Business Combinations

6 Months Ended

Jun. 30, 2020

BUSINESS COMBINATIONS

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

During the quarter ended June 30, 2020, the Company and and the Seller executed an agreement under which the parties agreed that the Company had fulfilled its payment obligation under the Stock Purchase Agreement executed October 3, 2018. As a result, the Company reversed the contingent earn-out liability balance of $4.2 million recorded at March 31, 2020 and reflected this amount in Other revenues.

In addition to the purchase price, the Company incurred $3.3 million of acquisition-related costs. In accordance with GAAP, these costs are included in Other operating expenses in the Condensed Consolidated Statements of Earnings (Loss) for the six months ended June 30, 2019 and are not considered part of the purchase price.

The acquisition has been accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Purchase accounting, as defined by ASC 805, requires that the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The fair values shown below were determined based on management’s best estimates, employing fair valuation methodologies commonly utilized in preparing financial statements in accordance with GAAP, and are subject to revision for one year following the acquisition date. The excess of the purchase price paid above net tangible assets acquired has been assigned to identifiable intangible assets and goodwill. The following table presents the fair values of the net assets acquired as of January 31, 2019.


	January 31, 2019
	Fair value
Assets	(In thousands)

Debt securities held to maturity	$	261,059
Debt securities available for sale	400,719
Policy loans	28,128
Real estate	4,600
Cash and cash equivalents	16,275
Accrued investment income	6,116
Value of business acquired	145,768
Reinsurance recoverables	21,895
Other intangible assets	9,600
Other assets acquired	12,075
Total assets acquired	906,235

Liabilities
Traditional life reserves	691,297
Other policyholder liabilities	13,867
Other liabilities acquired	5,840
	711,004

Net identifiable assets acquired	195,231
Goodwill	13,864
Net assets acquired	$	209,095

Identifiable Intangible Assets

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


	Fair Value		Weighted-Average Amortization Period
	(In thousands)

Trademarks / trade names	$	2,800	15
Internally developed software	3,800		7
Insurance licenses	3,000		NA
	$	9,600

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


	June 30, 2020						December 31, 2019
	Weighted-Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Gross Carrying Amount	Accumulated Amortization
		(In thousands)

Trademarks/trade names	15	$	2,800	(264)	2,800	(171)
Internally developed software	7	3,800		(769)	3,800	(498)
Insurance licenses (1)	N/A	3,000		—	3,000	—

		$	9,600	(1,033)	9,600	(669)

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

Value of Business Acquired ("VOBA")

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


	June 30,		December 31,
	2020		2019
	(In thousands)

Balance, beginning of year	$	138,071	—
Business acquired	—		145,768
Amortization:
Amortization, excluding unlocking	(3,801)		(7,697)


Balance as of end of period	$	134,270	138,071

Estimated future amortization of VOBA, net of interest (in thousands), as of June 30, 2020, is as follows:


	Expected Amortization
	(In thousands)

Remainder of 2020	$	3,218
2021	$	6,107
2022	$	5,797
2023	$	5,528
2024	$	5,287

Goodwill

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


	June 30,		December 31,
	2020		2019
	(In thousands)

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

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

Due to the severe change in economic climate as a result of the COVID-19 pandemic, the Company evaluated the goodwill balance for potential impairment as of June 30, 2020 and determined that there was evidence to support not impairing the balance.

Financial Information

Subsequent to the acquisition date of January 31, 2019, Ozark National and NIS total revenues of $48.4 million and net earnings of $7.2 million were included in Condensed Consolidated Statements of Earnings (Loss) for the six month period ended June 30, 2019. Their results for segment reporting purposes are combined in the Acquired Businesses segment.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019	2020	2019
	(In thousands)

Total revenues	$	216,015	192,685	268,503	420,268

Net earnings (loss)	$	48,413	33,696	46,351	75,328

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