.3 million and $2.5 million, respectively, of maintenance expense allowance revenue. For the three and six months ended June 30, 2021, these amounts were $1.3 million and $2.7 million, respectively. Under terms of the funds withheld reinsurance contract, National Western earns from the reinsurer a monthly expense allowance equal to the average policy count of the funds withheld reinsured block of business multiplied by a stated amount per policy.

Included in amortization of deferred transaction costs is DPAC amortization. Consistent with the domestic and international life segments, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse and 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 six months ended June 30, 2022 and 2021.


Amortization of deferred transaction costs	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Unlocking adjustments	$	—	—	—	—
DPAC amortization expense	14,424		13,115	30,126	25,695
COR amortization expense	2,397		3,263	5,511	7,130

Totals	$	16,821	16,378	35,637	32,825

Amortization of DPAC balances is proportional to estimated expected gross profits ("EGPs") for a line of business. The EGPs of the block of annuity in the first six months of 2022 were generally consistent with that of the first six months of 2021. In the three and six months ended June 30, 2022, amortization expense was reduced by $0.9 million and $2.0 million, respectively, for DPAC ceded to a reinsurer under the funds withheld reinsurance agreement entered into at December 31, 2020. These amounts for the three and six months ended June 30, 2021 were $2.0 million and 3.4 million, respectively, which reduced amortization expense in the periods. As previously noted, the amount of DAC interest offsetting amortization expense was lower in 2022 compared to the same period of 2021.

Amortization of deferred transaction costs includes amortization of the cost of reinsurance recorded at year-end 2020 associated with the funds withheld reinsurance agreement. At December 31, 2020, the Company recorded as an asset on the Consolidated Balance Sheet a deferred Cost of Reinsurance ("COR") amount of $102.8 million associated with the funds withheld reinsurance transaction. This represents the amount of assets transferred at the closing date of the funds withheld agreement (debt securities, policy loans, and cash) in excess of the GAAP liability ceded plus a $48.0 million ceding commission paid to the reinsurer. The COR balance is amortized commensurate with the runoff of the ceded block of funds withheld business. In the three and six months ended June 30, 2022, COR amortization expense of $2.4 million and $5.5 million, respectively, is included in Amortization of deferred transaction costs, as compared to $3.3 million and $7.1 million for three and six months ended June 30, 2021, respectively.

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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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Fixed-index annuities	$	(3,121)	34,443	(7,433)	57,942
All other annuities	1,258		(760)	1,356	(1,577)

Gross contract interest	(1,863)		33,683	(6,077)	56,365
Bonus interest deferred and capitalized	(1,957)		(5,007)	(5,039)	(10,711)
Bonus interest amortization	3,620		3,605	7,252	7,052

Total contract interest	$	(200)	32,281	(3,864)	52,706

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, the amounts shown for contract interest for fixed-index annuities generally align with the derivative gains/(losses) included in net investment income due to the market change of index options aligning closely with the movement of the embedded derivative liability held for these products.

Collection of asset management fees on positive returns of expiring options is subtracted from contract interest credited to 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 six months ended June 30, 2022 were $0.0 million and $0.0 million compared to $1.9 million and $5.8 million in the corresponding periods of 2021. As noted in the discussion in the Consolidated Operations section, the Company changed its option hedging methodology during 2020 to an "out-of-the-money" approach for those annuity products having the ability to assess asset management fees. By the end of the second quarter of 2021, all outstanding options for these products had been converted to this methodology which no longer hedges for the collection of asset management fees. As a result, there were no asset management fees collected subsequent to the second quarter of 2021.

