-----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, LMcsXOX5RUwNfMn3vipPoxx4pur4RLy0aw1Mx7BwsuF8CTyAAk3P2aqC8gxCIm3h 6FQGkXkheIWLOBwlE8gC+A== 0000070684-00-000004.txt : 20000516 0000070684-00-000004.hdr.sgml : 20000516 ACCESSION NUMBER: 0000070684-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 634074 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 March 31, 2000 [ ] 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 May 10, 2000, the number of shares of Registrant's common stock outstanding was: Class A -3,300,755 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 March 31, 2000 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Earnings For the Three Months Ended March 31, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity For the Three Months Ended March 31, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share For the Three Months Ended March 31, 2000 and 1999 (Unaudited) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
(Unaudited) March 31, December 31, ASSETS 2000 1999 Cash and investments: Securities held to maturity, at amortized cost $ 2,150,109 2,151,924 Securities available for sale, at fair value 743,190 717,948 Mortgage loans, net of allowances for possible losses ($4,104 and $4,104) 197,559 183,902 Policy loans 116,455 117,309 Index options 32,282 32,820 Other long-term investments 47,636 32,766 Cash and short-term investments 2,886 14,010 Total cash and investments 3,290,117 3,250,679 Deferred policy acquisition costs 381,645 369,665 Accrued investment income 46,543 47,756 Other assets 18,999 14,728 $ 3,737,304 3,682,828 Note: The balance sheet at December 31, 1999, has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
(Unaudited) March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 162,548 165,020 Universal life and investment annuity contracts 3,014,158 2,983,060 Other policyholder liabilities 24,237 24,103 Federal income taxes payable: Current 5,579 4,763 Deferred 728 4,659 Short-term borrowings 12,000 - Other liabilities 39,412 25,701 Total liabilities 3,258,662 3,207,306 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,300,728 shares issued and outstanding in 2000 and 1999 3,301 3,301 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2000 and 1999 200 200 Additional paid-in capital 25,028 25,028 Accumulated other comprehensive loss (12,779) (3,566) Retained earnings 462,892 450,559 Total stockholders' equity 478,642 475,522 $ 3,737,304 3,682,828 Note: The balance sheet at December 31, 1999, has been taken from the audited financial statements at that date. 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 March 31, 2000 and 1999 (Unaudited) (In thousands except per share amounts)
2000 1999 Premiums and other revenue: Life and annuity premiums $ 2,372 2,411 Universal life and investment annuity contract revenues 20,903 21,532 Net investment income 57,740 57,852 Other income 115 150 Realized gains (losses) on investments (580) 4,805 Total premiums and other revenue 80,550 86,750 Benefits and expenses: Life and other policy benefits 10,092 8,688 Decrease in liabilities for future policy benefits (2,482) (241) Amortization of deferred policy acquisition costs 10,885 9,571 Universal life and investment annuity contract interest 36,651 40,611 Other operating expenses 6,717 6,701 Total benefits and expenses 61,863 65,330 Earnings before Federal income taxes 18,687 21,420 Provision for Federal income taxes: Current 5,325 5,460 Deferred 1,029 1,857 Total Federal income taxes 6,354 7,317 Net earnings $ 12,333 14,103 Basic Earnings Per Share: Net earnings $ 3.52 4.03 Diluted Earnings Per Share: Net earnings $ 3.51 3.99 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 March 31, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Net earnings $ 12,333 14,103 Other comprehensive income (loss), net of effects of deferred policy acquisition costs and taxes: Unrealized losses on securities: Unrealized holding losses arising during period (1,476) (4,886) Less: reclassification adjustment for gains included in net earnings - (1,671) Amortization of net unrealized gains related to transferred securities (69) (85) Unrealized losses on securities transferred during period from held to maturity to available for sale (8,021) - Net unrealized losses on securities (9,566) (6,642) Foreign currency translation adjustments 353 (9) Other comprehensive loss (9,213) (6,651) Comprehensive income $ 3,120 7,452 See accompanying notes to condensed consolidated financial statements. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Common stock: Balance at beginning of year $ 3,501 3,498 Shares exercised under stock option plan - 1 Balance at end of period 3,501 3,499 Additional paid-in capital: Balance at beginning of year 25,028 24,899 Shares exercised under stock option plan - 31 Balance at end of period 25,028 24,930 Accumulated other comprehensive income (loss): Unrealized gains (losses) on securities: Balance at beginning of year (6,412) 16,000 Change in unrealized losses during period (9,566) (6,642) Balance at end of period (15,978) 9,358 Foreign currency translation adjustments: Balance at beginning of year 2,846 2,634 Change in translation adjustments during period 353 (9) Balance at end of period 3,199 2,625 Accumulated other comprehensive income (loss) at end of period (12,779) 11,983 Retained earnings: Balance at beginning of year 450,559 391,334 Net earnings 12,333 14,103 Balance at end of period 462,892 405,437 Total stockholders' equity $ 478,642 445,849 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from operating activities: Net earnings $ 12,333 14,103 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 36,651 40,611 Surrender charges and other policy revenues (9,838) (11,066) Realized (gains) losses on investments 580 (4,805) Accrual and amortization of investment income (1,012) (1,207) Depreciation and amortization 259 265 Decrease (increase) in insurance receivables and other assets (4,145) 4,925 Decrease in accrued investment income 1,213 336 Increase in deferred policy acquisition costs (5,294) (5,884) Decrease in liability for future policy benefits (2,482) (241) Increase (decrease) in other policyholder liabilities 134 (473) Increase in Federal income taxes payable 2,395 2,516 Increase (decrease) in other liabilities 13,711 (9,563) Other 1,827 (1,073) Net cash provided by operating activities 46,332 28,444 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity - - Securities available for sale - 24,446 Other investments 5,972 5,585 Proceeds from maturities and redemptions of: Securities held to maturity 8,034 24,763 Securities