-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OM+Yi9p5JSt82IPAuiLcCtaMQAxq3Sn96pggCEpWQ+l4c39a9o3Yo1dvjDxMOjHk ihNvIAHzQ7XhRPNOHrRJ0g== 0000070684-98-000013.txt : 19981118 0000070684-98-000013.hdr.sgml : 19981118 ACCESSION NUMBER: 0000070684-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-17039 FILM NUMBER: 98751412 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 [ ] 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: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512) 836-1010 (Address of Principal Executive Offices (Telephone Number) 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 [ X ] No [ ] As of November 11, 1998, the number of shares of Registrant's common stock outstanding was: Class A - 3,298,128 and Class B - 200,000. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information: Page Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1998 (Unaudited) and December 31, 1997 Condensed Consolidated Statements of Earnings For the Three Months Ended September 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Earnings For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Three Months Ended September 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information: Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 10(l) - Fifth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan Exhibit 11 - Computation of Earnings per Share For the Three Months Ended September 30, 1998 and 1997 (Unaudited) Exhibit 11 - Computation of Earnings per Share For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) September 30, December 31, ASSETS 1998 1997 Cash and investments: Securities held to maturity, at amortized cost $ 2,015,048 1,874,643 Securities available for sale, at fair value 718,316 651,736 Mortgage loans, net of allowance for possible losses ($4,640 and $4,640) 158,304 181,878 Policy loans 125,925 133,826 Other long-term investments 31,641 27,387 Cash and short-term investments 11,172 7,870 Total cash and investments 3,060,406 2,877,340 Accrued investment income 42,603 41,050 Deferred policy acquisition costs 300,712 291,079 Other assets 18,806 15,202 Assets of discontinued operations 609 892 $ 3,423,136 3,225,563 Note: The balance sheet at December 31, 1997, has been taken from the audited financial statements at that date. Certain reclassifications have been made in accordance with the implementation of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Shares Outstanding)
(Unaudited) September 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 167,985 170,423 Universal life and investment annuity contracts 2,724,171 2,580,867 Other policyholder liabilities 24,804 25,001 Federal income taxes payable: Current - 2,470 Deferred 16,061 13,153 Other liabilities 44,015 31,894 Liabilities of discontinued operations 14,734 892 Total liabilities 2,991,770 2,824,700 COMMITMENTS AND CONTINGENCIES (Notes 3 and 6) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,298,128 and 3,291,738 shares issued and outstanding in 1998 and 1997 3,298 3,292 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 1998 and 1997 200 200 Additional paid-in capital 24,899 24,662 Accumulated other comprehensive income 22,117 16,268 Retained earnings 380,852 356,441 Total stockholders' equity 431,366 400,863 $ 3,423,136 3,225,563 Note: The balance sheet at December 31, 1997, has been taken from the audited financial statements at that date. Certain reclassifications have been made in accordance with the implementation of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Three Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Amounts)
1998 1997 Premiums and other revenue: Life and annuity premiums $ 3,050 3,411 Universal life and investment annuity contract revenues 22,150 19,303 Net investment income 50,689 52,908 Other income 80 64 Realized gains on investments 606 408 Total premiums and other revenue 76,575 76,094 Benefits and expenses: Life and other policy benefits 9,155 9,362 Decrease in liabilities for future policy benefits (945) (96) Amortization of deferred policy acquisition costs 11,137 9,785 Universal life and investment annuity contract interest 33,177 36,116 Other insurance operating expenses 7,501 6,378 Total benefits and expenses 60,025 61,545 Earnings before Federal income taxes and discontinued operations 16,550 14,549 Provision (benefit) for Federal income taxes: Current (26) 6,741 Deferred 680 (1,721) Total Federal income taxes 654 5,020 Earnings from continuing operations 15,896 9,529 Losses from discontinued operations (14,125) - Net earnings $ 1,771 9,529 Basic earnings per share: Earnings from continuing operations $ 4.55 2.73 Losses from discontinued operations (4.04) - Net earnings $ 0.51 2.73 Diluted earnings per share: Earnings from continuing operations $ 4.48 2.71 Losses from discontinued operations (3.98) - Net earnings $ 0.50 2.71 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Amounts)
1998 1997 Premiums and other revenue: Life and annuity premiums $ 9,617 11,682 Universal life and investment annuity contract revenues 62,741 59,984 Net investment income 163,488 160,419 Other income 891 220 Realized gains (losses) on investments 2,114 (2,371) Total premiums and other revenue 238,851 229,934 Benefits and expenses: Life and other policy benefits 28,283 29,371 Decrease in liabilities for future policy benefits (2,438) (2,096) Amortization of deferred policy acquisition costs 31,537 30,670 Universal life and investment annuity contract interest 108,727 110,180 Other insurance operating expenses 21,829 19,750 Total benefits and expenses 187,938 187,875 Earnings before Federal income taxes and discontinued operations 50,913 42,059 Provision (benefit) for Federal income taxes: Current 12,619 16,536 Deferred (242) (2,556) Total Federal income taxes 12,377 13,980 Earnings from continuing operations 38,536 28,079 Losses from discontinued operations (14,125) (1,000) Net earnings $ 24,411 27,079 Basic earnings per share: Earnings from continuing operations $ 11.03 8.05 Losses from discontinued operations (4.04) (0.29) Net earnings $ 6.99 7.76 Diluted earnings per share: Earnings from continuing operations $ 10.91 7.98 Losses from discontinued operations (4.00) (0.28) Net earnings $ 6.91 7.70 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Net earnings $ 1,771 9,529 Other comprehensive income, net of effects of deferred policy acquisition costs and taxes: Unrealized gains on securities: Unrealized holding gains arising during period 5,328 3,638 Less: reclassification adjustment for gains included in net earnings (228) (268) Amortization of net unrealized gains related to transferred securities (67) (247) Net unrealized gains on securities 5,033 3,123 Foreign currency translation adjustments - 331 Other comprehensive income 5,033 3,454 Comprehensive income $ 6,804 12,983 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Net earnings $ 24,411 27,079 Other comprehensive income, net of effects of deferred policy acquisition costs and taxes: Unrealized gains on securities: Unrealized holding gains arising during period 6,930 3,881 Less: reclassification adjustment for gains included in net earnings (645) (1,033) Amortization of net unrealized gains related to transferred securities (401) (786) Net unrealized gains on securities 5,884 2,062 Foreign currency translation adjustments (35) 2,267 Other comprehensive income 5,849 4,329 Comprehensive income $ 30,260 31,408 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Common stock: Balance at beginning of year $ 3,492 3,491 Shares exercised under stock option plan 6 - Common stock at end of period 3,498 3,491 Additional paid-in capital: Balance at beginning of year 24,662 24,647 Shares exercised under stock option plan 237 - Additional paid-in capital at end of period 24,899 24,647 Accumulated other comprehensive income: Unrealized gains on securities: Balance at beginning of year 13,782 9,853 Change in unrealized gains during period 5,884 2,062 Balance at end of period 19,666 11,915 Foreign currency translation adjustments: Balance at beginning of year 2,486 - Change in translation adjustments during period (35) 2,267 Balance at end of period 2,451 2,267 Accumulated other comprehensive income at end of period 22,117 14,182 Retained earnings: Balance at beginning of year 356,441 314,869 Net earnings 24,411 27,079 Retained earnings at end of period 380,852 341,948 Total stockholders' equity $ 431,366 384,268 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Cash flows from operating activities: Net earnings $ 24,411 27,079 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 108,727 110,180 Surrender charges and other policy revenues (30,884) (31,716) Realized (gains) losses on investments (2,114) 2,371 Accrual and amortization of investment income (6,397) (3,846) Depreciation and amortization 737 746 Decrease in insurance receivables and other assets 864 395 Increase in accrued investment income (1,553) (644) Decrease (increase) in deferred policy acquisition costs (15,008) 2,391 Decrease in liability for future policy benefits (2,438) (2,096) Increase (decrease) in other policyholder liabilities (197) 1,146 Increase (decrease) in Federal income taxes payable (7,160) 976 Increase in other liabilities 12,121 2,903 Decrease in value of index options 5,201 - Other (245) - Net cash provided by operating activities 86,065 109,885 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity 2,978 1,993 Securities available for sale - 48,170 Other investments 2,595 1,615 Proceeds from maturities and redemptions of: Securities held to maturity 77,855 81,177 Securities available for sale 45,296 29,389 Purchases of: Securities held to maturity (226,321) (78,914) Securities available for sale (83,125) (167,569) Other investments (13,252) (3,822) Principal payments on mortgage loans 31,421 27,137 Cost of mortgage loans acquired (6,642) (19,395) Decrease in policy loans 7,901 5,960 Decrease in assets of discontinued operations 283 365 Increase (decrease) in liabilities of discontinued operations 13,842 (365) Other (349) (179) Net cash used in investing activities (147,518) (74,438) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 327,897 196,328 Return of account balances on universal life and investment annuity contracts (263,385) (236,909) Issuance of common stock under stock option plan 243 - Net cash provided by (used in) financing activities 64,755 (40,581) Net increase (decrease) in cash and short-term investments 3,302 (5,134) Cash and short-term investments at beginning of year 7,870 11,358 Cash and short-term investments at end of period $ 11,172 6,224 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation (Westcap), NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage operations during 1995 and filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation is reflected as discontinued operations in the accompanying financial statements. All significant intercorporate transactions and accounts have been eliminated in consolidation. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 1998, and the results of its operations for the three months and nine months ended September 30, 1998 and 1997 and its cash flows for the nine months ended September 30, 1998 and 1997. The results of operations for the three months and nine months ended September 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. (2) DIVIDENDS The Company paid no cash dividends on common stock during the nine months ended September 30, 1998 and 1997. (3) DISCONTINUED BROKERAGE OPERATIONS By order dated August 28, 1998, the United States Bankruptcy Court, Southern District of Texas, Houston Division, confirmed and approved the Third Amended Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. (jointly Westcap). Pursuant to the Plan, National Western will receive credit for $1,000,000 previously contributed to Westcap in bankruptcy in March, 1997, and will pay an additional $14,125,000 to compromise and settle (i) all claims of Westcap against National Western, and (ii) all claims and litigation of certain settling creditors of Westcap who alleged federal or state securities law "control person" violations by National Western relating to Westcap's brokerage business, in exchange for full and complete releases from all of such claims, litigation and alleged violations. Chicago City Colleges is excluded from the compromise and settlement by National Western with the settling creditors, but will participate with all creditors in the settlement distribution from Westcap. National Western will retain 100% continuing ownership of the reorganized Westcap. Westcap will no longer engage in brokerage operations, but will operate as a real estate management company. The $14,125,000 settlement was reflected as a loss from discontinued brokerage operations for the quarter ended September 30, 1998. The settlement payment is expected to be made in November, 1998. Any additional losses will depend on the results of the Chicago City Colleges lawsuit filed against National Western on March 28, 1994, for alleged federal or state securities law "control person" violations relating to Westcap, and which is pending in the United States District Court, Western District of Texas. National Western believes it has reasonable and adequate defenses to this suit and, accordingly, no amounts have been accrued in the accompanying consolidated financial statements for potential losses relating to such suit. (4) STOCK AND INCENTIVE PLAN On April 17, 1998, the Board of Directors approved the issuance of an additional 48,500 nonqualified stock options to selected officers of the Company. The options were granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan (Plan). Also, on June 19, 1998, stockholders' approved an amendment to the Plan which authorized the grant of an additional 1,000 nonqualified stock options to each director. Accordingly, 10,000 options were granted in total to directors effective on such date. The officers' stock options begin to vest following three full years of service to the Company after date of grant, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The directors' stock options vest 20% per year on each of the first five anniversary dates of the grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant. (5) STOCKHOLDERS' EQUITY Detail of changes in shares of common stock outstanding is provided below:
Nine Months Ended September 30, 1998 1997 (In thousands) Common stock shares outstanding: Shares outstanding at beginning of year 3,492 3,491 Shares exercised under stock option plan 6 - Shares outstanding at end of period 3,498 3,491
(6) COMMITMENTS AND CONTINGENCIES On September 8, 1998, National Western Life Insurance Company (National Western), National Annuity Programs, Inc. (NAP), and the policyholder plaintiffs, interveners and class-representatives in the Diffie, et al. vs. National Western Life Insurance Company and National Annuity Programs, Inc. class action litigation pending in the District Court of Travis County, Texas, filed with the Court a joint motion for preliminary approval of a Settlement Agreement among the parties, and requested the Court to review the Settlement Agreement and make a preliminary determination that it is fair, adequate and reasonable to the members of the proposed classes, and that the proposed classes are capable of being certified for settlement purposes, to approve the form of the notices of the settlement to the classes, and to set a class certification and fairness hearing on the settlement. As previously reported, National Western and NAP, its independent marketing general agency, were sued for alleged violations of Texas statutes and regulations of the Texas Department of Insurance, alleged negligent misrepresentations, and other allegations relating to breach of contract, common law fraud, good faith and fair dealing and conspiracy. In exchange for a final order and judgment dismissing with prejudice the claims asserted against National Western and NAP by all members of the settlement classes, National Western will contribute approximately $5 million to the proposed settlement and NAP will pay $750,000 to the settlement. On September 9, 1998, the District Court entered an order temporarily certifying a settlement class, preliminarily approved the Settlement Agreement between the parties, determined that it is appropriate to send notice to the proposed class members of the Settlement Agreement, approved the form and content of the notices to the members of the class, authorized National Western to retain an administrator to supervise the Settlement Agreement offer to members of the class, set a "fairness hearing" on the Settlement Agreement for January 20, 1999, and enjoined other actions. Although National Western and NAP consider this is a fair and equitable settlement offer, significant uncertainty still exists whether the Settlement Agreement will be approved by an acceptable number of class members and by the Court. Additionally, National Western may void the Settlement Agreement should a specified number of class members reject the proposed settlement. As a result of this considerable uncertainty, no amounts have been accrued in National Western's financial statements for the potential settlement. National Western will accrue the appropriate amount of the settlement offer if and when it is probable that acceptance of the Settlement Agreement will be achieved. National Western will proceed with notification of class members and preliminary administration of the claims process during the remainder of 1998. It is this process which will determine whether ultimate settlement is achieved. Accordingly, National Western has accrued approximately $250,000 for the estimated costs of the notification and administration process in the quarter ended September 30, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL National Western Life Insurance Company is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. It also accepts applications from and issues policies to residents of various Central and South American, Caribbean, and Pacific Rim countries. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
Nine Months Ended September 30, 1998 1997 United States domestic market: Investment annuities 81.9 % 72.7 % Life insurance 6.3 9.6 Total domestic market 88.2 82.3 International market: Investment annuities 0.2 0.7 Life insurance 11.6 17.0 Total international market 11.8 17.7 Total direct premiums collected 100.0 % 100.0 %
Insurance Operations - Domestic Division The Company's Domestic Division concentrates marketing efforts on federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are annuities, universal life insurance, and traditional life insurance, which includes both term and whole life products. The majority of products sold are the Company's annuities, which include single and flexible premium deferred annuities, single premium immediate annuities, and an equity-indexed annuity. Most of these annuities can be sold as tax qualified or nonqualified products. National Western Life markets and distributes its domestic products primarily through independent marketing organizations (IMOs). These IMOs assist the Company in recruiting, contracting, and managing agents. The Company currently has over 30 IMOs contracted for sales of life and annuity products. Current marketing plans are to increase the number of IMOs under contract by adding qualified, select organizations each year that are able to meet minimum production standards. Insurance Operations - International Division The Company's International Division issues policies to foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance sales are primarily on residents from Central and South America, the Caribbean, and the Pacific Rim. Providing insurance policies to residents in numerous countries in these different regions provides diversification that helps to minimize large fluctuations in sales that can occur due to various economic, political, and competitive pressures that may occur from one country to another. Products sold in the international market are almost entirely universal life and traditional life insurance products. However, certain annuity and investment contracts are also available through the International Division. The Company minimizes exposure to foreign currency risks, as almost all foreign policies require payment of premiums and claims in United States dollars. The International Division's sales production is from independent broker- agents, many of whom have been selling National Western Life products for 20 or more years. Currently marketing plans include expanding sales networks in specifically targeted South American and Pacific Rim countries which have higher growth potential than other countries. In accordance with these plans, two new equity-indexed investment products similar to the Domestic Division's new equity-indexed annuity were introduced in early 1998. While National Western Life increases its sales efforts in the international arena, the Company remains committed to its conservative, yet competitive, underwriting practices which historically have resulted in claims experience similar to that in the United States. Other In addition to the life insurance business, the Company had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements. INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities. Investments in debt and equity securities are classified and reported as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. At September 30, 1998, approximately 25.1% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are not classified as held to maturity are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as components of stockholders' equity and other comprehensive income. As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the investment portfolio. Review procedures are also performed on securities that have had significant declines in fair value. The Company's objective in these circumstances is to determine if the decline in fair value is due to changing market expectations regarding inflation and general interest rates or other factors. Additionally, the Company closely monitors financial, economic, and interest rate conditions to manage prepayment and extension risks in its mortgage-backed securities portfolio. The Company's overall conservative investment philosophy is reflected in the allocation of its investments which is detailed below as of September 30, 1998 and December 31, 1997. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments September 30, December 31, 1998 1997 Debt securities 88.8 % 87.3 % Mortgage loans 5.2 6.3 Policy loans 4.1 4.7 Equity securities 0.5 0.5 Real estate 0.4 0.5 Other 1.0 0.7 Totals 100.0 % 100.0 %