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 under the Company's historical practice of purchasing options priced to incorporate an expected probability of collecting asset management fees (referred to as "at the money hedging"). This projection for the embedded derivative liability is based upon the most recent performance of the reference equity index. Increases in projected asset management fees to be collected reduce contract interest expense while decreases in projected asset management fees to be collected increase contract interest expense. In the three month periods ended June 30, 2022 and 2021, contract interest was increased $0.0 million and $2.1 million million, respectively, for the projected change in asset management fees to be collected. In the six month periods ended June 30, 2022 and 2021, contract interest was increased $0.0 million and $6.5 million, respectively, for the projected change in asset management fees to be collected. Since the Company changed its embedded derivative hedging process to incorporate "out-of-the-money" hedging, probability projections of collected asset management fees are no longer applicable subsequent to the second quarter of 2021 (as the inventory of annual at the money hedges rolled over to only out-of-the-money hedges).

Annuity contract interest includes true-up adjustments for the deferred sales inducement balance which are done each period similar to that done with respect to DPAC balances with the adjustment reflected in current period contract interest expense. To the extent required, the Company may also record unlocking adjustments to deferred sales inducement balances in conjunction with DPAC balance unlockings. No unlocking adjustments were made in the first six months ended June 30, 2022 or 2021.

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ONL & Affiliates

Ozark National and NIS are combined into a separate segment "ONL & Affiliates" 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 ONL & Affiliates segment is detailed below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Premiums and other revenues:
Premiums and contract charges	$	18,894	19,299	38,326	38,764
Net investment income	7,209		6,780	14,137	13,354
Other revenues	2,873		3,273	6,088	6,199

Total premiums and other revenues	28,976		29,352	58,551	58,317

Benefits and expenses:
Life and other policy benefits	15,920		15,766	32,686	33,169
Amortization of deferred transaction costs	2,757		2,429	4,977	5,119

Other operating expenses	5,090		4,933	10,071	9,679

Total benefits and expenses	23,767		23,128	47,734	47,967

Segment earnings before Federal income taxes	5,209		6,224	10,817	10,350
Provision for Federal income taxes	1,044		1,258	2,172	2,115

Segment earnings	$	4,165	4,966	8,645	8,235

Revenues from ONL & Affiliates 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 June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Traditional life insurance premiums	$	19,661	19,903	39,584	39,970
Other insurance premiums and considerations	97		117	200	229
Reinsurance premiums	(864)		(721)	(1,458)	(1,435)

Totals	$	18,894	19,299	38,326	38,764

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Ozark National's traditional life block of business at June 30, 2022 included 173,626 policies in force representing $5.8 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 4.3% through June 30, 2022 as compared to the 4.4% rate experienced in the first six months of 2021. Traditional life premiums by first year and renewal are detailed below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Traditional life insurance premiums:
First year premiums	$	1,013	828	2,031	1,558
Renewal premiums	18,648		19,075	37,553	38,412

Totals	$	19,661	19,903	39,584	39,970

Other revenues consists primarily of brokerage revenue of NIS. Brokerage revenues of $6.0 million and $6.1 million for the six months ended June 30, 2022 and 2021, respectively, had associated brokerage expense of $3.0 million and $3.0 million which is included in Other operating expenses. Brokerage revenues of $2.8 million and $3.2 million for the three months ended June 30, 2022 and 2021, respectively, had associated brokerage expense of $1.4 million and $1.6 million.

The average face value of Ozark National's policies in force at June 30, 2022 was approximately $33,400. Life and policy benefits are subject to variation from quarter to quarter. Incurred net death claims, after reinsurance, for the first six months of 2022 were $19.0 million representing an average net claim of $15,700. Incurred net death claims in the six month period ended June 30, 2021 were $20.0 million representing a net average claim of $17,100. Included in the activity for 2022 and 2021 were reported COVID-19 net claims of approximately $2.3 million and $4.8 million, respectively. 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 six months ended June 30, 2022 and 2021 consisted of increases in insurance reserves and payments of other policy benefits.

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Amortization of deferred transaction costs for this segment includes amortization of DPAC and the value of business acquired ("VOBA"). VOBA represents the difference between the acquired assets and liabilities of Ozark National at the acquisition date 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 National Western. The following table identifies the amortization expense of Ozark National's DPAC and VOBA for the six months ended June 30, 2022 and 2021.


