-----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, BndLAB1HAYTdBUFYEjkT1Ujn1twkNxp9e3Xi1vp1LwKDL5vZd82a5A9E3lpkBPlR NETfbrdBdrN9EjG2E3WVmQ== /in/edgar/work/20000821/0000070684-00-000008/0000070684-00-000008.txt : 20000922 0000070684-00-000008.hdr.sgml : 20000922 ACCESSION NUMBER: 0000070684-00-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000821 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: [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: 706782 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 0001.txt 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 June 30, 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 August 10, 2000, the number of shares of Registrant's common stock outstanding was: Class A - 3,301,755 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 June 30, 2000 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Earnings For the Three Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Earnings For the Six Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Three Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Six Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity For the Six Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows For the Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share For the Three Months Ended June 30, 2000 and 1999 (Unaudited) Exhibit 11 - Computation of Earnings per Share For the Six Months Ended June 30, 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) June 30, December 31, ASSETS 2000 1999 Cash and investments: Securities held to maturity, at amortized cost $ 2,138,688 2,151,924 Securities available for sale, at fair value 728,186 717,948 Mortgage loans, net of allowances for possible losses ($4,104 and $4,104) 202,024 183,902 Policy loans 115,772 117,309 Index options 22,598 32,820 Other long-term investments 40,396 32,766 Cash and short-term investments 2,638 14,010 Total cash and investments 3,250,302 3,250,679 Deferred policy acquisition costs 392,123 369,665 Accrued investment income 49,444 47,756 Federal income tax receivable 282 237 Deferred Federal income tax asset 1,345 - Other assets 23,588 14,491 $ 3,717,084 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) June 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 161,806 165,020 Universal life and investment annuity contracts 2,984,775 2,983,060 Other policyholder liabilities 25,861 24,103 Federal income taxes payable: Current - 4,763 Deferred - 4,659 Short-term borrowings 23,000 - Other liabilities 38,714 25,701 Total liabilities 3,234,156 3,207,306 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,301,755 and 3,300,728 shares issued and outstanding in 2000 and 1999 3,302 3,301 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2000 and 1999 200 200 Additional paid-in capital 25,065 25,028 Accumulated other comprehensive loss (16,124) (3,566) Retained earnings 470,485 450,559 Total stockholders' equity 482,928 475,522 $ 3,717,084 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 June 30, 2000 and 1999 (Unaudited) (In thousands except per share amounts)
2000 1999 Premiums and other revenue: Life and annuity premiums $ 2,900 3,381 Universal life and investment annuity contract revenues 25,384 20,658 Net investment income 48,815 64,704 Other income 139 127 Realized gains (losses) on investments (5,832) 873 Total premiums and other revenue 71,406 89,743 Benefits and expenses: Life and other policy benefits 9,501 8,465 Decrease in liabilities for future policy benefits (1,011) (408) Amortization of deferred policy acquisition costs 11,293 10,435 Universal life and investment annuity contract interest 32,760 44,993 Other operating expenses 7,360 7,828 Total benefits and expenses 59,903 71,313 Earnings before Federal income taxes 11,503 18,430 Provision (benefit) for Federal income taxes: Current 4,180 7,664 Deferred (270) (1,432) Total Federal income taxes 3,910 6,232 Net earnings $ 7,593 12,198 Basic Earnings Per Share: Net earnings $ 2.17 3.49 Diluted Earnings Per Share: Net earnings $ 2.16 3.46 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Six Months Ended June 30, 2000 and 1999 (Unaudited) (In thousands except per share amounts)
2000 1999 Premiums and other revenue: Life and annuity premiums $ 5,272 5,792 Universal life and investment annuity contract revenues 46,287 42,190 Net investment income 106,555 122,556 Other income 254 277 Realized gains (losses) on investments (6,412) 5,678 Total premiums and other revenue 151,956 176,493 Benefits and expenses: Life and other policy benefits 19,593 17,153 Decrease in liabilities for future policy benefits (3,493) (649) Amortization of deferred policy acquisition costs 22,178 20,006 Universal life and investment annuity contract interest 69,411 85,604 Other operating expenses 14,077 14,529 Total benefits and expenses 121,766 136,643 Earnings before Federal income taxes 30,190 39,850 Provision for Federal income taxes: Current 9,505 13,124 Deferred 759 425 Total Federal income taxes 10,264 13,549 Net earnings $ 19,926 26,301 Basic Earnings Per Share: Net earnings $ 5.69 7.52 Diluted Earnings Per Share: Net earnings $ 5.66 7.45 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 June 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Net earnings $ 7,593 12,198 Other comprehensive income (loss), net of effects of deferred policy acquisition costs and taxes: Unrealized losses on securities: Unrealized holding losses arising during period (6,298) (7,060) Less: reclassification adjustment for losses (gains) included in net earnings 4,203 (377) Amortization of net unrealized gains related to transferred securities (110) 54 Unrealized losses on securities transferred during period from held to maturity to available for sale (1,145) - Net unrealized losses on securities (3,350) (7,383) Foreign currency translation adjustments 5 (69) Other comprehensive loss (3,345) (7,452) Comprehensive income $ 4,248 4,746 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Six Months Ended June 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Net earnings $ 19,926 26,301 Other comprehensive income (loss), net of effects of deferred policy acquisition costs and taxes: Unrealized losses on securities: Unrealized holding losses arising during period (7,774) (11,946) Less: reclassification adjustment for losses (gains) included in net earnings 4,203 (2,048) Amortization of net unrealized gains related to transferred securities (179) (31) Unrealized losses on securities transferred during period from held to maturity to available for sale (9,166) - Net unrealized losses on securities (12,916) (14,025) Foreign currency translation adjustments 358 (78) Other comprehensive loss (12,558) (14,103) Comprehensive income $ 7,368 12,198 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 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 3 Balance at end of period 3,502 3,501 Additional paid-in capital: Balance at beginning of year 25,028 24,899 Shares exercised under stock option plan 37 129 Balance at end of period 25,065 25,028 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 (12,916) (14,025) Balance at end of period (19,328) 1,975 Foreign currency translation adjustments: Balance at beginning of year 2,846 2,634 Change in translation adjustments during period 358 (78) Balance at end of period 3,204 2,556 Accumulated other comprehensive income (loss) at end of period (16,124) 4,531 Retained earnings: Balance at beginning of year 450,559 391,334 Net earnings 19,926 26,301 Balance at end of period 470,485 417,635 Total stockholders' equity $ 482,928 450,695 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from operating activities: Net earnings $ 19,926 26,301 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 69,411 85,604 Surrender charges and other policy revenues (22,555) (19,616) Realized losses (gains) on investments 6,412 (5,678) Accrual and amortization of investment income (2,213) (2,670) Depreciation and amortization 527 505 Decrease (increase) in insurance receivables and other assets (2,466) 4,965 Increase in accrued investment income (1,688) (1,294) Increase in deferred policy acquisition costs (8,988) (12,033) Decrease in liability for future policy benefits (3,493) (649) Increase in other policyholder liabilities 1,758 122 Decrease in Federal income taxes payable (4,049) (2,138) Increase (decrease) in other liabilities 13,013 (12,301) Decrease (increase) in value of index options 11,832 (6,836) Other (336) (221) Net cash provided by operating activities 77,091 54,061 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity - - Securities available for sale 9,993 40,101 Other investments 13,874 9,848 Proceeds from maturities and redemptions of: Securities held to maturity 14,189 42,997 Securities available for sale 24,825 34,535 Purchases of: Securities held to maturity (64,815) (116,474) Securities available for sale (18,765) (93,984) Other investments (23,192) (23,512) Principal payments on mortgage loans 9,683 29,140 Cost of mortgage loans acquired (27,357) (27,951) Decrease in policy loans 1,537 5,333 Decrease in assets of discontinued operations - 48 Decrease in liabilities of discontinued operations - (48) Other (6,670) (212) Net cash used in investing activities (66,698) (100,179) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Six Months Ended June 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 188,988 210,832 Return of account balances on universal life and investment annuity contracts (233,791) (184,474) Increase in short-term borrowings 23,000 - Issuance of common stock under stock option plan 38 132 Net cash provided by (used in) financing activities (21,765) 26,490 Net decrease in cash and short-term investments (11,372) (19,628) Cash and short-term investments at beginning of year 14,010 24,508 Cash and short-term investments at end of period $ 2,638 4,880 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 June 30, 2000, and the results of its operations for the three months and six months ended June 30, 2000 and 1999, and its cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the three months and six months ended June 30, 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:
Six Months Ended June 30, 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 3 Shares outstanding at end of period 3,502 3,501
(B) Dividends The Company paid no cash dividends on common stock during the six months ended June 30, 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 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 three and six months ended June 30, 2000 and 1999 is provided below.