Portfolio Analysis The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily corporate, mortgage-backed securities, and public utilities. Investments in mortgage-backed securities include U.S. government agency and collateralized mortgage obligations (CMOs). At September 30, 1998, the Company's debt and equity securities were classified as follows:
Gross Fair Amortized Unrealized Value Cost Gains (In thousands) Securities held to maturity: Debt securities $ 2,146,202 2,015,048 131,154 Securities available for sale: Debt securities 704,020 657,430 46,590 Equity securities 14,296 10,769 3,527 Totals $ 2,864,518 2,683,247 181,271
As detailed above, debt securities comprise almost the entire securities portfolio, as equity securities represent only a small component. Gross unrealized gains totaling $181,271,000 on the securities portfolio at September 30, 1998, are a reflection of market interest rates at quarter-end. The fair values, or market values, of fixed income debt securities correlate to external market interest rate conditions. Because the interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise. An analysis of gross unrealized gains on the Company's securities portfolio for the quarter ended September 30, 1998 is detailed below:
Change in Gross Unrealized Gains Unrealized At At Gains September 30, June 30, During 3rd 1998 1998 Quarter 1998 (In thousands) Securities held to maturity: Debt securities $ 131,154 85,692 45,462 Securities available for sale: Debt securities 46,590 32,669 13,921 Equity securities 3,527 3,777 (250) Totals $ 181,271 122,138 59,133
Changes in interest rates typically have a significant impact on the market values of the Company's debt securities, as reflected above. Unrealized gains at September 30, 1998, increased over $59 million from June 30, 1998, as market interest rates of the ten year U.S. Treasury bond declined approximately 100 basis points during the quarter. Because the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in market values have relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required which would realize market gains or losses. An important aspect of the Company's investment philosophy is managing the cash flow stability of the portfolio. Because expected maturities of securities may differ from contractual maturities due to prepayments, extensions, and calls, the Company takes steps to manage and minimize such risks. The Company continues to invest primarily in corporate debt securities, many of which are noncallable, which helps reduce prepayment and call risks. At September 30, 1998, corporate and public utility securities represented over 68% of the entire debt securities portfolio. Mortgage-backed securities are also an important component of the Company's debt securities portfolio, representing 24% of the portfolio at September 30, 1998. Although holdings of mortgage-backed securities are subject to prepayment and extension risks, both of these risks are addressed by specific portfolio management strategies which add stability to the Company's cash flow management. The Company substantially reduces both prepayment and extension risks of mortgage-backed securities by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I (PAC I) CMOs, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. 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. As of September 30, 1998, CMOs represent about 90% of the Company's mortgage- backed securities. Furthermore, PAC I CMOs account for approximately 94% of this CMO portfolio. The CMOs in the Company's portfolio have been modeled and subjected to detailed, comprehensive analysis by the Company's investment staff. The overall structure of the CMO as well as the individual tranche being considered for purchase have been evaluated to ensure that the security fits appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension, and credit risks. In addition to managing prepayment, extension, and call risks, the Company closely manages the credit quality of its investments in debt securities. Thorough credit analysis is performed on potential corporate investments including examinations of a company's credit and industry outlook, financial ratios and trends, and event risks. The Company continues to follow its conservative investment philosophy by minimizing its holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities are summarized below.
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) September 30, 1998 $ 44,985 47,003 1.5% December 31, 1997 $ 41,149 41,969 1.4% December 31, 1996 $ 38,696 38,784 1.4%
The Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio in recent years. At September 30, 1998, no securities were in default and on nonaccrual status. MORTGAGE LOANS AND REAL ESTATE Investment Philosophy In general, the Company seeks loans on high quality, income producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company seeks to minimize the credit and default risk in its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lessee, in which case the Company approves the loan based on the credit strength of the lessee. This approach has resulted in higher quality mortgage loans with fewer defaults. While mortgage loans remain an important component of the Company's investment portfolio, loans as a percentage of the portfolio have been declining in recent years. Competition for high quality mortgage loans in a declining interest rate environment has impacted the Company's level of mortgage loan originations, and the Company is unwilling to compromise its strict underwriting guidelines to maintain specific mortgage loan levels. The Company's direct investments in real estate are not a significant portion of its total investment portfolio, and the majority of real estate owned was acquired through mortgage loan foreclosures. However, the Company also participates in several real estate joint ventures and limited partnerships. The joint ventures and partnerships, which are not a significant portion of the Company's investment portfolio, invest primarily in income-producing retail properties. Portfolio Analysis The Company held net investments in mortgage loans totaling $158,304,000 and $181,878,000, or 5.2% and 6.3% of total invested assets, at September 30, 1998, and December 31, 1997, respectively. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates. The diversification of the mortgage loan portfolio by geographic regions of the United States and by property type as of September 30, 1998 and December 31, 1997, was as follows:
September 30, December 31, 1998 1997 West South Central 60.4% 54.9 % Mountain 12.7 11.3 South Atlantic 5.3 11.4 Pacific 8.6 8.0 East South Central 5.8 5.2 East North Central 1.4 3.9 Other 5.8 5.3 Totals 100.0% 100.0 %
September 30, December 31, 1998 1997 Retail 56.4 % 62.2 % Office 18.4 16.6 Hotel/Motel 8.8 7.9 Apartment 4.7 4.1 Land/Lots 4.9 3.3 Nursing Homes 3.4 3.2 Other 3.4 2.7 Totals 100.0 % 100.0 %
As of September 30, 1998, the allowance for possible losses on mortgage loans was $4,640,000. No additions were made to the allowance in the third quarter of 1998. Although management believes that the current balance is adequate, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the highest concentrations of the Company's mortgage loans. The Company currently places all loans past due three months or more on nonaccrual status, thus recognizing no interest income on the loans. Also, the Company will at times restructure mortgage loans under certain conditions which may involve changes in interest rates, payment terms, or other modifications. For the nine months ended September 30, 1998 and 1997, the reductions in interest income due to nonaccrual and restructured mortgage loans were not significant. The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $13,678,000 and $15,027,000 at September 30, 1998, and December 31, 1997, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating gains on these properties of approximately $167,000 and $124,000 for the three months ended September 30, 1998 and 1997. The Company monitors the conditions and market values of these properties on a regular basis. No significant realized losses were recognized due to declines in values of properties for the three months ended September 30, 1998 and 1997, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. Although not a significant portion of the investment portfolio, the Company's real estate joint ventures and partnerships continue to produce favorable returns. In the third quarter of 1998, the Company's investment income was enhanced once again from nonrecurring gains totaling $1,125,000 on investments in real estate limited partnerships. RESULTS OF OPERATIONS Summary of Consolidated Operations A summary of operating results for the three months and nine months ended September 30, 1998 and 1997 is provided below:
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (In thousands except per (In thousands except per share data) share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 75,969 75,686 236,737 232,305 Realized gains (losses) on investments 606 408 2,114 (2,371) Total revenues $ 76,575 76,094 238,851 229,934 Earnings: Earnings from insurance operations $ 15,502 9,264 37,162 29,620 Losses from discontinued brokerage operations (14,125) - (14,125) (1,000) Net realized gains (losses) on investments 394 265 1,374 (1,541) Net earnings $ 1,771 9,529 24,411 27,079 Basic Earnings Per Share: Earnings from insurance operations $ 4.44 2.66 10.64 8.49 Losses from discontinued brokerage operations (4.04) - (4.04) (0.29) Net realized gains (losses) on investments 0.11 0.07 0.39 (0.44) Net earnings $ 0.51 2.73 6.99 7.76 Diluted Earnings Per Share: Earnings from insurance operations $ 4.37 2.64 10.52 8.42 Losses from discontinued brokerage operations (3.98) - (4.00) (0.28) Net realized gains (losses) on investments 0.11 0.07 0.39 (0.44) Net earnings $ 0.50 2.71 6.91 7.70