available for sale 17,590 17,181 Purchases of: Securities held to maturity (55,481) (78,744) Securities available for sale (13,971) (53,699) Other investments (22,420) (10,370) Principal payments on mortgage loans 2,077 13,584 Cost of mortgage loans acquired (15,681) (8,282) Decrease in policy loans 854 3,155 Decrease in assets of discontinued operations - 48 Decrease in liabilities of discontinued operations - (48) Other (868) (50) Net cash used in investing activities (73,894) (62,431) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Three Months Ended March 31, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 98,255 109,827 Return of account balances on universal life and investment annuity contracts (93,817) (93,688) Increase in short-term borrowings 12,000 - Issuance of common stock under stock option plan - 32 Net cash provided by financing activities 16,438 16,171 Net decrease in cash and short-term investments (11,124) (17,816) Cash and short-term investments at beginning of year 14,010 24,508 Cash and short-term investments at end of period $ 2,886 6,692 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. The bankruptcy reorganization was completed in January, 1999 and National Western retained 100% continuing ownership of the reorganized subsidiary. As a result, The Westcap Corporation is reflected as discontinued operations in the accompanying financial statements for portions of 1999 and prior years. Westcap is currently operating as a real estate management company. 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 March 31, 2000, and the results of its operations and its cash flows for the three months ended March 31, 2000 and 1999. The results of operations for the three months ended March 31, 2000 and 1999 are not necessarily indicative of the results to be expected for the full year. (2) STOCKHOLDERS' EQUITY (A) Changes in Common Stock Shares Outstanding Details of changes in shares of common stock outstanding are provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Common stock shares outstanding: Shares outstanding at beginning of year 3,501 3,498 Shares exercised under stock option plan - 1 Shares outstanding at end of period 3,501 3,499
(B) Dividends The Company paid no cash dividends on common stock during the three months ended March 31, 2000 and 1999. (3) DISCONTINUED BROKERAGE OPERATIONS The Chapter 11 bankruptcy reorganization of the Company's wholly owned subsidiary, The Westcap Corporation, was completed in the first quarter of 1999. Pursuant to the reorganization plan, National Western retained 100% continuing ownership of the reorganized Westcap and the subsidiary is now operating as a real estate management company. No losses were reported for discontinued brokerage operations in the first quarter of 1999 as the entire $14,125,000 settlement payment was accrued and reported as a loss in the third quarter of 1998. 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 financial statements for potential losses relating to such suit. (4) SEGMENT AND OTHER OPERATING INFORMATION The Company's reportable operating segments include domestic life insurance, international life insurance, and annuities. These segments are organized based on product types and geographic marketing areas. A summary of segment information for the quarters ended March 31, 2000 and 1999 is provided below.
Selected Segment Information: Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) March 31, 2000: Selected Balance Sheet Items: Deferred policy acquisition costs $ 74,832 74,016 232,797 - 381,645 Total segment assets 407,613 376,372 2,887,321 46,999 3,718,305 Future policy benefits 321,785 292,380 2,562,541 - 3,176,706 Other policyholder liabilities 12,629 6,061 5,547 - 24,237 Condensed Income Statements: Premiums and contract revenues $ 5,930 10,686 6,659 - 23,275 Net investment income 6,472 5,650 45,096 522 57,740 Other income - 27 88 - 115 Total revenues 12,402 16,363 51,843 522 81,130 Policy benefits 3,893 3,650 67 - 7,610 Amortization of deferred policy acquisition costs 1,626 3,157 6,102 - 10,885 Universal life and investment annuity contract interest 2,222 3,930 30,499 - 36,651 Other operating expenses 2,086 1,994 2,637 - 6,717 Federal income taxes 876 1,236 4,267 178 6,557 Total expenses 10,703 13,967 43,572 178 68,420 Segment earnings $ 1,699 2,396 8,271 344 12,710
Selected Segment Information: Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) March 31, 1999: Selected Balance Sheet Items: Deferred policy acquisition costs $ 69,200 71,210 188,255 - 328,665 Total segment assets 408,548 372,867 2,730,023 32,634 3,544,072 Future policy benefits 322,094 286,277 2,416,454 - 3,024,825 Other policyholder liabilities 12,974 6,039 4,469 - 23,482 Condensed Income Statements: Premiums and contract revenues $ 5,791 10,228 7,924 - 23,943 Net investment income 6,331 5,443 45,896 182 57,852 Other income 16 12 122 - 150 Total revenues 12,138 15,683 53,942 182 81,945 Policy benefits 3,544 4,702 201 - 8,447 Amortization of deferred policy acquisition costs 932 3,279 5,360 - 9,571 Universal life and investment annuity contract interest 2,449 3,433 34,729 - 40,611 Other operating expenses 2,062 2,135 2,504 - 6,701 Federal income taxes 1,069 724 3,781 61 5,635 Total expenses 10,056 14,273 46,575 61 70,965 Segment earnings $ 2,082 1,410 7,367 121 10,980
Reconciliations of segment information to the Company's consolidated financial statements are provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Premiums and Other Revenue: Premiums and contract revenues $ 23,275 23,943 Net investment income 57,740 57,852 Other income 115 150 Realized gains (losses) on investments (580) 4,805 Total consolidated premiums and other revenue $ 80,550 86,750
Three Months Ended March 31, 2000 1999 (In thousands) Federal Income Taxes: Total segment Federal income taxes $ 6,557 5,635 Taxes (benefits) on realized gains (losses) on investments (203) 1,682 Total consolidated Federal income taxes $ 6,354 7,317
Three Months Ended March 31, 2000 1999 (In thousands) Net Earnings: Total segment earnings $ 12,710 10,980 Realized gains (losses) on investments, net of taxes (377) 3,123 Total consolidated net earnings $ 12,333 14,103
March 31, 2000 1999 (In thousands) Assets: Total segment assets $ 3,718,305 3,544,072 Other unallocated assets 18,999 15,613 Total consolidated assets $ 3,737,304 3,559,685
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:
Three Months Ended March 31, 2000 1999 United States domestic market: Investment annuities 79.3% 82.5% Life insurance 6.4 5.7 Total domestic market 85.7 88.2 International market: Investment annuities 2.2 1.1 Life insurance 12.1 10.7 Total international market 14.3 11.8 Total direct premiums collected 100.0% 100.0%