Amortization of deferred transaction costs	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Unlocking	$	—	—	—	—
VOBA amortization expense	2,500		2,251	4,537	4,801
DPAC amortization expense	257		178	440	318

Totals	$	2,757	2,429	4,977	5,119

Other Operations

The Company's primary business encompasses its domestic and international life insurance operations, its annuity operations, and ONL & Affiliates. However, the Company also has real estate and other investment operations through its wholly owned subsidiaries.

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 $(0.6) million and $(0.4) million for the six months ended June 30, 2022 and 2021, 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.

The remaining pre-tax earnings of $9.3 million and $11.3 million in Other Operations during the six-month periods includes investment income from real estate, municipal bonds, and common and preferred equities held in subsidiary company portfolios principally for tax-advantage purposes. Included in these amounts are semi-annual distributions from a life interest in the Libbie Shearn Moody Trust which is held in NWLSM, Inc. Pre-tax distributions from this trust were $2.3 million and $2.7 million in the six-month periods ended June 30, 2022 and 2021, respectively. Included in the pre-tax earnings for the six months ended June 30, 2022, is a $6.8 million non-recurring profits participation payment received on a mezzanine loan. The Company holds a modest portfolio of equity securities, primarily in NWL Financial, Inc., whose fair value changes are recorded in net investment income. For the three months ended June 30, 2022 and 2021, the market value changes for these securities were a decrease of $5.2 million and an increase of $2.0 million, respectively and for the six months there ended were a decrease of $5.9 million and an increase of $3.4 million, respectively.

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.

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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.


	June 30, 2022			December 31, 2021
	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)

Debt securities available-for-sale	$	8,160,952	83.0	$	9,068,946	82.7
Debt securities trading	909,647		9.2	1,077,438		9.8
Mortgage loans	511,936		5.2	487,304		4.4
Policy loans	71,443		0.7	71,286		0.6
Derivatives, index options	6,071		0.1	101,622		0.9
Real estate	28,242		0.3	28,606		0.3
Equity securities	22,121		0.2	28,217		0.3
Other	130,617		1.3	109,064		1.0

Totals	$	9,841,029	100.0	$	10,972,483	100.0

Invested assets at June 30, 2022 include Ozark National and NIS amounts as follows: Debt securities of $709.3 million and Policy loans of $22.5 million. These invested asset amounts at December 31, 2021 were: Debt securities of $823.0 million and Policy loans of $23.3 million. The decrease in the debt securities balance from December 31, 2021 to June 30, 2022 is due to recording these investments at fair market values which decreased during the period with the rise in interest rates.

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Debt Securities

GAAP accounting requires investments in debt securities to be classified into one of three categories: (a) trading securities; (b) securities available-for-sale; or (c) securities held-to-maturity. The Company generally purchases securities with the intent to hold to maturity and has historically classified its debt securities into either the held-to-maturity or available-for-sale categories. As an outcome of the funds withheld reinsurance agreement executed December 31, 2020, the Company reclassified all of its debt security holdings at that time into the available-for-sale category. The discussion that follows reflects this category classification.

The Company maintains a diversified debts security 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 June 30, 2022 and December 31, 2021, the Company's available-for-sale debt securities portfolio consisted of the following classes of securities:


	June 30, 2022			December 31, 2021
	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)

Corporate	$	5,973,804	73.3	$	6,700,953	73.8
Residential mortgage-backed securities	378,878		4.6	549,623		6.1
Public utilities	695,813		8.5	784,969		8.7
State and political subdivisions	449,563		5.5	505,960		5.6
U.S. agencies	31,222		0.4	44,543		0.5
Asset-backed securities	555,272		6.8	390,260		4.3
Commercial mortgage-backed	26,062		0.3	27,757		0.3
Foreign governments	48,535		0.6	62,391		0.7
U.S. Treasury	1,803		—	2,490		—

Totals	$	8,160,952	100.0	$	9,068,946	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.

The Company has de-emphasized mortgage-backed securities for a number of years given the low interest rate environment and the lack of incremental yield relative to other classes of debt securities. 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.