Significant changes and fluctuations in income and expense items between the three months ended September 30, 1998 and 1997 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations for the quarter ended September 30, 1998, were $15,502,000 compared to $9,264,000 for the third quarter of 1997. However, third quarter 1998 earnings include a $4.9 million tax benefit resulting from losses from the Westcap bankruptcy settlement. The tax benefit was recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Excluding the tax benefit, 1998 third quarter earnings increased $1.3 million over the comparable 1997 quarter. Contributing to the increased earnings were universal life and annuity contract revenues which were up 14.7% from the 1997 third quarter and lower life insurance benefit claims. Additionally, increases in net investment income totaling $730,000, net of taxes, were realized from nonrecurring gains on investments in real estate limited partnerships. Increases in earnings were offset somewhat by higher amortization of deferred policy acquisition costs and other insurance operating expenses. Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets continue to consist of nontraditional types such as universal life and investment annuities. The Company's current plans are to continue to focus the majority of its product development and marketing efforts on universal life and investment annuities. As a result, as in past years, no significant growth is anticipated for these premiums in the near future, and actual declines in this category are likely. Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's nontraditional products which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, surrender charges, policy administration fees, and other miscellaneous revenues. These revenues increased from $19,303,000 for the quarter ended September 30, 1997, to $22,150,000 for the same 1998 period. The higher revenues are primarily due to increases in surrender charge revenues totaling $1,158,000 for single-tier annuities and universal life insurance and increases in cost of insurance revenues totaling $1,002,000. Policy surrenders were 37.9% and 2.7% higher for single-tier annuities and universal life, respectively, for the third quarter of 1998 compared to the same period of 1997. The increase in cost of insurance revenues continues as sales of universal life products in both the domestic and international markets increase, resulting in growth of the Company's block of universal life insurance in force. Policy fees and other revenues consist primarily of policy administration fee charges on universal life products and recognition of deferred revenues relating to immediate annuities. Annuitizations result in transfers of policies from deferred to immediate or payout status. The deferred revenues related to the immediate annuities are amortized into income during the payout period. A comparative detail of the components of universal life and investment annuity contract revenues is provided below:
Three Months Ended September 30, 1998 1997 (In thousands) Surrender charges: Two-tier annuities $ 5,104 4,803 Universal life insurance 2,391 1,922 Single-tier annuities 1,916 1,227 Total surrender charges 9,411 7,952 Cost of insurance revenues 9,761 8,759 Policy fees and other revenues 2,978 2,592 Totals $ 22,150 19,303
Actual universal life and investment annuity deposits collected for the quarters ended September 30, 1998 and 1997, are detailed below. Deposits collected on these nontraditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Three Months Ended September 30, 1998 1997 (In thousands) Investment annuities: First year and single premiums $ 122,212 56,071 Renewal premiums 3,989 4,981 Total annuities 126,201 61,052 Universal life insurance: First year and single premiums 5,316 5,001 Renewal premiums 12,767 12,863 Total universal life insurance 18,083 17,864 Totals $ 144,284 78,916
Annuities sold include flexible premium deferred annuities, single premium deferred annuities, and single premium immediate annuities. These products can be tax qualified or nonqualified annuities. In recent years the majority of annuities sold have been nonqualified single premium deferred annuities. The Company also continues to collect additional premiums on existing two-tier annuities, as a large portion of the two-tier block of business were flexible premium annuities on which renewal premiums continue to be collected. Although annuity sales declined in 1996 and 1997 from previous levels, the Company is again experiencing significant growth in annuity production in 1998. The growth is primarily attributable to the Company's new equity- indexed annuity. In fact, the growth has been dramatic as annuity production increased 107% from $61,052,000 for the third quarter of 1997 to $126,201,000 for the same period of 1998. This growth is almost entirely from the Company's new equity-indexed annuity. The Company diversified its annuity products offered to customers by introducing an equity-indexed annuity in late 1997. This product is a flexible premium deferred annuity which combines the features associated with traditional fixed annuities, with the option to have interest rates that are linked in part to an equity index, the S&P 500 Composite Stock Price Index. This new annuity is a long-term contract designed as a planning vehicle for retirement security. Initial sales of $158 million in the first nine months of 1998 indicate that this product is attractive to customers, as it has guaranteed minimum interest rates, coupled with the potential for significantly higher returns based on an equity index component. Also, because the Company does not offer variable products or mutual funds, this new product provides a key equity-based alternative to the Company's existing fixed annuity products. The Company has implemented an investment hedging program to offset the potential higher returns required to be paid on these products. Specifically, the Company purchases index options from highly rated banks and brokerage firms. These index options act as hedges to match closely the returns based on the S&P 500 Composite Stock Price Index which may be paid to policyholders. First year and single universal life insurance premiums showed moderate growth in the third quarter of 1998. These premiums totaled $5,316,000 for the quarter ended September 30, 1998, compared to $5,001,000 for the same period of 1997, reflecting an increase of 6.3%. The Company has experienced growth in this area throughout 1998 from both international and domestic life insurance sales as the Company's increased marketing efforts and additional personnel are producing positive results. The majority of the Company's life insurance production continues to come from the international market, primarily Central and South American countries. While the Company continues to see economic and competitive pressures in the Central and South American market, which has resulted in relatively flat insurance production over the past few years, first year universal life insurance premiums have reflected significant growth in 1998. The Company has been accepting policies from foreign nationals for over thirty years and has developed strong relationships with carefully selected brokers in the foreign countries. This experience and strong broker relations have enabled the Company to meet pressures with continued strong production and successful marketing efforts. While international life insurance production has been consistently strong for National Western over the years, the Company's goal is to increase sales in this market. To accomplish this goal, the Company has continued to modify its market, distribution, and product strategies. For example, the Company introduced two new equity-indexed investment products in 1998 similar to the equity-indexed annuity sold in the domestic market. These new products are targeted primarily to specific South American countries for pension and retirement planning needs. The Company also continues to modify its current portfolio of products to better meet the needs of policyholders in expanded market niches. Net Investment Income: Net investment income decreased 4.2% from the third quarter of 1997, due to declines in fair values of index options used to hedge the equity return component of the Company's equity-indexed annuity product. The index options, which act as hedges to match closely the returns on the S&P 500 Composite Stock Price Index, are reported at fair value in the accompanying financial statements. Because the index options are used as hedges, the changes in the values of the index options and the changes in the policyholder liabilities for equity-indexed annuities are both reflected in the statement of earnings. The decline in value of the index options totaled $6.6 million for the third quarter of 1998. This significant decline is directly attributable to the decline in the S&P 500 Composite Stock Price Index over the same period. While net investment was lower due to these options, the Company also incurred corresponding lower annuity contract interest expense as the credited return on the Company's equity-indexed annuities are also based on the same S&P 500 Composite Stock Price Index. Net investment income from debt securities continues to increase primarily due to increases in invested assets as a result of strong annuity production in 1998. But as market interest rates continue to decline in 1998, this has also lowered the Company's portfolio yield on its debt securities. As a result of these factors, net investment income from debt securities for the third quarter of 1998 reflects an increase of $3,522,000, or 7.7%, over the same period for 1997. However, net investment income for the third quarter of 1997 also was lower than anticipated due to yield and amortization adjustments on mortgage-backed securities totaling $1.4 million. The Company continues to experience declines in investment income from mortgage loans which is consistent with decreases in mortgage loans as previously described. Also, in addition to the decline in value of index options, other investment income includes nonrecurring gains on investments in real estate limited partnerships totaling $1,125,000. A detail of net investment income is provided below:
Three Months Ended September 30, 1998 1997 (In thousands) Investment income: Debt securities $ 49,149 45,627 Mortgage loans 4,189 4,633 Policy loans 2,290 2,458 Other (4,364) 598 Total investment income 51,264 53,316 Investment expenses 575 408 Net investment income $ 50,689 52,908
Realized Gains on Investments: The Company recorded realized gains of $606,000 in 1998 compared to realized gains of $408,000 in 1997. The gains in 1998 were primarily from calls of investments in debt securities. The 1997 gains were primarily from sales of debt securities and mortgage loan prepayment penalties. Life and Other Policy Benefits: Expenses in 1998 and 1997 were relatively comparable at $9.2 million and $9.4 million, respectively. Closer analysis shows life insurance benefit claims were $1,276,000 lower in the third quarter of 1998 than in 1997. Conversely, traditional life insurance surrenders increased $1,164,000 in 1998 over the comparable 1997 period. However, much of the increase in traditional surrender expense is offset by corresponding changes in liabilities for future policy benefits. A comparative detail of life and other policy benefits is provided below:
Three Months Ended September 30, 1998 1997 (In thousands) Life insurance benefit claims $ 5,397 6,673 Surrenders of traditional products 3,293 2,129 Other policy benefits 465 560 Totals $ 9,155 9,362
Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level and types of policy surrenders. Amortization for 1998 was significantly higher at $11,137,000 compared to $9,785,000 for 1997. The increase in amortization correlates directly to higher policy surrenders. Surrenders for the third quarter of 1998 were 25% higher than the comparable 1997 period. Universal Life and Investment Annuity Contract Interest: Interest expense decreased from $36,116,000 in 1997 to $33,177,000 in 1998. The decrease in interest expense is due to reductions and reversals of interest credited to equity-indexed annuities. The equity return component of the Company's equity-indexed annuity is based on the performance of the S&P 500 Composite Stock Price Index. This index rose in the first half of 1998, but declined significantly in the third quarter, resulting in the decrease in interest credited to equity-indexed annuities. As previously described, the Company uses index options to hedge the equity component of these annuities and, as a result, net investment income resulting from these option hedges also decreased significantly in the third quarter of 1998. Other Insurance Operating Expenses: Operating expenses for the third quarter of 1998 were $7,501,000 compared to $6,378,000 for the comparable 1997 period. Included in 1998 expenses is $250,000 for the estimated costs of the notification and administration process for the class action lawsuit settlement as previously described in Note 6 of the accompanying financial statements. Also contributing to the higher expenses were increases in legal fees and several other areas, most of which are related to increased marketing efforts such as salaries and compensation, travel, and printing and publication costs. Federal Income Taxes: Federal income taxes for the quarter ended September 30, 1998, totaled $654,000, reflecting an effective tax rate of only 4.0%. The low effective tax rate is due to a $4.9 million tax benefit resulting from discontinued brokerage operations losses totaling $14,125,000. The tax benefit was reflected in earnings from continuing operations in accordance with the Company's tax allocation agreement with its subsidiaries. Discontinued Brokerage Operations As more fully described in Part II, Item 1, Legal Proceedings of this Form 10- Q, by order dated August 28, 1998, the United States Bankruptcy Court, confirmed and approved the Third Amended Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. (jointly Westcap). Pursuant to the Plan, National Western will receive credit for $1,000,000 previously contributed to Westcap in bankruptcy in March, 1997, and will pay an additional $14,125,000 to compromise and settle (i) all claims of Westcap against National Western, and (ii) all claims and litigation of certain settling creditors of Westcap who alleged federal or state securities law "control person" violations by National Western relating to Westcap's brokerage business, in exchange for full and complete releases from all of such claims, litigation and alleged violations. The $14,125,000 settlement was reflected as a loss from discontinued brokerage operations for the quarter ended September 30, 1998. The settlement payment is expected to be made in November, 1998. Significant changes and fluctuations in income and expense items between the nine months ended September 30, 1998 and 1997 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations for the nine months ended September 30, 1998, were $37,162,000 compared to $29,620,000 for the same period of 1997. As previously described, 1998 earnings include a $4.9 million tax benefit resulting from losses from the Westcap bankruptcy settlement. Excluding the tax benefit, year-to-date 1998 earnings increased $2.6 million over the comparable 1997 period. Contributing to the higher earnings were increased universal life and annuity contract revenues and lower life insurance benefit claims. Increases in net investment income totaling $730,000, net of taxes, were also realized in 1998 from nonrecurring gains on investments in real estate limited partnerships. Additionally, increases in net investment income due to yield and amortization adjustments on mortgage- backed securities resulting from lower market interest rates were recognized in the second quarter of 1998. Universal Life and Investment Annuity Contract Revenues: These revenues increased from $59,984,000 for the nine months ended September 30, 1997, to $62,741,000 for the same 1998 period. Cost of insurance revenues account for substantially all of this increase as the Company's universal life insurance in force consistently grows. Universal life insurance premiums collected for the nine months ended September 30, 1998, increased 7.6% over the comparable 1997 period. This growth in premiums, and resulting increased life insurance in force, is consistent with the increase in cost of insurance revenues in 1998.
Nine Months Ended September 30, 1998 1997 (In thousands) Surrender charges: Two-tier annuities $ 14,368 15,161 Universal life insurance 6,252 6,849 Single-tier annuities 5,125 3,595 Total surrender charges 25,745 25,605 Cost of insurance revenues 28,294 25,757 Policy fees and other revenues 8,702 8,622 Totals $ 62,741 59,984
Actual universal life and investment annuity deposits collected for the nine months ended September 30, 1998 and 1997, are detailed below. Deposits collected on these nontraditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Nine Months Ended September 30, 1998 1997 (In thousands) Investment annuities: First year and single premiums $ 294,347 159,417 Renewal premiums 14,735 17,602 Total annuities 309,082 177,019 Universal life insurance: First year and single premiums 15,422 12,040 Renewal premiums 36,704 36,404 Total universal life insurance 52,126 48,444 Totals $ 361,208 225,463
Annuity sales increased $132,063,000, or 75%, for the nine months ended September 30, 1998, compared to the same period of 1997. This increase is almost entirely from sales of equity-indexed annuities. Universal life insurance premiums also increased over $3.6 million for the same period. This reflects growth of 7.6% and is from increased sales in both the international and domestic life insurance markets. Net Investment Income: Net investment income from debt securities continues to increase primarily due to increases in invested assets. These increases are attributable to significantly higher annuity production in 1998 than in recent years. Net investment income was also higher in 1998 due to yield and amortization adjustments on mortgage-backed securities resulting from lower market interest rates. These adjustments totaling $985,000 were recorded in the second quarter of 1998. Also affecting comparability between periods were third quarter 1997 yield and amortization adjustments totaling $1.4 million which lowered 1997 investment income. Decreases in investment income from mortgage loans and policy loans continue in correlation to decreases in investments in such loans. Other investment income decreased significantly due to declines in fair values of index options. These options are used to hedge the equity return component of the Company's equity-indexed annuity product, as more fully described for the three months ended September 30, 1998. The decline in value of the index options totaled $5.2 million for the nine months ended September 30, 1998. Also included in other investment income for 1998 are nonrecurring gains on investments in real estate limited partnerships totaling $1,125,000, which are partially offsetting the declines from the index options. A detail of investment income is provided below:
Nine Months Ended September 30, 1998 1997 (In thousands) Investment income: Debt securities $ 145,313 137,473 Mortgage loans 12,988 14,144 Policy loans 7,015 7,306 Other 149 3,461 Total investment income 165,465 162,384 Investment expenses 1,977 1,965 Net investment income $ 163,488 160,419