Selected Segment Information: Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) June 30, 2000: Selected Balance Sheet Items: Deferred policy acquisition costs $ 74,601 76,165 241,357 - 392,123 Total segment assets 406,158 382,253 2,860,791 47,899 3,697,101 Future policy benefits 320,863 296,200 2,529,518 - 3,146,581 Other policyholder liabilities 9,259 6,944 9,658 - 25,861 Three Months Ended June 30, 2000: Condensed Income Statements: Premiums and contract revenues $ 6,007 11,022 11,255 - 28,284 Net investment income 6,563 5,769 34,246 2,237 48,815 Other income 22 2 115 - 139 Total revenues 12,592 16,793 45,616 2,237 77,238 Policy benefits 4,305 4,144 41 - 8,490 Amortization of deferred policy acquisition costs 572 3,794 6,927 - 11,293 Universal life and investment annuity contract interest 2,418 3,956 26,386 - 32,760 Other operating expenses 2,297 2,049 2,774 240 7,360 Federal income taxes 1,029 979 3,260 683 5,951 Total expenses 10,621 14,922 39,388 923 65,854 Segment earnings $ 1,971 1,871 6,228 1,314 11,384 Six Months Ended June 30, 2000: Condensed Income Statements: Premiums and contract revenues $ 11,937 21,708 17,914 - 51,559 Net investment income 13,035 11,419 79,342 2,759 106,555 Other income 22 29 203 - 254 Total revenues 24,994 33,156 97,459 2,759 158,368 Policy benefits 8,198 7,794 108 - 16,100 Amortization of deferred policy acquisition costs 2,198 6,951 13,029 - 22,178 Universal life and investment annuity contract interest 4,640 7,886 56,885 - 69,411 Other operating expenses 4,383 4,043 5,411 240 14,077 Federal income taxes 1,905 2,215 7,527 861 12,508 Total expenses 21,324 28,889 82,960 1,101 134,274 Segment earnings $ 3,670 4,267 14,499 1,658 24,094
Selected Segment Information: Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) June 30, 1999: Selected Balance Sheet Items: Deferred policy acquisition costs $ 69,886 73,021 200,654 - 343,561 Total segment assets 408,013 373,831 2,767,952 34,521 3,584,317 Future policy benefits 323,527 287,792 2,459,637 - 3,070,956 Other policyholder liabilities 9,062 7,383 7,632 - 24,077 Three Months Ended June 30, 1999: Condensed Income Statements: Premiums and contract revenues $ 6,489 10,516 7,034 - 24,039 Net investment income 6,347 5,460 50,864 2,033 64,704 Other income 51 41 35 - 127 Total revenues 12,887 16,017 57,933 2,033 88,870 Policy benefits 5,156 3,705 (804) - 8,057 Amortization of deferred policy acquisition costs 1,460 3,283 5,692 - 10,435 Universal life and investment annuity contract interest 2,436 3,461 39,096 - 44,993 Other operating expenses 2,757 2,268 2,803 - 7,828 Federal income taxes 362 1,115 3,762 688 5,927 Total expenses 12,171 13,832 50,549 688 77,240 Segment earnings $ 716 2,185 7,384 1,345 11,630 Six Months Ended June 30, 1999: Condensed Income Statements: Premiums and contract revenues $ 12,280 20,744 14,958 - 47,982 Net investment income 12,678 10,903 96,760 2,215 122,556 Other income 67 53 157 - 277 Total revenues 25,025 31,700 111,875 2,215 170,815 Policy benefits 8,700 8,407 (603) - 16,504 Amortization of deferred policy acquisition costs 2,392 6,562 11,052 - 20,006 Universal life and investment annuity contract interest 4,885 6,894 73,825 - 85,604 Other operating expenses 4,819 4,403 5,307 - 14,529 Federal income taxes 1,431 1,839 7,543 749 11,562 Total expenses 22,227 28,105 97,124 749 148,205 Segment earnings $ 2,798 3,595 14,751 1,466 22,610
Reconciliations of segment information to the Company's consolidated financial statements are provided below:
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 (In thousands) Premiums and Other Revenue: Premiums and contract revenues $ 28,284 24,039 51,559 47,982 Net investment income 48,815 64,704 106,555 122,556 Other income 139 127 254 277 Realized gains on investments (5,832) 873 (6,412) 5,678 Total consolidated premiums and other revenue $ 71,406 89,743 151,956 176,493