Insurance Operations - Domestic The Company's domestic operations concentrate 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 equity-indexed annuities. Most of these annuities can be sold as tax qualified or nonqualified products. National Western 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 80 IMOs contracted for sales of life and annuity products. Insurance Operations - International The Company's international operations focus marketing efforts on foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance sales are from countries in Central and South America, the Caribbean, and the Pacific Rim. Marketing to 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 in this market. International sales production is from broker-agents, many of whom have been selling National Western products for 20 or more years. The Company continues to expand its sales networks in specifically targeted South American and Pacific Rim countries which have higher growth potential than other countries. There are inherent risks of conducting international business that are not present within the domestic market. The risks involved with international business are reduced substantially by the Company in several ways. As previously described, the Company focuses its marketing efforts on a specific niche group, which is foreign nationals in upper socioeconomic classes who have substantial financial resources. This targeted customer base coupled with National Western's conservative, yet competitive, underwriting practices have historically resulted in claims experience similar to that in the United States. The Company also minimizes exposure to foreign currency risks, as almost all foreign policies require payment of premiums and claims in United States dollars. Finally, the Company's experience in the international market and its strong broker-agent relationships, which in many cases exceed 20 years, help minimize risks and problems when selling products to foreign nationals. 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 March 31, 2000, approximately 26.3% 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 in accumulated 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 March 31, 2000 and December 31, 1999. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments March 31, December 31, 2000 1999 Debt securities 87.4% 87.8% Mortgage loans 6.0 5.7 Policy loans 3.5 3.6 Index options 1.0 1.0 Equity securities 0.5 0.5 Real estate 0.6 0.4 Other 1.0 1.0 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 primarily U.S. government agency pass-through securities and collateralized mortgage obligations (CMOs). An important aspect of the Company's investment philosophy is managing the credit quality of its investments in debt securities. Thorough credit analysis is performed on existing and potential corporate investments including examination of a company's credit and industry outlook, financial strength, effectiveness of management, and event risks. In the past few years, credit analysis has become one of the most critical activities of the Company's portfolio management. National Western 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 holdings of below investment grade debt securities, which are lower than industry averages, are summarized below.
Below Investment Grade Debt Securities % of Amortized Carrying Market Invested Cost Value Value Assets (In thousands except percentages) March 31, 2000 $ 110,312 87,810 79,174 2.7% December 31, 1999 $ 73,607 70,900 63,864 2.2% December 31, 1998 $ 46,453 44,974 45,317 1.4%
Although National Western purchases only investment grade debt securities, a growing number of companies have become more leveraged due to an environment of heightened acquisition activity and large share repurchase programs. Therefore, continued monitoring of credit quality after the purchase of a company's debt securities is crucial in order for National Western to maintain a high quality portfolio with a low percentage of below investment grade debt securities. While the Company's holdings of below investment grade debt securities remain low, these holdings have increased from $44,974,000 at December 31, 1998, to $87,810,000 at March 31, 2000. This increase is due to downgrades of investment grade debt securities as opposed to purchases of such holdings. Historically, the Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio. At March 31, 2000 and December 31, 1999, no securities were in default and on nonaccrual status. During the third and fourth quarters of 1999, the Company recorded permanent impairment writedowns totaling $4,403,000 related to two separate securities. The writedowns were reflected as realized losses. One of these securities was classified as available for sale and the other as held to maturity. The Company subsequently transferred the held to maturity security to securities available for sale during the first quarter of 2000. Three additional debt securities experienced significant credit deterioration during the first quarter of 2000. As a result of the significant deterioration of the issuing companies' creditworthiness, National Western also transferred these three securities from held to maturity to available for sale. The Company is closely monitoring these securities as well as its other below investment grade holdings. While additional losses are not anticipated based on the current status and condition of these securities, continued credit deterioration of some securities is possible, which may result in further writedowns. Amortized cost, net of writedowns, of the four transferred securities totaled $49,528,000 and unrealized losses resulting from recording the securities at fair value, before effects of taxes and deferred policy acquisitions costs, totaled $20,376,000. The unrealized losses were recorded as a component of accumulated other comprehensive loss in the accompanying financial statements. Although there is loss exposure related to its below investment grade debt securities, the Company is firmly committed to minimizing credit risks and maintaining a high quality portfolio. This commitment is reflected in the high average credit rating of the Company's portfolio. In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's (S&P), a nationally recognized statistical rating organization (NRSRO). If securities were not rated by S&P, the equivalent rating of another NRSRO or the National Association of Insurance Commissioners was used.