Other Income: Other income increased significantly from $220,000 in 1997 to $891,000 in 1998. The increase was primarily due to proceeds received from the U.S. government in the first quarter of 1998 related to previous litigation involving a failed savings and loan institution. The litigation related to the Company's previous investment in bonds of the financial institution and subsequent losses incurred upon its failure. Realized Gains and Losses on Investments: The Company recorded realized gains of $2,114,000 in 1998 compared to realized losses of $2,371,000 in 1997. The gains in 1998 were primarily from calls of investments in debt securities. The losses in 1997 were primarily from net losses on debt securities totaling $1.7 million. The Company also incurred net losses totaling $485,000 on mortgage loans primarily relating to a foreclosure during the first quarter of 1997. Life and Other Policy Benefits: Expenses in 1998 and 1997 were $28.3 million and $29.4 million, respectively. The significant decrease in expenses is due primarily to lower life insurance benefit claims as previously described for the three months ended September 30, 1998. Universal Life and Investment Annuity Contract Interest: Interest expense was down from $110.2 million in 1997 to $108.7 million in 1998. As previously described for the three months ended September 30, 1998, the decrease in interest expense is due to reductions and reversals of interest credited to equity-indexed annuities. Other Insurance Operating Expenses: Operating expenses for the nine months ended September 30, 1998, increased 10.5% over the comparable 1997 period. Included in 1998 expenses is a $200,000 lawsuit settlement payment by National Western to San Patricio County. The lawsuit arose from derivative investments purchased by San Patricio County from affiliates of The Westcap Corporation. As part of the settlement, National Western received a general release of all claims asserted with no admission of liability. Also included in 1998 expenses is $250,000 for the estimated costs of the notification and administration process for the class action lawsuit settlement as previously described in Note 6 of the accompanying financial statements. Other factors contributing to higher operating expenses are in specific areas, most of which are related to increased marketing efforts such as salaries and compensation, travel, and printing and publication costs. Federal Income Taxes: Federal income taxes for 1998 and 1997 reflect effective tax rates of 24.3% and 33.2%, respectively, which are lower than the current Federal tax rate of 35%. Federal income taxes for the nine months ended September 30, 1998 and 1997, include tax benefits totaling $4,900,000 and $350,000, respectively, resulting from the Company's subsidiary brokerage operations losses. These tax benefits were reflected in earnings from continuing operations in accordance with the Company's tax allocation agreement with its subsidiaries, resulting in the lower effective tax rate. Discontinued Brokerage Operations As previously described, The Westcap Corporation bankruptcy settlement totaling $14,125,000 was recorded in the third quarter of 1998. Also, a $1,000,000 cash infusion was made by the Company to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as a loss from discontinued operations in the first quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES Liquidity The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet cash needs are the Company's securities available for sale portfolio, net cash provided by operations, and bank line of credit. The Company's investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $60 million on its bank line of credit for short-term cash needs. A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds. In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $86.1 million and $109.9 million for the nine months ended September 30, 1998 and 1997, respectively. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $64.5 million for the first nine months of 1998, but reflected a net cash outflow totaling $40.6 million for the same period of 1997. The increase in cash flows from the deposit product operations was due primarily to increases in sales of the Company's new equity-indexed annuity. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $123.2 million and $110.6 million for the nine months ended September 30, 1998 and 1997, respectively. The Company expects significant cash flows to continue from these sources throughout the remainder of 1998. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1998 or recent years. The Company does not anticipate the need for any long-term debt in the near future. There are also no current or anticipated material commitments for capital expenditures in 1998. Stockholders' equity totaled $431.4 million at September 30, 1998, reflecting an increase of $30.5 million from December 31, 1997. The increase in capital is primarily from net earnings of $24.4 million and an increase in net unrealized gains on investment securities totaling $5.9 million during the first nine months of 1998. Book value per share at September 30, 1998, was $123.31. YEAR 2000 ISSUES The Year 2000 problem, also known as Y2K, is the result of concerns that many computer software systems today cannot distinguish the year 2000 from the year 1900. The Year 2000 problem arose because many existing computer programs use only the last two digits to refer to a year, resulting in these programs' inability to recognize "00" in the date field as the year 2000. If not corrected, many computer systems may be unable to process date sensitive data accurately beyond the year 1999, resulting in possible system failures or generation of erroneous results. National Western has been cognizant of these problems for many years as life insurance and annuity products can have very long life spans. Thus, many of our systems have been developed to process and administer our insurance products into the next century. National Western has been working to alleviate or eliminate Year 2000 problems for many years and has assigned the responsibility for the analysis of the problem, to its Senior Vice President-Information Services who deemed the most complete and cost effective approach to the problem was to use existing staff and facilities. Accordingly, the Company's Year 2000 plan includes staff review and analysis of internal systems, embedded chip technology, and external vendor interfaces as described below. National Western's primary internal software systems include its policy administration system and investment accounting system. The policy administration system is an important software system for National Western as it is a comprehensive system involving the following functions: policy issuance, maintenance and accounting, cash receipts, cash disbursements, general ledger, agent commissions, and various other accounting functions. While this policy administration system was not developed by National Western, several key employees of the National Western Information Services department were involved in the system's original development process. As a result, National Western does not maintain a service agreement with the original developer but, rather, maintains and services the system internally. National Western has performed an assessment of this system regarding Year 2000 issues which revealed that there is some exposure to insufficient date processing that must be corrected. However, the assessment also revealed that much of the date sensitive data is already in four digit format which avoids the Year 2000 processing problems. Accordingly, National Western commenced a project to perform a comprehensive review of the entire policy administration system. This project has been substantially completed and changes are currently being made to correct any software coding problems. The Company plans to test and validate the system changes in the fourth quarter of 1998 with continuing testing throughout 1999. Final implementation of the system changes is currently planned for mid-year 1999 based on anticipated favorable results of testing. The Company's investment accounting system is also a critical system as it provides accounting, analysis, and transaction processing for the Company's bond and stock securities which comprise most of its investments. Like the Company's policy administration system, this system was developed by a third party software vendor. However, National Western does maintain a product support agreement with the original vendor. Maintenance and changes to this investment system are the responsibility of the vendor in accordance with this support agreement. National Western has addressed Year 2000 issues with the vendor and the vendor has provided assurance that their system has been subjected to significant review for any problems. The review included assessment, correction, and testing of date sensitive problems and the vender has provided us written acknowledgment that we should encounter no significant Year 2000 related problems. National Western will also independently test the investment system in the fourth quarter of 1998 and through the beginning of 1999. The Company is already using the vendor's Year 2000 modified software release for current processing. National Western does have some exposure to date sensitive embedded technology such as microcontrollers, but the Company views this exposure as minimal. Unlike other industries that may be equipment intensive such as manufacturing, National Western is a financial services company providing insurance and annuities to its customers. As such, the primary equipment and electronic devices used are computers and telephone related equipment. This type of hardware can have date sensitive embedded technology which could be subject to Year 2000 problems. Because of this exposure, National Western has reviewed its computer hardware and telephone systems, with assistance from the applicable vendors, and has replaced, or is in the process of replacing any items that will not properly process date sensitive data in the Year 2000 or beyond. This project will be substantially completed by year-end 1998. The final area of concern is the Company's use of third party systems or interfaces with vendor systems. National Western's most significant interfaces and uses of third party vendor systems are in the bank and trust services area. The Company utilizes various banks to handle numerous types of financial transactions. Several of these banks also provide trustee and custodial services for National Western's investment holdings and transactions. These services are critical to a financial service company such as National Western as its business centers around cash receipts and disbursements to policyholders and the investment of policyholder funds. As a result, National Western has received written confirmation from its vendor banks regarding their status on Year 2000 issues. The banks indicate their dedication to resolving any Year 2000 issues related to their systems and services prior to the critical date. These banks have completed assessments of their exposure to Year 2000 issues and are in problem resolution and testing phases of their Y2K projects. In reviewing the Year 2000 issue, National Western has identified various risks to the Company that could impact daily operations and its ability to satisfactorily transact business with its primary customers and vendors. Risks related to servicing our customers are inabilities to process policyholder and agent commission related transactions timely which could lead to some loss of business. The accuracy of policyholder transactions should not be affected as the Company's policy administration system already uses four digit year data for policy calculations. Risks in the investment accounting area center around accuracy of accounting for investments but should not actually impact cash receipt