NATIONAL WESTERN LIFE GROUP, INC. 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 ofNational 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'sSecurities 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") ofNational Western Life Group, Inc. ("NWLGI") for the three and nine months endedSeptember 30, 2022 follows. Where appropriate, discussion specific to the insurance operations ofNational 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 theSEC .
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 inAustin, Texas where substantially all of its 266 employees atSeptember 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
57-------------------------------------------------------------------------------- Table of Contents The Company monitors these factors continually as key business indicators. The discussion that follows in this Item 2 includes these indicators and presents information useful to an overall understanding of the Company's business performance for the nine months endedSeptember 30, 2022 , incorporating required disclosures in accordance with the rules and regulations of theSEC .
Insurance Operations - Domestic
National Western is currently licensed to do business in all states, exceptNew York , and theDistrict 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. AtSeptember 30, 2022 , National Western maintained approximately 101,250 annuity contracts in force and 45,100 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 31,630 domestic independent agent contracts. EffectiveJanuary 31, 2019 , the Company acquiredOzark National Life Insurance Company ("Ozark National") andN.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 aMissouri domiciled, stock life insurance company currently licensed to conduct business in thirty states. Organized and incorporated in 1964, its largest markets by state areMissouri ,Iowa ,Minnesota ,Nebraska , andKansas . 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. AtSeptember 30, 2022 , Ozark National maintained 172,736 life insurance policies in force representing nearly$5.8 billion in face amount of coverage. It maintains its home office facility inKansas 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. AtSeptember 30, 2022 , National Western had approximately 38,380 international life insurance policies in force representing$10.6 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 inAustin, Texas , and issued policies from there to foreign nationals in upper socioeconomic classes of other countries. Insurance products, issued primarily to residents of countries inSouth 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 inthe United States . Foreign currency risks were minimized by requiring payment of premiums and claims inUnited States dollars. In addition, the Company adopted an extensive anti-money laundering compliance program in order to fully comply with all applicableU.S. monitoring and reporting requirements pertaining to money laundering and other illegal activities. All of the above served to minimize risks. 58 --------------------------------------------------------------------------------
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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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(In thousands)
Single premium life $ 29,279 52,578 104,498 157,024
Traditional life 782 922 2,723 2,855
Universal life - - 1 -
Totals $ 30,061 53,500 107,222 159,879
Life insurance sales, as measured by total and annualized first year premiums,
decreased (44)% in the third quarter of 2022 as compared to the third quarter of
2021 reflecting a pullback in consumer spending in the current period. Sales for
the three months ended September 30, 2022 , included $0.8 million from Ozark
National, slightly below the $0.9 million reported in the third 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
attempting to recover from the disruption of the pandemic effects upon its
business. For the nine months ended September 30, 2022 , total life insurance
sales decreased (33)% from the level in 2021. Included in these nine month
amounts were $2.7 million in sales from Ozark National in 2022 and $2.9 million
in 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 nine 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 -
Nine Months Ended September 30, 2022 221,000 46,680 -
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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
September 30, December 31,
2022 2021
($ in thousands)
National Western
Universal life:
Number of policies 26,920 28,640
Face amounts $ 3,701,800 3,966,160
Traditional life:
Number of policies 23,190 24,500
Face amounts $ 2,146,000 2,257,490
Fixed-index life:
Number of policies 33,370 34,200
Face amounts $ 8,426,330 8,772,280
Total life insurance:
Number of policies 83,480 87,340
Face amounts $ 14,274,130 14,995,930
Ozark National
Total life insurance (all traditional):
Number of policies 172,740 175,610 Face amounts $ 5,763,650 5,892,500 AtSeptember 30, 2022 , National Western's face amount of life insurance in force was comprised of$10.6 billion from the international line of business and$3.7 billion from the domestic line of business. AtDecember 31, 2021 , these amounts were$11.3 billion and$3.7 billion for the international and domestic lines of business, respectively. 60 -------------------------------------------------------------------------------- Table of Contents Annuities The following table sets forth information regarding the Company's annuity sales activity as measured by single and annualized first year premiums. Similar to life insurance sales, these figures are considered a non-GAAP financial measure but are shown in accordance with industry practice and depict the Company's sales productivity. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (In thousands) Fixed-index annuities$ 35,863 102,322 191,828 333,146 Other deferred annuities 346 1,008 1,699 2,965 Immediate annuities 328 5,380 2,726 19,460 Totals$ 36,537 108,710 196,253 355,571 Annuity sales decreased (66)% in the third quarter of 2022 compared to 2021 and were (45)% lower in the nine months endedSeptember 30, 2022 relative to the comparable period of 2021. Sales activity in the first nine months of 2022 was dampened by current economic conditions, including increasing inflation and expectations for rising interest rates. In recent years, the Company's annuity product portfolio consisted principally of offerings that emphasize income features. The 2022 environment switched consumer preference toward products which emphasized accumulation of value. This change in consumer sentiment, in combination with competitor product pricing adjustments which were more attractive than the Company's product offerings, resulted in decreased sales activity. In addition, the 2021 sales levels reflect an expansion in sales in conjunction with an overall increase in market demand as the economy emerged from the COVID-19 constraints present in 2020. The Company has endeavored to introduce new annuity products which include accumulation features which have become available for sale in the fourth quarter of 2022. The Company's mix of annuity sales has historically shifted with interest rate levels and the relative performance of the equity market. Since the decline in secular interest rates subsequent to the subprime crisis, the Company's fixed-index products have comprised the majority of annuity sales, generally accounting for 90% or more of all annuity sales. During the first nine months of 2022, this percentage approximated 98% reflecting the ongoing narrative of historically low levels in interest rates relative to the returns from equity investments. 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, until this year, the Company has faced a scenario of declining yields on its investment portfolio as securities backing annuity policies and their credited rates have been subsequently reinvested at substantially lower yields. The resulting compression on interest rate margins caused 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. 61 -------------------------------------------------------------------------------- Table of Contents As a result of the foregoing, the Company entered into a coinsurance funds withheld reinsurance arrangement atDecember 31, 2020 withProsperity Life Assurance Limited ("Prosperity") under which 100% of the policyholder obligations associated with its fixed interest rate and payout annuity block of policies at that time, approximating$1.7 billion , were reinsured with Prosperity. Having transferred the risk of these policies and the exposure to further compression on interest rate margins, the Company redirected its attention on rebuilding annuity sales momentum 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. EffectiveJuly 27, 2022 , the Company entered into a second funds withheld coinsurance agreement withAspida Life Re Ltd. ("Aspida"), a separate third party reinsurer. At the inception of this agreement, annuity policy obligations approximating$250 million were reinsured with Aspida. In addition, for specified new annuity product sales, the Company is reinsuring an agreed upon quota share of this business in a flow reinsurance structure. The objective is to be able to more competitively price these annuity products utilizing the investment expertise of Aspida and their ability to obtain higher investment yields. The following table sets forth information regarding annuities in force for each date presented. These amounts include the policies and reserves associated with the funds withheld reinsurance transactions discussed above. Annuities In Force as of September 30, December 31, 2022 2021 ($ in thousands) Fixed-index annuities: Number of policies 62,530 64,860 GAAP annuity reserves $ 4,923,115
5,151,890
Other deferred annuities:
Number of policies 28,330 30,260
GAAP annuity reserves $ 1,069,409 1,119,207
Immediate annuities:
Number of policies 10,390 10,930
GAAP annuity reserves $ 360,821 376,667
Total annuities:
Number of policies 101,250 106,050
GAAP annuity reserves $ 6,353,345 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 rapid rise in interest rates has significantly flipped fair market values of investments in debt securities from unrealized gain positions to unrealized loss positions. The recent jobs reports have disclosed both headline job and wage growth above expectations. Contrary to market hopes, these reports do not provide theFederal Reserve with a rationale to pursue a less aggressive stance on inflation fueling the expectation for future rate increases higher than previously expected. With unemployment remaining below 4%, an argument can be made that the economy can withstand further increases. TheFederal Reserve Chairman's comments seem to indicate more of a focus on a strong labor market than on a housing market that has been weakening. Market watchers are concerned with the ability of theFederal Reserve to effectively control inflation without precipitating a recessionary environment. This concern is evident by the inversion of the yield curve with two-yearTreasury note yields remaining above ten-yearTreasury notes yields since early July. This phenomenon is a a frequent harbinger of imminent contractions in economic activity. Should theU.S. economy enter a recession, demand for financial vehicles such as life insurance could be significantly curtailed. 62
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While the recent interest rate level increases have been a welcomed relief, 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 an ultra low interest environment is not desirable for insurance carriers, the company has managed to adjust over time to the environment by 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. 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 requirements and rating agency standards. 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 helps provide the Company with resources to fund future growth and cushion the Company in periods of abnormal cash outflows.
RESULTS OF OPERATIONS
The Company's Condensed Consolidated Financial Statements are prepared in accordance withU.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.
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