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A substantial portion of the Company's investable cash flows are directed toward the purchase of long-term debt securities. The Company's investment practice has been to invest 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.


	Six Months Ended June 30,			Year Ended December 31,
	2022			2021

	($ In thousands)

Cost of acquisitions	$	609,963		$	1,104,009
Average credit quality	A-			A-
Effective annual yield	3.94		%	3.02		%
Spread to treasuries	1.65		%	1.31		%
Effective duration	8.1 years			10.5 years

In the past several years, the Company has purchased a higher level of longer maturity debt securities to match the increased duration of its growing life insurance policy liabilities. However, with the results of a strategic asset allocation study, the Company is extending its asset maturities through incremental investments in commercial mortgage loans and alternative investment funds.

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 98.6%, as of June 30, 2022, held in investment grade securities. In the table below, investments in available-for-sale debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.


	June 30, 2022			December 31, 2021
	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)

AAA	$	156,145	1.9	$	126,954	1.4
AA	2,168,916		26.6	2,474,572		27.3
A	1,816,168		22.3	1,861,686		20.5
BBB	3,908,728		47.8	4,452,694		49.1
BB and other below investment grade	110,995		1.4	153,040		1.7

Totals	$	8,160,952	100.0	$	9,068,946	100.0

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Historically, the Company's investment guidelines have not permitted the purchase of below investment grade securities. Recently, these guidelines were amended to allow for purchases of below investment grade securities that are part of an alternative investment ("Schedule BA assets"). The Company continues its longstanding practice of not purchasing any other below investment grade securities. Investments held in available-for-sale debt securities may become below investment grade as a result of subsequent downgrades of the securities. These below investment grade holdings, including structured notes associated with the Schedule BA assets category, are further summarized below.


	Available-for-Sale Below Investment Grade Debt Securities
	Amortized Cost		Carrying Value	Fair Value	% of Invested Assets

	(In thousands, except percentages)

June 30, 2022	$	122,421	110,995	110,995	1.1	%

December 31, 2021	$	150,447	153,040	153,040	1.4	%

As shown, the Company's percentage of below investment grade securities as of June 30, 2022 compared with the percentage at December 31, 2021 decreased in the first six months of 2022. 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 as of June 30, 2022 are summarized below by category, including their comparable fair value as of December 31, 2021. The Company continually monitors developments in these industries for issues that may affect security valuation.


	Available-for-Sale Below Investment Grade Debt Securities
	Amortized Cost		Carrying Value	Fair Value	Fair Value
Industry Category	June 30, 2022		June 30, 2022	June 30, 2022	December 31, 2021

	(In thousands)



Asset-backed securities	$	581	581	581	588

Oil & gas	90,513		81,801	81,801	92,777
Manufacturing	11,995		9,975	9,975	11,430


Other	19,332		18,638	18,638	17,753

Total before Allowance for credit losses	122,421		110,995	110,995	122,548

Allowance for credit losses	—		—	—	—

Totals	$	122,421	110,995	110,995	122,548

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. While additional losses are not currently anticipated, based on the existing status and condition of these securities, credit deterioration of some securities or the markets in general is possible, which may result in future allowances or write-downs. The Company has no direct holdings of debt securities with operations in Ukraine or Russia, nor does it hold any investments in debt securities with significant exposure to these regions.

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The Company's holdings in available-for-sale debt securities provide flexibility (a) to react to market opportunities and conditions and (b) to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Holdings in trading debt securities are included in funds withheld account assets to support reinsured policy liabilities.


	June 30, 2022
	Fair Value		Amortized Cost	Allowance for Credit Losses	Unrealized Gains (Losses)

	(In thousands)


Debt securities available-for-sale	$	8,160,952	8,723,242	—	(562,290)
Debt securities trading	909,647		1,055,106	—	(145,459)

Totals	$	9,070,599	9,778,348	—	(707,749)

The unrealized loss position of the Company's debt securities holdings reflects the impact of rising interest rate levels on fair market values. At December 31, 2021, the Company's debt securities were in an unrealized gain position of $476.0 million. At March 31, 2022, this position had changed to an unrealized loss of $(155.3) million.