and disbursement transactions. However, the Company has various controls which should identify and enable correction of such issues should they arise. Risks in interfaces with third party systems, which are primarily banking systems for National Western, include the inability to timely and accurately receive and disburse cash and process investment related transactions. This could affect the Company's service to its policyholders if cash flow issues arise due to delays in bank processing. Based on information from the Company's banks, National Western does not anticipate significant Year 2000 issues relating to bank processing. Based on its analysis, the Company believes it is on schedule with its Year 2000 plan so that any disruptions by Year 2000 will be minimal. National Western recognizes, however, that it is virtually impossible to assure that the Company will be 100% Year 2000 compliant until Year 2000 is here. We anticipate there will be problems that will have to be resolved in the ordinary course of business on and after Year 2000. However, the Company does not believe that the problems will have a material affect on the Company's operations or financial condition. Under a worst case scenario, where systems do not function adequately on or after Year 2000, the Company intends to place all available resources it can to remedy any problems as soon as possible. The resources include National Western staff as well as outside consulting services. The Company has reviewed Year 2000 related costs incurred to date and is monitoring potential future costs to complete its Year 2000 plan. Such costs are not expected to exceed $200,000. A significant amount of these costs have not and will not be incremental costs to the Company, as internal resources are primarily being used and will continue to be utilized and reallocated as needed. Also, for externally developed systems under licensing contracts, costs are primarily borne by the software developer. Costs already incurred as of September 30, 1998, related to the Year 2000 plan total approximately $120,000. 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 Insurance Company or its subsidiaries are or may be viewed a forward-looking. Although the Company has used appropriate care in developing any such information, forward-looking information involves risks and uncertainties that could significantly impact actual results. These risk and uncertainties include, but are not limited to, matters described in the Company's SEC filings such as exposure to market risks, anticipated cash flows, future capital needs, and Year 2000 issues. However, National Western, as a matter of policy, 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS PENDING LITIGATION Class Action Litigation National Western Life Insurance Company (the Company or National Western) and National Annuity Programs, Inc. (NAP) have been sued in the District Court of Travis County, Texas, by a former agent of the Company, eight plaintiffs, and fourteen intervenors, being present and past annuity policyholders of the Company, and on behalf of an asserted class of annuity policyholders of the Company, and alleged that in the sale of certain Company annuities to the plaintiffs and intervenors the Company and NAP (i) had violated the Texas Deceptive Trade Practices-Consumer Protection Act, statutes in the Texas Insurance Code, and certain rules and regulations of the Texas Department of Insurance; (ii) committed common law fraud; (iii) were negligent; (iv) had breached a duty of good faith and fair dealing; (v) made negligent misrepresentations; (vi) committed a civil conspiracy to commit fraud; and (vii) breached policy contracts. The plaintiffs seek (i) certification of one or more classes; and (ii) recovery of unspecified actual damages, monies paid by plaintiffs, attorneys' fees, prejudgment and postjudgment interests and costs, increased or treble damages, punitive damages, and general relief as awarded by the Court. NAP was an independent marketing general agency under contract with the Company that hired and supervised the agents marketing the annuity products on behalf of the Company. On September 8, 1998, National Western, NAP, and the policyholder plaintiffs, interveners and class-representatives in this class action litigation filed with the Court a joint motion for preliminary approval of a Settlement Agreement among the parties. The parties requested the Court to review the Settlement Agreement and make a preliminary determination that it is fair, adequate and reasonable to the members of the proposed classes, and that the proposed classes are capable of being certified for settlement purposes, to approve the form of the notices of the settlement to the classes, and to set a class certification and fairness hearing on the settlement. In exchange for a final order and judgment dismissing with prejudice the claims asserted against National Western and NAP by all members of the settlement classes, National Western will contribute approximately $5 million to the proposed settlement and NAP will pay $750,000 to the settlement. Approximately $3,850,000 will be made available for the members of the various classes that qualify for payments, and $1,900,000 will be paid for attorneys' fees and expenses. There is a possibility that National Western's total payment to members of the classes could increase, but it is believed that the amount would not be material. In the settlement, National Western guarantees that at least $900,000 will be paid out to approved claims by members of the classes, and any unclaimed amounts are to be returned to National Western. Additionally, National Western has agreed to pay the costs of notice to the class and administration of the settlement claims process, estimated to be approximately $250,000. National Western has also agreed to guarantee minimum interest rates of 3% and 5% in the future on certain settlement options under specified annuity policies which are the subject matter of the litigation, and to provide additional incidental settlement benefits, all as detailed in the motion and Settlement Agreement. The plaintiffs estimate that the aggregate value of all of the settlement benefits, including the $5,750,000 settlement payments and potential future benefits to be derived by policyholders under certain policy settlement elections, is approximately $10 million. On September 9, 1998, the District Court entered an order temporarily certifying a settlement class, preliminarily approved the Settlement Agreement between the parties, determined that it is appropriate to send notice to the proposed class members of the Settlement Agreement, approved the form and content of the notices to the members of the class, authorized National Western to retain an administrator to supervise the Settlement Agreement offer to members of the class, set a "fairness hearing" on the Settlement Agreement for January 20, 1999, and enjoined other actions. The Settlement Agreement is subject to Court review and initial approval as to fairness, certification of appropriate classes, approval of form of notice to class members, as well as notice to class members, claim application by class members for payment, and final Court approval of the settlement. Although National Western and NAP consider this is a fair and equitable settlement offer, significant uncertainty still exists whether the Settlement Agreement will be approved by an acceptable number of class members and by the Court. Additionally, National Western may void the Settlement Agreement should a specified number of class members reject the proposed settlement. As a result of this considerable uncertainty, no amounts have been accrued in National Western's financial statements for the potential settlement. National Western will accrue the appropriate amount of the settlement offer if and when it is probable that acceptance of the Settlement Agreement will be achieved. National Western will proceed with notification of class members and preliminary administration of the claims process during the remainder of 1998. It is this process which will determine whether ultimate settlement is achieved. Accordingly, National Western has accrued approximately $250,000 for estimated costs of the notification and administration process in the quarter ended September 30, 1998. Westcap Related Litigation On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company or National Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company. The suit sought rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993, and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western was named as a "controlling person" of the Westcap defendants. Westcap filed Chapter 11 bankruptcy, and The City Colleges filed a claim in the bankruptcy court against Westcap. The claim was tried before the bankruptcy court and in September, 1997, a $56,173,000 judgment was entered against Westcap favorable to The City Colleges. Westcap appealed this decision to the United States District Court for the Southern District of Texas (Houston Division). On July 24, 1998, the United States District Court affirmed the orders of the bankruptcy court with respect to their underlying conclusion that Westcap is liable to The City Colleges under the Texas Securities Act, but the Court vacated the orders and remanded them to the bankruptcy court to determine the correct amount of damages in a manner consistent with the Court's opinion and the Texas Securities Act. It is expected that Westcap will appeal the District Court's judgment to the Fifth Circuit Court of Appeals. While Westcap is a wholly owned subsidiary of the Company, the Company is not a party to the bankruptcy or the judgment against Westcap by the bankruptcy court or the United States District Court. The lawsuit against the Company was stayed in September, 1994, pending resolution of The City Colleges' claim against Westcap. Following the judgment against Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted by the United States District Court in Illinois, and The City Colleges filed an amended complaint seeking to hold the Company liable for the claim allowed in the bankruptcy court against Westcap under the "control person" provision of the Texas Securities Act. The suit seeks approximately $56 million plus fees and costs. The Company filed jurisdictional and venue motions to have the case transferred to the United States District Court for the Western District of Texas, which motions were agreed to by the Plaintiff, and the case in now pending in the United States District Court for the Western District of Texas, where the parties are engaged in discovery activities. The Company believes