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 (In thousands) Federal Income Taxes: Total segment Federal income taxes $ 5,951 5,927 12,508 11,562 Taxes (benefits) on realized gains (losses) on investments (2,041) 305 (2,244) 1,987 Total consolidated Federal income taxes $ 3,910 6,232 10,264 13,549
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 (In thousands) Net Earnings: Total segment earnings $ 11,384 11,630 24,094 22,610 Realized gains (losses) on investments, net of taxes (3,791) 568 (4,168) 3,691 Total consolidated net earnings $ 7,593 12,198 19,926 26,301
June 30, 2000 1999 (In thousands) Assets: Total segment assets $ 3,697,101 3,584,317 Other unallocated assets 19,983 15,535 Total consolidated assets $ 3,717,084 3,599,852
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. The Company 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:
Six Months Ended June 30, 2000 1999 United States domestic market: Investment annuities 77.3 % 81.6 % Life insurance 6.6 5.9 Total domestic market 83.9 87.5 International market: Investment annuities 3.0 0.9 Life insurance 13.1 11.6 Total international market 16.1 12.5 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 supervising 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 on insureds from countries in Central and South America, the Caribbean, and the Pacific Rim. Policy sales on insureds from 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 June 30, 2000, approximately 26.1% 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 are 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 June 30, 2000 and December 31, 1999. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments June 30, December 31, 2000 1999 Debt securities 87.7% 87.8% Mortgage loans 6.2 5.7 Policy loans 3.6 3.6 Index options 0.7 1.0 Equity securities 0.5 0.5 Real estate 0.4 0.4 Other 0.9 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) June 30, 2000 $ 103,624 78,510 75,240 2.4% 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 $78,510,000 at June 30, 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. 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 holding to securities available for sale during the first quarter of 2000. Subsequently, three additional debt securities experienced significant credit deterioration. 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 during the first quarter of 2000. Amortized cost, net of writedowns, of the four transferred securities totaled $49,528,000. 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 for the quarter ended March 31, 2000. During the second quarter of 2000, an additional below investment grade debt security, which the Company has been monitoring closely due to credit deterioration, defaulted on its interest payment. Based on the current condition of the issuing company, complete recovery of National Western's investment in this security is not expected. As a result, the Company recorded a permanent impairment writedown for this security totaling $6,715,000 during the quarter ended June 30, 2000 and also transferred the security from held to maturity to available for sale. The writedown was recorded as a realized investment loss. Amortized cost, net of writedowns, of this security totaled $8,250,000 and unrealized losses resulting from recording the security at fair value, before the effects of taxes and deferred policy acquisition costs, totaled $4,000,000. The unrealized losses were recorded as a component of accumulated other comprehensive loss in the accompanying financial statements for the quarter ended June 30, 2000. The Company is closely monitoring the previously described securities as well as its other below investment grade holdings. While additional losses are not currently anticipated based on the existing status and condition of these securities, continued credit deterioration of some securities is possible, which may result in further writedowns. 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.