Under terms of the funds withheld reinsurance agreement, effective December 31, 2020, the Company, on behalf of the reinsurer, transferred debt securities approximating $1.7 billion to a funds withheld account. Due to the nature of the reinsurance transaction, these debt securities remained as invested assets on the Company's financial statements and were included in the available-for-sale category. In accordance with the terms of the agreement, the reinsurer, or their appointed sub-advisor, was granted investment management authority with respect to these securities following agreed upon investment guidelines defined in the reinsurance agreement. Since inception, the reinsurer has actively engaged in selling debt securities in the funds withheld account and purchasing other debt securities. The debt securities acquired by the reinsurer remain as invested assets on the Company's financial statements and have been classified as trading debt securities. The designation as trading debt securities allows the market value fluctuation of these securities to be recorded directly in the Condensed Consolidated Statements of Earnings. This results in offsetting the embedded derivative liability change due to market value fluctuations which is also recorded directly in the Condensed Consolidated Statements of Earnings.

The Company's trading debt securities portfolio consisted of the following classes of securities:


	June 30, 2022			December 31, 2021
	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)

Corporate	$	364,678	40.2	$	423,778	39.4
Residential mortgage-backed securities	19,376		2.1	44,772		4.2
Public utilities	27,534		3.0	36,973		3.4
State and political subdivisions	13,763		1.5	17,487		1.6

Asset-backed securities	278,381		30.6	313,855		29.1
Commercial mortgage-backed	205,915		22.6	240,573		22.3



Totals	$	909,647	100.0	$	1,077,438	100.0

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In the table below, investments in trading debt securities are classified according to credit ratings by nationally recognized statistical rating organizations.


	June 30, 2022			December 31, 2021
	Carrying Value		%	Carrying Value		%
	(In thousands)			(In thousands)

AAA	$	6,775	0.7	$	6,473	0.6
AA	213,754		23.5	251,507		23.3
A	181,609		20.0	207,637		19.3
BBB	475,231		52.3	573,139		53.2
BB and other below investment grade	32,278		3.5	38,682		3.6

Totals	$	909,647	100.0	$	1,077,438	100.0

The investments in the trading debt securities below investment grade are summarized below.


	Trading Below Investment Grade Debt Securities
	Amortized Cost		Carrying Value	Fair Value	% of Invested Assets

	(In thousands, except percentages)

June 30, 2022	$	36,365	32,278	32,278	0.3	%
December 31, 2021	39,470		38,682	38,682	0.4	%

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, 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 further supported by the lease payments. 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. A low interest rate environment, along with a competitive marketplace, had resulted in fewer loan opportunities being available that met the Company's required rate of return. Mortgage loan originations were further impeded by the COVID-19 pandemic and its effects upon the commercial real estate market. As stabilization returned to the commercial real estate market, the Company directed resources and effort towards expanding its mortgage loan investment portfolio in 2021. In the first six months of 2022, the rapid rise in interest rate levels has caused potential mortgage loan opportunities to fall outside the Company's underwriting criteria resulting in a lower level of originations. Mortgage loans originated by the Company totaled $44.1 million in the six months ended June 30, 2022 compared to $70.3 million for the six months ended June 30, 2021 and $183.6 million for the year ended December 31, 2021.

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. 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.