March 31, December 31, 2000 1999 AAA and U.S. government 29.0% 28.7% AA 7.3 8.8 A 34.5 34.1 BBB 26.2 25.9 BB and other below investment grade 3.0 2.5 100.0% 100.0%
Another important part 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 these risks. The Company continues to reduce its exposure to prepayment and extension risks by lowering its holdings of mortgage-backed securities. This strategy began in 1994 when mortgage-backed securities totaled 47.6% of the entire portfolio, but now total only 20.9% at March 31, 2000. The majority of this reduction has been achieved by shifting investments into corporate securities and public utilities, as these holdings have increased from 47.0% at December 31, 1994 to 68.9% at March 31, 2000. Also, most of these additions have been noncallable corporates, which help reduce prepayment and call risks. As indicated above, the Company's holdings of mortgage-backed securities are also subject to prepayment risk, as well as extension risk. Both of these risks are addressed by specific portfolio management strategies. The Company has substantially reduced both prepayment and extension risks 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 March 31, 2000, CMOs represent approximately 98% of the Company's mortgage-backed securities. 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. At March 31, 2000, the Company's debt and equity securities were classified as follows:
Unrealized Fair Amortized Gains Value Cost (Losses) (In thousands) Securities held to maturity: Debt securities $ 2,081,639 2,150,109 (68,470) Securities available for sale: Debt securities 727,213 775,291 (48,078) Equity securities 15,977 12,755 3,222 Totals $ 2,824,829 2,938,155 (113,326)
As detailed above, debt securities classified as held to maturity comprise the majority of the Company's securities portfolio, while equity securities are a small component of the portfolio. Unrealized losses totaling $113,326,000 on the securities portfolio at March 31, 2000, are a reflection of market conditions at quarter-end. The fair values, or market values, of fixed income debt securities generally 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. However, market values may fluctuate for other reasons, such as changing economic conditions or increasing event-risk concerns. An analysis of unrealized gains and losses on the Company's securities portfolio for the quarter ended March 31, 2000, is detailed below:
Change in Unrealized Unrealized Gains (Losses) Gains At At (Losses) March 31, December 31, During 1st 2000 1999 Quarter 2000 (In thousands) Securities held to maturity: Debt securities $ (68,470) (67,430) (1,040) Securities available for sale: Debt securities (48,078) (26,905) (21,173) Equity securities 3,222 3,245 (23) Totals $ (113,326) (91,090) (22,236)
Unrealized losses at March 31, 2000, increased 24% from year-end 1999 even though market interest rates of the ten year U.S. Treasury bond actually decreased approximately 44 basis points during the quarter. With market interest rates declining, it would be expected that market values of debt securities would increase. However, market values actually decreased because of the substantial widening of the yield premium for corporate bonds over comparable Treasury securities. Approximately 69% of National Western's bond portfolio consists of corporate bonds, including public utilities. The increase of the yield premium has primarily been event-risk driven as companies increase their leverage through stock buyback programs and acquisitions. 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. Changes in fair values of securities due to changes in market interest rates is an example of market risk. Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices. The most significant market risk exposure for National Western is interest rate risk. The Company manages interest rate risk through on-going cash flow testing required for insurance regulatory purposes. Computer models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows. Management strives to closely match the durations of its assets and liabilities. Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to seek to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities. The Company seeks to minimize the impact of interest risk through surrender charges that are imposed to discourage policy surrenders. Interest rate changes can be anticipated and risk may be limited due to management actions regarding asset and liability instruments. However, potential changes in the values of financial instruments indicated by hypothetical interest changes will likely be different from actual changes experienced, and the differences may be material. Market risk-sensitive assets of the Company include debt securities, equity securities which are almost entirely preferred stocks, mortgage loans, policy loans, and index options. The Company does not maintain a securities trading portfolio. Market risk-sensitive liabilities include policy liabilities for deferred and immediate investment annuity contracts and supplemental contracts. Sensitivity analysis expresses the potential gain or loss in fair value, over a selected time period, from one or more selected hypothetical changes in interest rates which are reasonably possible in the near term. The Company performed detailed sensitivity analysis at December 31, 1999, for its interest rate-sensitive assets. Based on the recent change in market conditions in the first quarter of 2000, the changes in market values of the Company's debt securities fell somewhat outside the expected range of results of this analysis. The deviation from the expected results was due to the volatility in the corporate bond market as previously described above. In addition to the securities described above, the Company invests in index options which are derivative financial instruments used to hedge the equity return component of the Company's equity-indexed annuities. The values of these options are primarily impacted by equity price risk, as the options' fair values are dependent on the performance of the S&P 500 Composite Stock Price Index. However, increases or decreases in investment returns from these options are substantially offset by corresponding increases or decreases in amounts paid to equity-indexed annuity policyholders, subject to minimum guaranteed policy interest rates. The Company's market risk liabilities, which include policy liabilities for investment annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described. As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of both a 100 basis point increase and decrease in the U.S. Treasury yield curve as of December 31, 1999. A 100 basis point interest rate decline would decrease net earnings for 2000 by approximately $300,000, based on the Company's projections. A 100 basis point increase in interest rates would increase net earnings by approximately $200,000, based on the Company's projections. These estimated impacts to earnings are net of tax effects determined at a tax rate of 35% and are also net of the estimated effects of deferred policy acquisition costs. The Company has modeled these scenarios, as a change in market interest rates could pose potential risks to the current profitability levels of this business. These movements in interest rates are also reasonably possible near-term scenarios given the current interest rate environment. The risks from such changes are primarily due to changes in interest rate spreads, which are the differences between investment income earned and credited interest paid to policyholders. Also, the changes in interest rates can effect the level of surrenders and timing of cash flows related to policy liabilities. The above-described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections. Estimated cash flows in the Company's model assume cash flow reinvestments which are representative of the Company's current investment strategy. Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers. Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies. The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs. The model considers only investment annuity and supplemental contracts in-force at December 31, 1999, and does not consider new product sales or the possible impact of interest rate changes on sales. 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. The Company's direct investments in real estate are not a significant portion of its total investment portfolio. Many of these investments were acquired through mortgage loan foreclosures. However, the Company also participates in several real estate joint ventures and limited partnerships. The joint ventures and partnerships invest primarily in income-producing retail properties. These investments have typically enhanced the Company's investment portfolio returns. Portfolio Analysis The Company held net investments in mortgage loans totaling $197,559,000 and $183,902,000, or 6.0% and 5.7% of total invested assets, at March 31, 2000, and December 31, 1999, 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 March 31, 2000, and December 31, 1999, was as follows:
March 31, December 31, 2000 1999 Geographic Region: West South Central 55.7% 58.8% Mountain 23.9 20.5 Pacific 10.1 11.0 South Atlantic 4.7 5.1 East South Central 3.9 4.2 Other 1.7 0.4 Totals 100.0% 100.0%
March 31, December 31, 2000 1999 Property Type: Retail 58.1% 56.1% Office 25.3 27.4 Hotel/Motel 6.7 7.2 Land/Lots 3.8 2.5 Nursing Homes 2.1 2.4 Apartment 1.5 1.6 Other 2.5 2.8 Totals 100.0% 100.0%
As of March 31, 2000, the allowance for possible losses on mortgage loans was $4,104,000. No additions were made to the allowance in the first quarter of 2000. 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. The Company had mortgage loan principal balances on nonaccrual status totaling $3,047,000 and $3,014,000 at March 31, 2000 and December 31, 1999, respectively. 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 three months ended March 31, 2000, the reductions in interest income due to nonaccrual and restructured mortgage loans were approximately $79,000. For the three months ended March 31, 1999, 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 $19,386,000 and $11,388,000 at March 31, 2000, and December 31, 1999, 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 income on these properties of approximately $187,000 and $283,000 for the three months ended March 31, 2000 and 1999. Also during the first quarter of 1999, the Company sold a real estate property resulting in a realized gain on investments totaling $1,419,000. 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 March 31, 2000 and 1999, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. During the first quarter of 2000, the Company acquired a nursing home facility through an affiliated limited partnership. The acquisition, which totaled approximately $6.6 million, was made by a newly formed limited partnership, the partners of which are downstream subsidiaries of National Western. This investment resulted in an increase in real estate owned from December 31, 1999, as reflected above. The nursing home facility, which is expected to open in the second quarter of 2000, will also be operated by an affiliated limited partnership and the financial operating results will be consolidated with those of the Company. Daily operations and management of the nursing home will be performed by an experienced management company through a contract with the limited partnership. Initial first year start up expenses could generate minimum operating losses of approximately $400,000, before taxes. RESULTS OF OPERATIONS Consolidated Operations Summary of Consolidated Operating Results A summary of operating results for the three months ended March 31, 2000 and 1999 is provided below:
Three Months Ended March 31, 2000 1999 (In thousands except per share data) Revenues: Revenues, excluding realized gains (losses) on investments $ 81,130 81,945 Realized gains (losses) on investments (580) 4,805 Total revenues $ 80,550 86,750 Earnings: Earnings from operations $ 12,710 10,980 Net realized gains (losses) on investments (377) 3,123 Net earnings $ 12,333 14,103 Basic Earnings Per Share: Earnings from operations $ 3.63 3.14 Net realized gains (losses) on investments (0.11) 0.89 Net earnings $ 3.52 4.03 Diluted Earnings Per Share: Earnings from operations $ 3.61 3.11 Net realized gains (losses) on investments (0.10) 0.88 Net earnings $ 3.51 3.99
Consolidated Operating Results: Earnings from operations, excluding net realized gains and losses on investments, totaled $12,710,000 for the quarter ended March 31, 2000, compared to $10,980,000 for the first quarter of 1999. The higher earnings in 2000 are primarily related to the growth in the Company's interest sensitive blocks of business. Additionally, while life insurance benefit claims were significantly higher in the first quarter of 2000, this increase was largely offset by reductions in traditional policy liabilities. The Company is also benefitting from lower agent bonus commissions as a result of a litigation settlement in 1999, which terminated future bonus commissions on certain annuities in-force. Revenues, excluding realized gains and losses on investments, were relatively consistent totaling $81,130,000 and $81,945,000 for the quarters ended March 31, 2000 and 1999, respectively. Increases in universal life cost of insurance revenues were offset by lower policy surrender charge revenues and lower income related to index options, which are used to hedge the Company's equity-indexed annuity products. The Company recorded realized losses on investments, net of taxes, totaling $377,000 for the quarter ended March 31, 2000, compared to gains of $3,123,000 for the first quarter of 1999. The first quarter 2000 losses were primarily related to investments in debt securities. The 1999 gains were primarily from sales and calls of investments in debt securities totaling $1,687,000, net of taxes. Also included in 1999 was a net gain totaling $922,000 from the sale of investment real estate owned by one of the Company's subsidiaries, NWL 806 Main, Inc. As previously reported, the bankruptcy reorganization of the Company's wholly owned subsidiary, The Westcap Corporation, was completed in the first quarter of 1999. Pursuant to the reorganization plan, National Western retained 100% continuing ownership of the reorganized Westcap and the subsidiary is now operating as a real estate management company. No losses were reported for discontinued brokerage operations in the first quarter of 1999 as the entire $14,125,000 settlement payment was accrued and reported as a loss in the third quarter of 1998. Net Investment Income: Net investment income decreased slightly from the first quarter of 1999, totaling $57,740,000 and $57,852,000 for the quarter ended March 31, 2000 and 1999, respectively. While investment income from debt securities continues to increase with corresponding increases in invested assets, the essentially flat total investment income growth is primarily due to index options. Declines in fair values of index options used to hedge the equity return component of the Company's equity-indexed annuity products resulted in lower investment income for the first quarter of 2000. The index options, which act as hedges to match closely the returns on the S&P 500 Index, are reported at fair value in the accompanying financial statements. The changes in the values of the index options and the credited interest on policyholder liabilities for equity-indexed annuities are both reflected in the statement of earnings. The reduction to investment income from index options for the quarter ended March 31, 2000, totaling $1,725,000 is composed of a $1,978,000 decline in fair value of options, offset partially by $253,000 of actual income realized as a result of option expirations. Comparative income from index options totaled $1,575,000 for the quarter ended March 31, 1999. This significant decline is directly attributable to the decline in the S&P 500 Index over the same period. While net investment income was lower due to these options, this reduction was partially offset by 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 Index. The decrease in investment income was tempered somewhat by reduced investment expenses. Investment expenses were lower in 2000 compared to 1999 primarily due to the implementation of a new cost allocation study in the first quarter of 2000. Accordingly, the lower investment expenses were offset by a corresponding higher allocation of costs to other operating expenses in the accompanying financial statements. A detail of net investment income is provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Investment income: Debt securities $ 52,661 50,379 Mortgage loans 4,281 4,248 Policy loans 2,027 2,111 Index options (1,725) 1,575 Other investment income 1,170 832 Total investment income 58,414 59,145 Investment expenses 674 1,293 Net investment income $ 57,740 57,852