June 30, December 31, 2000 1999 AAA and U.S. government 28.4% 28.7% AA 7.9 8.8 A 33.9 34.1 BBB 27.1 25.9 BB and other below investment grade 2.7 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 20.2% at June 30, 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 69.5% at June 30, 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 June 30, 2000, CMOs represent approximately 94% 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 June 30, 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 $ 2,063,393 2,138,688 (75,295) Securities available for sale: Debt securities 712,117 771,963 (59,846) Equity securities 16,069 12,754 3,315 Totals $ 2,791,579 2,923,405 (131,826)
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 $131,826,000 on the securities portfolio at June 30, 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 the change in unrealized gains and losses on the Company's securities portfolio for the quarter ended June 30, 2000, is detailed below:
Change in Unrealized Gains (Losses) Unrealized At At Gains (Losses) June 30, March 31, During 2nd 2000 2000 Quarter 2000 (In thousands) Securities held to maturity: Debt securities $ (75,295) (68,470) (6,825) Securities available for sale: Debt securities (59,846) (48,078) (11,768) Equity securities 3,315 3,222 93 Totals $ (131,826) (113,326) (18,500)
Unrealized losses at June 30, 2000, increased 45% from year-end 1999 and 16% from March 31, 2000, even though market interest rates of the ten year U.S. Treasury bond actually decreased approximately 40 basis points during this six month period. 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. The Company's market risk-sensitive assets 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 changes in market conditions in the first six months 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 $202,024,000 and $183,902,000, or 6.2% and 5.7% of total invested assets, at June 30, 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 June 30, 2000, and December 31, 1999, was as follows:
June 30, December 31, Geographic Region: 2000 1999 West South Central 55.2% 58.8% Mountain 23.3 20.5 Pacific 9.8 11.0 South Atlantic 4.5 5.1 East South Central 3.8 4.2 Other 3.4 0.4 Totals 100.0% 100.0
June 30, December 31, Property Type: 2000 1999 Retail 60.3% 56.1% Office 24.2 27.4 Hotel/Motel 6.4 7.2 Land/Lots 3.5 2.5 Nursing Homes 2.0 2.4 Apartment 1.0 1.6 Other 2.6 2.8 Totals 100.0% 100.0%
As of June 30, 2000, the allowance for possible losses on mortgage loans was $4,104,000. No additions were made to the allowance in the first six months 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 $3,031,000 and $3,014,000 at June 30, 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 six months ended June 30, 2000, the reductions in interest income due to nonaccrual and restructured mortgage loans were approximately $155,000. For the six months ended June 30, 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 $12,355,000 and $11,388,000 at June 30, 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 $395,000 and $450,000 for the six months ended June 30, 2000 and 1999. Also during the first six months of 2000 and 1999, the Company sold real estate properties resulting in realized gains on investments totaling $207,000 and $1,419,000, respectively. 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 six months ended June 30, 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. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated Operations Summary of Consolidated Operating Results A summary of operating results for the three months ended June 30, 2000 and 1999 is provided below:
Three Months Ended June 30, 2000 1999 (In thousands except per share data) Revenues: Revenues, excluding realized gains (losses) and index options $ 89,728 82,918 Index options (12,490) 5,952 Realized gains (losses) on investments (5,832) 873 Total revenues $ 71,406 89,743 Earnings: Earnings from operations $ 11,384 11,630 Net realized gains (losses) on investments (3,791) 568 Net earnings $ 7,593 12,198 Basic Earnings Per Share: Earnings from operations $ 3.25 3.33 Net realized gains (losses) on investments (1.08) 0.16 Net earnings $ 2.17 3.49 Diluted Earnings Per Share: Earnings from operations $ 3.24 3.30 Net realized gains (losses) on investments (1.08) 0.16 Net earnings $ 2.16 3.46