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The Company held net investments in mortgage loans, after allowances for possible losses, totaling $511.9 million and $487.3 million at June 30, 2022 and December 31, 2021, respectively. The diversification of the portfolio by geographic region and by property type was as follows:


	June 30, 2022			December 31, 2021
	Amount		%	Amount		%
	(In thousands)			(In thousands)

Mortgage Loans by Geographic Region:
West South Central	$	221,897	43.1	$	237,644	48.5
South Atlantic	104,858		20.4	81,847		16.7
East North Central	61,070		11.9	61,397		12.6
West North Central	12,079		2.3	12,213		2.5
East South Central	19,040		3.7	20,069		4.1
Pacific	13,177		2.6	13,800		2.8
Middle Atlantic	40,787		7.8	36,296		7.4
Mountain	42,317		8.2	26,613		5.4

Gross balance	515,225		100.0	489,879		100.0

Market value adjustment	(716)		(0.1)	412		0.1
Allowance for credit losses	(2,573)		(0.5)	(2,987)		(0.6)

Totals	$	511,936	99.4	$	487,304	99.5


	June 30, 2022			December 31, 2021
	Amount		%	Amount		%
	(In thousands)			(In thousands)

Mortgage Loans by Property Type:
Retail	$	173,905	33.7	$	164,895	33.7
Office	141,474		27.5	142,824		29.2
Storage facility	78,481		15.2	73,401		15.0
Apartments	38,646		7.5	38,920		7.9
Industrial	36,381		7.1	34,212		7.0
Hotel	23,606		4.6	23,748		4.8
Land/Lots	4,601		0.9	4,597		0.9
Residential	13,364		2.6	1,905		0.4
All other	4,767		0.9	5,377		1.1
Gross balance	515,225		100.0	489,879		100.0

Market value adjustment	(716)		(0.1)	412		0.1
Allowance for credit losses	(2,573)		(0.5)	(2,987)		(0.6)

Totals	$	511,936	99.4	$	487,304	99.5

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Included in the mortgage loan investment balance at June 30, 2022 and December 31, 2021 were mortgage loan investments made by the reinsurer under the funds withheld reinsurance agreement totaling $18.7 million and $8.5 million, respectively. Similar to trading debt securities, these loans are reported at fair market values in order to allow the market value fluctuation to be recorded directly in the Condensed Consolidated Statements of Earnings and to offset the embedded derivative liability change due to market value fluctuations.

The Company employs the Weighted Average Remaining Maturity ("WARM") method in estimating current expected credit losses with respect to mortgage loan investments. 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. Changes in the allowance for current expected credit losses are reported in net investment income in the Condensed Consolidated Statements of Earnings.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021


Mortgage Loans Allowance for Credit Losses:
Balance, beginning of the period	$	2,816	3,033	2,987	2,486

Provision (release) during the period	(243)		205	(414)	752


Balance, end of period	$	2,573	3,238	2,573	3,238

The Company's direct investments in real estate are not a significant portion of its total investment portfolio and consist primarily of income-producing properties which are being operated by a wholly owned subsidiary of National Western. The Company's real estate investments totaled approximately $28.2 million and $28.6 million at June 30, 2022 and December 31, 2021, respectively. During the six months ended June 30, 2022, the Company sold land located in Freeport, Texas and Houston, Texas for a net realized gain of $0.3 million.

The Company recognized operating income of approximately $1.5 million and $1.4 million on real estate properties in the first six months of 2022 and 2021, 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 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, declination in credit quality, 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 reduces the fair value of the Company's investment 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.

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The movement of interest rates and fair values of available-for-sale debt securities for the quarters ended June 30, 2022 and March 31, 2022, and for the year ended December 31, 2021 are reflected in the tables below.


	June 30, 2022			March 31, 2022		December 31, 2021

	(In thousands except percentages)

Available-for-Sale Debt securities - fair value	$	8,160,952		8,715,874		9,068,946
Available-for-Sale Debt securities - amortized cost	$	8,723,242		8,809,594		8,604,250
Fair value as a percentage of amortized cost	93.55		%	98.94	%	105.40	%
Net unrealized gain (loss) balance	$	(562,290)		(93,720)		464,696
Ten-year U.S. Treasury bond – increase (decrease) in yield for the period	0.68		%	0.83	%	0.59	%

The Company's trading debt securities, which are exclusively in the funds withheld assets managed by the reinsurer, are recorded at fair value upon purchase. While the recorded value of these trading debt securities subsequently fluctuates with market prices, the fair value movement of the securities is entirely offset by an identical fair value movement of the associated funds withheld liabilities.