it has reasonable and adequate defenses to the suit. Although the alleged damages, if sustained, would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. THE WESTCAP CORPORATION BANKRUPTCY PROCEEDINGS By order dated August 28, 1998, the United States Bankruptcy Court, Southern District of Texas, Houston Division, confirmed and approved the Third Amended Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. (jointly Westcap). Westcap is a wholly owned subsidiary of National Western Life Insurance Company (National Western). Pursuant to the Plan, National Western will receive credit for $1,000,000 previously contributed to Westcap in bankruptcy in March, 1997, and will pay an additional $14,125,000 to compromise and settle (i) all claims of Westcap against National Western, and (ii) all claims and litigation of certain settling creditors of Westcap who have alleged federal or state securities law "control person" violations by National Western relating to Westcap's brokerage business, in exchange for full and complete releases from all of such claims, litigation and alleged violations. Approximately $7,979,000 will be paid and transmitted to a Disbursing Trust Committee on behalf of Westcap for payment to holders of allowed claims against the Westcap debtors. Included in this amount are Westcap assets totaling approximately $568,000 which remain primarily from National Western's $1,000,000 contribution as described above. National Western will also pay a total of approximately $6,714,000 to other settling Westcap creditors with allowed claims against the Westcap debtors who are also settling with and releasing National Western from alleged federal or state securities law "control person" violations relating to Westcap. The settling creditors are: City of Tracy, California; Michigan South Central Power Agency; Covafer, S.A. and Sergio Covarrubias; Sheriff of Palm Beach County, Florida; San Antonio River Authority; Tom Green County, Texas; Eduardo and Antonietta Saad; City of La Mesa; Darlington County, South Carolina; Greenwood County, South Carolina; Bernice and Sarah Finger; Winston-Salem State University Foundation; Mary Robin Christison; Mason Tenders; Clerk of the Circuit Court of St. Lucie County, Florida. Pursuant to the Plan, National Western will retain 100% continuing ownership of the reorganized Westcap. Westcap will no longer engage in brokerage operations, but will operate as a real estate management company. The City Colleges is excluded from the compromise and settlement by National Western with the settling creditors, but will participate with all creditors in the distribution from Westcap. The City Colleges previously obtained a bankruptcy court judgment for approximately $56 million against the Westcap debtors. Under the Plan, The City Colleges will participate in the $7,979,000 creditor distribution relating to an allowed $30 million claim, with any distribution relating to the remaining $26 million claim in dispute pending an appeal by Westcap of the $56 million judgment. Should Westcap prevail in the appeal, National Western will be entitled to recover 23.1% of the reduced amount of The City Colleges judgment, but not to exceed $600,000. Should Westcap lose the appeal, The City Colleges will receive a higher prorata percentage of the $7,979,000 creditor distribution. However, pursuant to the Plan, National Western will have no additional liability for settlement payments in excess of the $14,125,000 as described above. Under the Plan, National Western will pay all of the attorneys' fees and court costs incurred by Westcap in the appeal of The City Colleges' judgment. The $14,125,000 settlement payment was reflected as a loss from discontinued brokerage operations in the consolidated financial statements of National Western for the quarter ended September 30, 1998. The settlement payment is expected to be made in November, 1998. The $1,000,000 previously contributed to Westcap in bankruptcy was reflected as a loss from discontinued brokerage operations in the first quarter of 1997. Any additional losses will depend on the results of The City Colleges lawsuit filed against National Western on March 28, 1994, for alleged federal or state securities law "control person" violations relating to Westcap, and which is pending in the United States District Court, Western District of Texas. National Western believes it has reasonable and adequate defenses to this suit and, accordingly, no amounts have been accrued in National Western's consolidated financial statements for potential losses relating to such suit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10(l) -Fifth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan Exhibit 11 -Computation of Earnings Per Share (filed on pages __ and __ of this report). Exhibit 27 -Financial Data Schedule (filed electronically pursuant to Regulation S-K). (b) Reports on Form 8-K A report on Form 8-K dated August 28, 1998, was filed by the Company disclosing the confirmation and approval by the United States Bankruptcy Court of the Third Amended Joint Consensual Plan of Reorganization of The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. A report on Form 8-K dated September 8, 1998, was filed by the Company disclosing the filing of a joint motion with the District Court of Travis County, Texas, for preliminary approval of a settlement agreement among parties involved in class action litigation. This litigation involves National Western Life Insurance Company, National Annuity Programs, Inc., and the policyholder plaintiffs, interveners and class representatives in the Diffie, et al. vs. National Western Life Insurance Company and National Annuity Programs, Inc. lawsuit. 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 Insurance Company (Registrant) Date: November 11, 1998 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director (Authorized Officer) Date: November 11, 1998 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: November 11, 1998 /S/ Vincent L. Kasch Vincent L. Kasch Vice President - Controller and Assistant Treasurer (Principal Accounting Officer) EX-10.L 2 EXHIBIT 10(l) - MATERIAL CONTRACTS FIFTH AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFERRED COMPENSATION PLAN This Fifth Amendment to the National Western Life Insurance Company Pension Plan (the Plan) is hereby made and entered into this 1st day of July, 1998, by National Western Life Insurance Company (the Company). WITNESSETH: WHEREAS, the Plan was originally established effective January 1, 1991, and amended and restated effective April 1, 1995; and WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at any time; and WHEREAS, the Company desires to change certain provisions of the Plan; NOW THEREFORE, the Plan is hereby amended as follows: 1. Section 3.1., Participant Contribution, is hereby amended, effective July 1, 1998, to read as follows: "Each Employee who becomes a Participant in accordance with Article II hereof may elect to make contibutions to the Plan on a pre-tax basis in increments of one-quarter percent (1/4% or 0.25%) of his Compensation, from one-quarter percent (1/4% or 0.25%) to fifty percent (50%). Each Participant's pre-tax salary deferral agreement shall be made in writing on such forms as the Committee shall prescribe, and shall be effective on a Plan Year basis, or until changed in accordance with subsequent provisions of this Section 3.1. A Participant's election hereunder may be completely discontinued at any time, and may be changed on any periodic basis defined and approved by the Committee, or as of any Valuation Date, provided that notice of such change is received at least thirty (30) days prior to such Valuation Date for Compensation to be earned for services rendered following such date, or within such time frame as is approved by the Committee. If, as of any Valuation Date, or as of the last day of any time period defined and approved by the Committee in accordance with the provisions of this Section 3.1, a Participant does not submit a new election, his previous election shall be deemed to continue." IN WITNESS WHEREOF, the National Western Life Insurance Company has executed this Second Amendment. ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY By: Its: Approved by National Western Executive Committee on July 24, 1998 EX-11 3 EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Data)
1998 1997 Numerator for basic and diluted earnings per share: Earnings available to common stockholders before and after assumed conversions: Earnings from continuing operations $ 15,896 9,529 Losses from discontinued operations (14,125) - Net earnings $ 1,771 9,529 Denominator: Basic earnings per share - weighted-average shares 3,498 3,491 Effect of dilutive stock options 46 30 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,544 3,521 Basic earnings per share: Earnings from continuing operations $ 4.55 2.73 Losses from discontinued operations (4.04) - Net earnings $ 0.51 2.73 Diluted earnings per share: Earnings from continuing operations $ 4.48 2.71 Losses from discontinued operations (3.98) - Net earnings $ 0.50 2.71
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Nine Months Ended September 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Data)
1998 1997 Numerator for basic and diluted earnings per share: Earnings available to common stockholders before and after assumed conversions: Earnings from continuing operations $ 38,536 28,079 Losses from discontinued operations (14,125) (1,000) Net earnings $ 24,411 27,079 Denominator: Basic earnings per share - weighted-average shares 3,495 3,491 Effect of dilutive stock options 38 28 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,533 3,519 Basic earnings per share: Earnings from continuing operations $ 11.03 8.05 Losses from discontinued operations (4.04) (0.29) Net earnings $ 6.99 7.76 Diluted earnings per share: Earnings from continuing operations $ 10.91 7.98 Losses from discontinued operations (4.00) (0.28) Net earnings $ 6.91 7.70
EX-27 4
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 704,020 2,015,048 2,146,202 14,296 158,304 13,678 3,060,406 11,172 4,572 300,712 3,423,136 2,892,156 0 15,117 9,687 2,590 0 0 3,498 427,868 3,423,136 72,358 163,488 2,114 891 134,572 31,537 21,829 50,913 12,377 38,536 (14,125) 0 0 24,411 6.99 6.91 0 0 0 0 0 0 0 Consists of $9,617 revenues from traditional contracts subject to FAS 60 accounting treatment, and $62,741 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $28,283 benefits paid to policyholders, $(2,438) decrease in reserves on traditional contracts and $108,727 interest on universal life and investment annuity contracts.
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