Consolidated Operating Results: Earnings from operations, excluding net realized gains and losses on investments, totaled $11,384,000 for the quarter ended June 30, 2000, compared to $11,630,000 for the second quarter of 1999. Earnings for the current quarter were affected by the Company's equity-indexed annuity business. These annuities combine features associated with traditional fixed annuities, with the option to have interest rates linked in part to an equity index, the S&P 500 Index. Volatility and declines in the S&P 500 Index during the second quarter of 2000 resulted in lower earnings from this block of business. However, universal life and annuity contract revenues were significantly higher offsetting much of the impact from the equity-indexed annuity business. Revenues for the quarters ended June 30, 2000 and 1999 totaled $71,406,000 and $89,743,000, respectively. The lower revenues in 2000 are due to realized losses on investments and significant decreases in investment income from index options which are used to hedge the Company's equity-indexed annuities. The lower investment income was substantially offset by lower annuity contract interest expense, which reflects the results of the Company's hedging policy of this business. Excluding both realized gains and losses on investments and income or losses from index options, as these items can be irregular and variable in nature, revenues reflected significant growth totaling $89,728,000 and $82,918,000 for the quarters ended June 30, 2000 and 1999, respectively. The Company recorded realized losses on investments, net of taxes, totaling $3,791,000 for the quarter ended June 30, 2000, compared to gains of $568,000 for the second quarter of 1999. The loss in the second quarter of 2000 is primarily due to a permanent impairment writedown for a specific debt security which defaulted during the quarter. The Company's policy is to record an impairment writedown when a decline in value is other than temporary and full recovery of the investment cost is not expected. Overall, the Company's debt securities portfolio remains high quality with minimal holdings of below investment grade securities, particularly in comparison to life insurance industry averages. Universal Life and Investment Annuity Contract Revenues: Contract revenues increased significantly during the quarter ended June 30, 2000 totaling $25,384,000 compared to $20,658,000 for the comparable 1999 period. This increase of over 22% is almost entirely due to higher annuity surrender charge income. Surrenders for both single-tier and two-tier annuities were abnormally high during the second quarter of 2000. Net Investment Income: Net investment income decreased 24.6% from the second quarter of 1999, primarily 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 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 June 30, 2000, totaled $12,490,000 compared to income of $5,952,000 for the comparable period of 1999. This significant decline is directly attributable to the volatility and decline in the S&P 500 Index. While net investment income was lower due to these options, this reduction was substantially 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. A detail of net investment income is provided below:
Three Months Ended June 30, 2000 1999 (In thousands) Investment income: Debt securities $ 52,894 51,097 Mortgage loans 4,726 4,021 Policy loans 2,040 2,045 Index options (12,490) 5,952 Other investment income 2,790 2,720 Total investment income 49,960 65,835 Investment expenses 1,145 1,131 Net investment income $ 48,815 64,704
Life and Other Policy Benefits: Policy benefits in the second quarter of 2000 increased 12.2% over the 1999 second quarter. The higher expenses were almost entirely due to life insurance benefits claims which increased $1,044,000 as indicated in the comparative detail provided below:
Three Months Ended June 30, 2000 1999 (In thousands) Life insurance benefit claims $ 6,482 5,438 Surrenders of traditional products 2,658 2,513 Other policy benefits 361 514 Totals $ 9,501 8,465
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 $32.8 million and $45.0 million for the quarters ended June 30, 2000 and 1999, respectively. The decrease is primarily attributable to interest on the Company's equity-indexed annuity products. Because of the volatility and decline of the S&P 500 Index during the second 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: These expenses totaled $7,360,000 and $7,828,000 for the quarters ended June 30, 2000 and 1999, respectively. Included in 1999 expenses is an additional accrual for state income taxes totaling $800,000. While a portion of these taxes relate to 1999, the majority of this accrual covers adjustments for previous years. Federal Income Taxes: Federal income taxes include no unusual items as effective tax rates for the quarters ended June 30, 2000 and 1999 were 34.0% and 33.8%, respectively. Segment Operations Summary of Segment Earnings A summary of segment earnings for the quarters ended June 30, 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: June 30, 2000 $ 1,971 1,871 6,228 1,314 11,384 June 30, 1999 $ 716 2,185 7,384 1,345 11,630