The Company's unrealized gain (loss) balance for available-for-sale and trading debt securities held at June 30, 2022, March 31, 2022, and December 31, 2021 is shown in the following table. The change in unrealized balance pertaining to debt securities available-for-sale is recorded in Other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income while the change in the unrealized balance pertaining to trading debt securities is recorded in net investment income in the Condensed Consolidated Statements of Earnings.


	Net Unrealized Gain (Loss) Balance
	At June 30, 2022		At March 31, 2022	At December 31, 2021	Quarter Change in Unrealized Balance	Year-to-date Change in Unrealized Balance

	(In thousands)


Debt securities available-for-sale	$	(562,290)	(93,720)	464,696	(468,570)	(1,026,986)
Debt securities trading	(145,459)		(61,613)	11,331	(83,846)	(156,790)

Totals	$	(707,749)	(155,333)	476,027	(552,416)	(1,183,776)

Changes in interest rates typically 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 increased 151 basis points from 1.51% at year-end 2021 to 3.02% by the end of the first six months of 2022. Therefore the decrease in the unrealized gain balance position at December 31, 2021 is the expected portfolio value movement.

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 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.

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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, 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, 2021, for its interest rate-sensitive assets and liabilities. The changes in market values of the Company's debt securities in the first six months of 2022 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 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 primarily 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 National Western’s Investment Department with adjustments to collateral levels managed as incurred under the credit support agreements.

The Company follows the industry practice of reinsuring (ceding) portions of its insurance risks with a variety of reinsurance companies on either a coinsurance or a modified coinsurance basis in order to limit risk. Use of reinsurance does not relieve the Company of its primary liability to pay the full amount of the insurance benefit in the event the reinsurer (counterparty) fails to honor its contractual obligation. Consequently, the Company avoids concentrating reinsurance counterparty credit risk with any one reinsurer and only maintains reinsurance agreements with reputable carriers which are well-capitalized and highly rated by independent rating agencies. With respect to the funds withheld coinsurance arrangement entered into by National Western, assets backing the reserves for the policyholder obligations under the agreement are retained by the Company and are available to meet benefit payment commitments. In addition, National Western is the beneficiary of an incremental collateral trust account provided by the reinsurer providing additional security for the payment of all amounts due under the reinsurance agreement.

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.

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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. National Western maintains a line of credit facility of $75 million which it may access for short-term cash needs. There were no borrowings under the line of credit as of June 30, 2022. In addition, as previously reported, National Western is 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 is able to create a specified borrowing capacity based upon the amount of collateral it elects to establish. At June 30, 2022, securities in the amount of $57.4 million (fair value of $56.4 million) were pledged as collateral to the FHLB.

A primary liquidity concern for life insurers is the risk of an extraordinary level of early policyholder withdrawals, particularly with respect to annuity products 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, before reinsurance, for the three and six months ended June 30, 2022 and 2021, are noted in the table below.


	Three Months Ended June 30,			Six Months Ended June 30,
	2022		2021	2022	2021

	(In thousands)

Product Line:
Traditional Life	$	4,335	4,943	8,056	8,984
Universal Life	25,459		26,988	47,923	46,337
Annuities	142,332		179,033	292,304	340,620

Total	$	172,126	210,964	348,283	395,941

The above contractual withdrawals, as well as the level of surrenders experienced, and the associated cash outflows did not have an adverse impact on overall liquidity. The amounts shown includes funds withheld policyholder obligations and Ozark National cash outflows. Individual life insurance policies are typically less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may need to undergo a new underwriting process in order to obtain a new insurance policy elsewhere. Annuity dollar outflows are generally more sensitive to economic conditions, interest rate levels, and the level of surrender charges assessed upon withdrawal or termination. Cash flow projections and tests under various market interest rate scenarios and assumptions are performed to assist in evaluating liquidity needs and adequacy. With the economic decline precipitated by the COVID-19 pandemic, Company management conducted additional liquidity scenario testing 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.