Realized Gains and Losses on Investments: The Company recorded realized losses of $580,000 and realized gains of $4,805,000 in the first quarters of 2000 and 1999, respectively. As previously described, the 2000 losses were primarily related to investments in debt securities. The 1999 gains were primarily from sales and calls of investments in debt securities totaling $2,595,000 and a gain of $1,419,000 from the sale of investment real estate. Life and Other Policy Benefits: These expenses in 2000 and 1999 were $10.1 million and $8.7 million, respectively. The significant increase is due to higher life insurance benefit claims. Mortality claims experience fluctuates from period to period, and such deviations are not uncommon in the life insurance industry. However, the Company utilizes reinsurance to help minimize its exposure to adverse mortality experience. The Company's general policy is to reinsure amounts in excess of $200,000 on the life of any one individual. Most of the increase in life insurance benefit claims in the first quarter of 2000 was related to traditional policies which was largely offset by reductions in traditional policy liabilities. As reflected in the accompanying financial statements, the decrease in liabilities for future policy benefits totaled $2,482,000 and $241,000 for the quarters ended March 31, 2000 and 1999, respectively. A comparative detail of life and other policy benefits is provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Life insurance benefit claims $ 6,596 5,524 Surrenders of traditional products 2,984 2,460 Other policy benefits 512 704 Totals $ 10,092 8,688
Universal Life and Investment Annuity Contract Interest: The Company closely monitors its credited interest rates, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives. As market interest rates fluctuate, the Company's credited interest rates are often adjusted accordingly, while also taking into consideration other factors as described above. Contract interest totaled $36.7 million and $40.6 million for the quarters ended March 31, 2000 and 1999, respectively. This decline is primarily related to the Company's equity-indexed annuities. Because the S&P 500 Index declined significantly during the first quarter of 2000, the related contract interest of the equity-indexed annuities also declined. Correspondingly, the income from index options used to hedge these annuities also declined, substantially offsetting the lower contract interest. Other Operating Expenses: Other operating expenses totaled $6,717,000 and $6,701,000 for the quarters ended March 31, 2000 and 1999, respectively. While these total expenses are consistent between quarters, as previously described, the Company implemented a new cost allocation study in the first quarter of 2000. This resulted in lower investment expenses and corresponding higher other operating expenses. The amount of this reallocation totaled approximately $650,000. However, the higher cost allocation to other operating expenses was substantially offset by lower agent commissions. The Company is benefitting from lower agent bonus commissions as a result of a litigation settlement in 1999, which terminated future bonus commissions on certain annuities in-force. Federal Income Taxes: Federal income taxes include no unusual items as effective tax rates for the quarters ended March 31, 2000 and 1999 were 34.0% and 34.2%, respectively. Segment Operations Summary of Segment Earnings A summary of segment earnings for the quarters ended March 31, 2000 and 1999 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) Segment earnings: March 31, 2000 $ 1,699 2,396 8,271 344 12,710 March 31, 1999 $ 2,082 1,410 7,367 121 10,980
Domestic Life Insurance Operations The Company's domestic life insurance operations concentrate marketing efforts on federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are universal life insurance and traditional life insurance, which includes both term and whole life products. National Western markets and distributes its domestic products primarily through independent agents and brokers and independent marketing organizations (IMOs). The IMOs also assist the Company in recruiting, contracting, and supervising agents as well as providing additional financial resources for product marketing. Geographically, the domestic life insurance operations market products in most of the United States, which encompasses 43 states and the District of Columbia. The states in which the Company does not conduct business are primarily in the northeast and include Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, and Vermont. Earnings for the domestic life insurance operating segment were $1,699,000 and $2,082,000 for the three months ended March 31, 2000 and 1999, respectively. The decrease in earnings in 2000 is primarily due to higher amortization of deferred policy acquisition costs and modest increases in policy benefits. These increases were partially offset by higher premiums and contract revenues and net investment income during the first quarter of 2000. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Three Months Ended March 31, 2000 1999 (In thousands) Domestic Life Insurance Operations: Premiums and other revenue: Premiums and contract revenues $ 5,930 5,791 Net investment income 6,472 6,331 Other income - 16 Total premiums and other revenue 12,402 12,138 Benefits and expenses: Policy benefits 3,893 3,544 Amortization of deferred policy acquisition costs 1,626 932 Universal life insurance contract interest 2,222 2,449 Other operating expenses 2,086 2,062 Total benefits and expenses 9,827 8,987 Segment earnings before Federal income taxes 2,575 3,151 Federal income taxes 876 1,069 Segment earnings $ 1,699 2,082
Revenues from domestic life insurance operations include life insurance premiums on traditional type products and revenues from universal life insurance. The Company's current marketing efforts focus more on universal life insurance, and, as a result, revenues from these products continue to increase over traditional products. Revenues from traditional products are simply premiums collected, while revenues from universal life insurance consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. A comparative detail of premiums and contract revenues is provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 3,023 2,837 Surrender charges 482 406 Policy fees and other revenues 443 308 Traditional life insurance premiums 1,982 2,240 Totals $ 5,930 5,791
Actual universal life insurance deposits collected for the quarters ended March 31, 2000 and 1999 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 March 31, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 1,610 1,105 Renewal premiums 3,668 3,769 Totals $ 5,278 4,874
Policy benefits were higher in the first quarter of 2000 totaling $3,893,000 compared to $3,544,000 for the comparable 1999 period. The increase was due to significantly higher life insurance benefit claims, which was largely offset by reductions in traditional policy liabilities. Mortality claims experience fluctuates from period to period, and such deviations are not uncommon in the life insurance industry. Universal life insurance contract interest decreased to $2,222,000 in 2000 compared to $2,449,000 in 1999. This is consistent with the relative stable to declining size of this block of business. Amortization of deferred policy acquisition costs increased from $932,000 in 1999 to $1,626,000 in 2000. These expenses represent 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 of policy surrenders, lapses, and benefit claims. The significant increase in amortization for the first quarter of 2000 is partially due to high lapses in a small block of universal life policies. International Life Insurance Operations The Company's international life insurance operations focus marketing efforts on foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance sales are primarily on insureds from countries in Central and South America, the Caribbean, and the Pacific Rim. Marketing to 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. Historically, the top three countries in insurance sales have often been Argentina, Chile, and Peru. Products sold in the international market include both universal life and traditional life insurance products. The Company minimizes exposure to foreign currency risks, as almost all foreign policies require payment of premiums and claims in United States dollars. Sales production from the international market is from independent broker-agents, many of whom have been selling National Western products for 20 or more years. Earnings for the international life insurance operating segment were $2,396,000 and $1,410,000 for the quarters ended March 31, 2000 and 1999, respectively. Earnings in 2000 were higher primarily due to increases in universal life insurance revenues and lower policy benefits. The higher earnings were also somewhat enhanced by slightly higher net investment income. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Three Months Ended March 31, 2000 1999 (In thousands) International Life Insurance Operations: Premiums and other revenue: Premiums and contract revenues $ 10,686 10,228 Net investment income 5,650 5,443 Other income 27 12 Total premiums and other revenue 16,363 15,683 Benefits and expenses: Policy benefits 3,650 4,702 Amortization of deferred policy acquisition costs 3,157 3,279 Universal life insurance contract interest 3,930 3,433 Other operating expenses 1,994 2,135 Total benefits and expenses 12,731 13,549 Segment earnings before Federal income taxes 3,632 2,134 Federal income taxes 1,236 724 Segment earnings $ 2,396 1,410