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Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $139.3 million and $5.8 million for the six months ended June 30, 2022 and 2021, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $635.4 million and $790.1 million for the six months ended June 30, 2022 and 2021, 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 $(227.2) million and $(17.7) million during the six months ended June 30, 2022 and 2021, respectively. The higher negative net outflow in the first six months of 2022 reflects a lower level of fixed-index annuity and life sales.

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 June 30, 2022, the Company maintained commitments for its normal operating and investment activities.

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.

As the largest subsidiary of NWLGI, National Western serves as the primary funding source for NWLGI. 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, 2021, the maximum amount legally available for distribution without further regulatory approval is $64.4 million. National Western paid a dividend of $2.0 million in the three and six months ended June 30, 2022.

It is 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 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 Summary of Significant Accounting Policies 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, 2021 for a discussion of reserving methods.

The table below summarizes future estimated cash payments under existing contractual obligations.


	Payment Due by Period
	Total		Less Than 1 Year	1 Year or More

	(In thousands)

Loan commitments	$	11,300	11,300	—
Commitments for capital calls to investment funds (3)	354,643		135,133	219,510
Lease obligations	1,174		343	831
Claims payable (1)	86,840		86,840	—
Other long-term reserve liabilities reflected on the balance sheet (2)	12,526,311		1,005,481	11,520,830

Total	$	12,980,268	1,239,097	11,741,171

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(1) 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, 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.

(3) Commitments for capital calls to alternative investment funds reflect amounts which have not been called by the fund managers as of the current balance sheet date.

The Company, through its wholly owned subsidiary Braker P III, LLC ("BP III"), owns a commercial office building for which it has entered into lease agreements with various tenants for space not occupied by the Company. Total revenues recorded pertaining to these non-Company leases for the three-month periods ended June 30, 2022 and 2021 amounted to $1.3 million and $1.3 million, respectively, and for the six months there ended amounted to $2.6 million and $2.6 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	$	37,116	6,554	12,033	6,700	11,829

CHANGES IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES

Changes in Accounting Principles

There were no 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 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.

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Risk-Based Capital Requirements

The NAIC established risk-based capital ("RBC") standards for U.S. life insurers as well as a risk-based capital model act ("RBC Model Act"). The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC amounts based upon four categories 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. The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premium, insurance in force, and policy benefit reserve items. The formula is an early warning tool used by regulators to identify potential weakly capitalized companies for purposes of initiating further regulatory action. Independent rating agencies utilize proprietary versions similar to the NAIC RBC model incorporating additional risk factors identified in their respective rating methodologies. National Western and Ozark National's current statutory capital and surplus are each substantially in excess of applicable statutory 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 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.

There 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, during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

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

The risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 included a discussion of the potential ramifications of natural or man-made disasters and catastrophes including pandemic disease. There have been no substantial changes relative to the risk factors disclosed in the Company's Annual Report.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company maintains a limited stock buy-back program associated with its Incentive Plan which provides Option Holders the additional alternative of selling shares acquired through the exercise of stock options directly back to the Company. Purchased shares, if any, are reported in the Company's Condensed Consolidated Financial Statements as authorized and unissued. At December 31, 2021 and June 30, 2022, there were no stock options vested or unvested and outstanding under the Incentive Plan.

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

April 1, 2022 through April 30, 2022

—

N/A

May 1, 2022 through May 31, 2022

—

N/A

June 1, 2022 through June 30, 2022

—

N/A

Total

—

N/A

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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.

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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:

August 9, 2022

/S/ Ross R. Moody

Ross R. Moody

Chairman of the Board, President and

Chief Executive Officer

(Authorized Officer)

Date:

August 9, 2022

/S/ Brian M. Pribyl

Brian M. Pribyl

Senior Vice President,

Chief Financial Officer and Treasurer

(Principal Financial Officer)

(Principal Accounting Officer)

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