As with domestic operations, revenues from the international life insurance segment include both premiums on traditional type products and revenues from universal life insurance. The international operations' marketing efforts are also focused more on universal life insurance, and, as a result, revenues from these products continue to increase over traditional products. Cost of insurance revenues continue to increase as the international block of business grows, while traditional life insurance premiums were also higher during the first quarter of 2000. These increases were minimally affected by small decreases in surrender charges and policy fees and other revenues. A comparative detail of premiums and contract revenues is provided below:
Three Months Ended March 31, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 7,616 7,221 Surrender charges 1,891 1,956 Policy fees and other revenues 803 898 Traditional life insurance premiums 376 153 Totals $ 10,686 10,228
Actual universal life insurance deposits collected for the quarters ended March 31, 2000 and 1999 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 March 31, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 3,123 2,569 Renewal premiums 8,343 8,486 Totals $ 11,466 11,055
Policy benefits were significantly lower in 2000 totaling $3,650,000 compared to $4,702,000 in 1999. The decrease in expenses was due to lower life insurance benefit claims. Universal life insurance contract interest increased from $3,433,000 in 1999 to $3,930,000 in 2000. The increase in contract interest is consistent with growth in the universal life insurance business. Annuity Operations The Company's annuity operations are almost exclusively in the United States. Like the Company's domestic life insurance operations, annuities are marketed in 43 states and the District of Columbia using independent agents, brokers, and independent marketing organizations (IMOs). For most of these organizations, annuity sales are much more significant than life insurance sales and are the primary focus of their business operations. Although some of the Company's annuities are available in the international market, current sales are insignificant to total annuity sales. Annuities sold include single and flexible premium deferred annuities, single premium immediate annuities, and equity-indexed annuities. These products can be tax qualified or nonqualified annuities. In recent years the majority of annuities sold have been nonqualified 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 is flexible premium annuities on which renewal premiums continue to be collected. However, the Company has not sold two-tier annuities since 1992. Earnings for the annuity operating segment were $8,271,000 and $7,367,000 for the quarters ended March 31, 2000 and 1999, respectively. Earnings for 2000 were up from 1999 primarily due to increased investment income over annuity contract interest. Reducing this increase in earnings are lower premiums and contract revenues and higher amortization of deferred policy acquisition costs. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Three Months Ended March 31, 2000 1999 (In thousands) Annuity Operations: Premiums and other revenue: Premiums and contract revenues $ 6,659 7,924 Net investment income 45,096 45,896 Other income 88 122 Total premiums and other revenue 51,843 53,942 Benefits and expenses: Policy benefits 67 201 Amortization of deferred policy acquisiton costs 6,102 5,360 Annuity contract interest 30,499 34,729 Other operating expenses 2,637 2,504 Total benefits and expenses 39,305 42,794 Segment earnings before Federal income taxes 12,538 11,148 Federal income taxes 4,267 3,781 Segment earnings $ 8,271 7,367
Revenues from annuity operations include primarily surrender charges and recognition of deferred revenues relating to immediate or payout annuities. Annuitizations result in transfers of policies from deferred to immediate or payout status. The deferred revenues related to these annuities are amortized into income during the payout period. Surrender charge revenues were down 19.4% in 2000 compared to 1999 primarily due to reductions in surrender charges from two-tier annuities. Although total annuity policy surrenders were actually only down 2.2% from 1999 to 2000, the mix of surrender types was significantly different. While single-tier annuity policy surrenders increased 24% in 2000, two-tier annuity policy surrenders, which typically have much higher surrender charges, declined over 32%. This decline in surrenders and related income from two-tier annuities is not unexpected and could continue, since this is a closed block of business. The Company has not sold two-tier annuities since 1992. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Three Months Ended March 31, 2000 1999 (In thousands) Surrender charges: Two-tier annuities $ 3,052 4,643 Single-tier annuities 2,167 1,829 Total surrender charges 5,219 6,472 Payout annuity and other revenues 1,426 1,434 Traditional annuity premiums 14 18 Totals $ 6,659 7,924
Actual annuity deposits collected for the quarters ended March 31, 2000 and 1999 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 March 31, 2000 1999 (In thousands) Deferred annuities: Equity-indexed $ 34,239 45,630 Other 51,357 51,818 Total deferred annuities 85,596 97,448 Immediate annuities 7,725 7,624 Totals $ 93,321 105,072
Although total annuity deposits for the quarter ended March 31, 2000, were lower than the comparable 1999 period, the decline is primarily attributable to equity-indexed annuities. Sales of the Company's other deferred annuity products and immediate annuities were virtually the same for the first quarters of 2000 and 1999. While sales were lower in 2000, equity-indexed annuities are a major portion of the Company's total annuity production. The Company's equity-indexed annuities are flexible premium deferred annuities which combine 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 Index. These annuities are long-term contracts designed as planning vehicles for retirement security. These annuities are attractive to customers, as they have 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, these products provide a key equity-based alternative to the Company's existing fixed annuity products. In conjunction with the sale of these annuities, the Company uses an investment hedging program to offset the potential higher returns that could 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 Index which may be paid to policyholders. Sales of equity-indexed annuities declined during the year ended December 31, 1999, primarily due to volatility in the stock market. This volatility affects both the immediate demand for these annuities and the pricing of these products. Increased product costs from stock market volatility, particularly costs of index options used to hedge the equity return component of these annuities, can reduce potential credited interest to policyholders. The lower production level has continued in the first quarter of 2000, which is consistent with volatility in the stock market, although first quarter 2000 sales were higher than the fourth quarter of 1999. Net investment income for the first quarters of 2000 and 1999 totaled $45,096,000 and $45,896,000, respectively. As previously described in Summary of Consolidated Operating Results, the decrease in net investment income is due to lower income from index options. Declines in fair values of index options used to hedge the equity return component of the Company's equity- indexed annuity products resulted in lower investment income for the first quarter of 2000. The decline is directly attributable to the decline in the S&P 500 Index over the same period. Annuity contract interest was $30.5 million in 2000 compared to $34.7 million in 1999. The decrease is due to lower interest credited on equity-indexed annuities due to the decline in the S&P 500 Index. Contract interest on equity-indexed annuities totaled $1,874,000 and $4,726,000 for the quarters ended March 31, 2000 and 1999, respectively. While 2000 contract interest is lower due to equity-indexed annuities, net investment income from index options for 2000 was also $3,300,000 lower than the comparable 1999 first quarter. Although index options are used as hedges, differences between income from index options and contract interest credited to policyholders will occur for several reasons, some of which may only be timing differences between the recognition of income and expenses. One reason is that the costs of the index options are essentially amortized against net investment income as the options are marked to fair value each reporting period. The costs of options are covered by additional income earned on debt securities purchased with equity-indexed annuity premiums. Other differences are due to asset fees charged against policyholder contract interest, surrenders and death benefits on annuities within the annual hedging period, and inherent differences between index option fair values and policy liability reserving treatments related to minimum guaranteed interest rates. Amortization of deferred policy acquisition costs represents the amortization of the costs of acquiring or producing new business, primarily agents' commissions, the majority of which 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 type of policy surrenders. Amortization for 2000 and 1999 was $6,102,000 and $5,360,000, respectively. Other operating expenses totaled $2,637,000 for the first quarter of 2000 compared to $2,504,000 for the comparable 1999 period. As previously described in Summary of Consolidated Operating Results, the Company implemented a new cost allocation study in the first quarter of 2000. This resulted in lower investment expenses and corresponding higher other operating expenses. However, the higher cost allocation to other operating expenses was substantially offset by lower agent commissions. The Company is benefitting from lower agent bonus commissions as a result of a litigation settlement in 1999, which terminated future bonus commissions on certain annuities in-force. Other Operations National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations. However, National Western also has small real estate and other investment operations through the following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. Also, during January, 1999, the Company's wholly owned subsidiary, The Westcap Corporation, completed its Chapter 11 bankruptcy reorganization. With the reorganization complete, National Western transferred its investment real estate holdings totaling approximately $11,589,000 to Westcap, and the subsidiary is now operating as a real estate management company. Earnings for these other operations totaled $344,000 and $121,000 for the first quarters of 2000 and 1999, respectively. Most of the income from the Company's subsidiaries is from a life interest in the Libbie Shearn Moody Trust. This asset was owned by National Western Life Insurance Company prior to 1997 but was transferred to NWL Services, Inc., in 1997. Dividend distributions from the Trust are declared semi-annually in June and December each year. Because the asset is a life interest, these distributions are only accrued in the Company's financial statements when declared. Semi-annual distributions in recent years typically exceed $1.7 million. 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 a 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 $46.3 million and $28.4 million for the three months ended March 31, 2000 and 1999, respectively. Net cash flows from the Company's financing activities, which includes universal life and investment annuity deposit product operations, totaled $16.4 million and $16.1 million in the first quarters of 2000 and 1999, respectively. While annuity production declined in 2000 due to lower equity-indexed annuity sales, surrenders remained relatively stable. Cash flows from financing activities also include $12.0 million from utilization of the Company's line of credit short-term borrowing facility. The borrowings were used for cash management purposes related to the settlement of routine investment transactions. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $25.6 million and $41.9 million for the quarters ended March 31, 2000 and 1999, respectively. The Company again expects significant cash flows from these sources throughout the remainder of 2000. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 2000 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 2000. Stockholders' equity totaled $478.6 million at March 31, 2000, reflecting an increase of $3.1 million from December 31, 1999. The increase in capital is primarily from net earnings of $12.3 million, offset by an increase in net unrealized losses on investment securities totaling $9.6 million during the first quarter of 2000. The increase in unrealized losses was due to market interest rate conditions and transfers of securities from held to maturity to available for sale. As previously described in Investments in Debt and Equity Securities, the debt securities transfers were executed due to significant credit deterioration of the issuing companies. Book value per share at March 31, 2000, was $136.73. 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 as 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 risks and uncertainties include, but are not limited to, matters described in the Company's SEC filings such as exposure to market risks, anticipated cash flows or operating performance, future capital needs, and statutory or regulatory related issues. However, 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Investments in Debt and Equity Securities section. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 -Computation of Earnings Per Share (filed on page __ of this report). Exhibit 27 -Financial Data Schedule (filed electronically pursuant to Regulation S-K). (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2000. 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: May 10, 2000 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director (Authorized Officer) Date: May 10, 2000 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: May 10, 2000 /S/ Vincent L. Kasch Vincent L. Kasch Vice President - Controller and Assistant Treasurer (Principal Accounting Officer) EX-11 2 EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended March 31, 2000 and 1999 (Unaudited) (In thousands except per share data)
2000 1999 Numerator for basic and diluted earnings per share: Earnings available to common stockholders before before and after assumed conversions: Net earnings $ 12,333 14,103 Denominator: Basic earnings per share - weighted-average shares 3,501 3,498 Effect of dilutive stock options 17 37 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,518 3,535 Basic earnings per share: Net earnings $ 3.52 4.03 Diluted earnings per share: Net earnings $ 3.51 3.99
EX-27 3
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 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 727,213 2,150,109 2,081,639 15,977 197,559 19,386 3,290,117 2,886 7,137 381,645 3,737,304 3,176,706 0 13,961 10,276 12,000 0 0 3,501 475,141 3,737,304 23,275 57,740 (580) 115 44,261 10,885 6,717 18,687 6,354 12,333 0 0 0 12,333 3.52 3.51 0 0 0 0 0 0 0 Consists of $2,372 revenues from traditional contracts subject to FAS 60 accounting treatment and $20,903 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $10,092 benefits paid to policyholders, $(2,482) decrease in reserves on traditional contracts and $36,651 interest on univeral life and investment annuity contracts.
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