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 $1,971,000 and $716,000 for the three months ended June 30, 2000 and 1999, respectively. The increase in earnings in 2000 is primarily due to decreases in amortization of deferred policy acquisition costs, policy benefits, and other operating expenses. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Three Months Ended June 30, Domestic Life Insurance Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 6,007 6,489 Net investment income 6,563 6,347 Other income 22 51 Total premiums and other revenue 12,592 12,887 Benefits and expenses: Policy benefits 4,305 5,156 Amortization of deferred policy acquisition costs 572 1,460 Universal life insurance contract interest 2,418 2,436 Other operating expenses 2,297 2,757 Total benefits and expenses 9,592 11,809 Segment earnings before Federal income taxes 3,000 1,078 Federal income taxes 1,029 362 Segment earnings $ 1,971 716
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 June 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 3,037 2,947 Surrender charges 476 477 Policy fees and other revenues 170 335 Traditional life insurance premiums 2,324 2,730 Totals $ 6,007 6,489
Actual universal life insurance deposits collected for the quarters ended June 30, 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 June 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 1,281 1,270 Renewal premiums 3,676 3,491 Totals $ 4,957 4,761
Policy benefits were lower in the second quarter of 2000 totaling $4,305,000 compared to $5,156,000 for the comparable 1999 period. The decrease is due to reductions in traditional policy liabilities which were partially offset by higher life insurance benefit claims. Mortality claims experience fluctuates from period to period, and such deviations are not uncommon in the life insurance industry. Universal life insurance contract interest remained relatively constant at $2,418,000 in 2000 compared to $2,436,000 in 1999. This is consistent with the relative stable to declining size of this block of business. Amortization of deferred policy acquisition costs was significantly lower in 2000 totaling $572,000 compared to $1,460,000 in 1999. 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. The lower amortization costs in 2000 resulted from adjustments to deferred policy acquisition costs as anticipated future gross profits on domestic blocks of business were revised. Other operating expenses totaled $2,297,000 and $2,757,000 for the quarters ended June 30, 2000 and 1999, respectively. Expenses for 2000 were lower as 1999 expenses include an additional accrual for state income taxes as previously described. 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. Policy sales on insureds from 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 $1,871,000 and $2,185,000 for the quarters ended June 30, 2000 and 1999, respectively. Earnings in 2000 were somewhat lower due to higher life insurance benefit claims, amortization of deferred policy acquisition costs, and contract interest, partially offset by increases in universal life insurance revenues. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Three Months Ended June 30, International Life Insurance Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 11,022 10,516 Net investment income 5,769 5,460 Other income 2 41 Total premiums and other revenue 16,793 16,017 Benefits and expenses: Policy benefits 4,144 3,705 Amortization of deferred policy acquisition costs 3,794 3,283 Universal life insurance contract interest 3,956 3,461 Other operating expenses 2,049 2,268 Total benefits and expenses 13,943 12,717 Segment earnings before Federal income taxes 2,850 3,300 Federal income taxes 979 1,115 Segment earnings $ 1,871 2,185
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. A comparative detail of premiums and contract revenues is provided below:
Three Months Ended June 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 7,667 7,292 Surrender charges 1,882 1,707 Policy fees and other revenues 919 887 Traditional life insurance premiums 554 630 Totals $ 11,022 10,516
Actual universal life insurance deposits collected for the quarters ended June 30, 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 June 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 3,376 3,317 Renewal premiums 9,569 8,978 Totals $ 12,945 12,295
Life insurance benefit claims, which are reflected in policy benefits for segment reporting purposes, were higher in 2000 at $2,700,000 compared to $2,163,000 in 1999. As previously described for domestic life insurance operations, mortality claims fluctuate from period to period. These deviations, which can at times be significant, are not uncommon in the life insurance industry. Over extended periods of time, higher claims experience tends to be offset by periods of lower claims experience. Additionally, 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. Universal life insurance contract interest increased from $3,461,000 in 1999 to $3,956,000 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 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 $6,228,000 and $7,384,000 for the quarters ended June 30, 2000 and 1999, respectively. Earnings for 2000 were down from 1999 primarily due to lower earnings from the Company's equity- indexed annuity business, offset significantly by higher annuity contract revenues primarily from surrender charges. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Three Months Ended June 30, Annuity Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 11,255 7,034 Net investment income 34,246 50,864 Other income 115 35 Total premiums and other revenue 45,616 57,933 Benefits and expenses: Policy benefits 41 (804) Amortization of deferred policy acquisition costs 6,927 5,692 Annuity contract interest 26,386 39,096 Other operating expenses 2,774 2,803 Total benefits and expenses 36,128 46,787 Segment earnings before Federal income taxes 9,488 11,146 Federal income taxes 3,260 3,762 Segment earnings $ 6,228 7,384
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 up 76% in 2000 compared to 1999 due to increases in surrender charges from both single-tier and two-tier annuities. Actual policy surrenders for annuities were abnormally high increasing 85% in the second quarter of 2000 from the comparable period of 1999. This unusual rate of surrenders has slowed through the first portion of the third quarter of 2000. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Three Months Ended June 30, 2000 1999 (In thousands) Surrender charges: Two-tier annuities $ 5,414 3,924 Single-tier annuities 4,261 1,579 Total surrender charges 9,675 5,503 Payout annuity and other revenues 1,558 1,510 Traditional annuity premiums 22 21 Totals $ 11,255 7,034
Actual annuity deposits collected for the quarters ended June 30, 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 June 30, 2000 1999 (In thousands) Deferred annuities: Equity-indexed $ 27,083 44,289 Other 52,720 46,287 Total deferred annuities 79,803 90,576 Immediate annuities 6,275 6,043 Totals $ 86,078 96,619
Although total annuity deposits for the quarter ended June 30, 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 reflect increases of 13.9% and 3.8%, respectively. 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 began declining 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 and second quarters of 2000, which is consistent with volatility in the stock market. Net investment income for the second quarters of 2000 and 1999 totaled $34,246,000 and $50,864,000, 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 second 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 $26.4 million in 2000 compared to $39.1 million in 1999, reflecting a decrease of $12.7 million. The decrease is primarily due to lower interest credited on equity-indexed annuities due to the volatility and decline in the S&P 500 Index. While 2000 contract interest is lower, net investment income for 2000 was also $16.6 million lower than the comparable 1999 second quarter. Most of the difference between the contract interest and net investment income declines is related to the equity-indexed annuity business. 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 reserves 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 of policy surrenders. Amortization for 2000 and 1999 was $6,927,000 and $5,692,000, respectively. The large increase in amortization is directly related to the significant increase in annuity surrenders in the quarter ended June 30, 2000, as previously described. Other Operations Earnings for other operations totaled $1,314,000 and $1,345,000 for the second quarters of 2000 and 1999, respectively. While National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations, the Company also has small real estate, nursing home, 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. 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. The nursing home facility, which opened in late July, 2000, is operated by an affiliated limited partnership and the financial operating results are consolidated with those of the Company. Daily operations and management of the nursing home are 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 $600,000, before taxes. Currently, operating losses from initial start up costs totaled $240,000 for the period from inception to June 30, 2000. Most of the income from the Company's other operations is from a life interest in the Libbie Shearn Moody Trust. This asset was owned by National Western Life Insurance Company during 1996 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 totaled $1,793,000 and $1,751,000 in June 2000 and 1999, respectively. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Consolidated Operations Summary of Consolidated Operating Results A summary of operating results for the six months ended June 30, 2000 and 1999 is provided below:
Six Months Ended June 30, 2000 1999 (In thousands except per share data) Revenues: Revenues, excluding realized gains (losses) and index options $ 172,583 163,288 Index options (14,215) 7,527 Realized gains (losses) on investments (6,412) 5,678 Total revenues $ 151,956 176,493 Earnings: Earnings from operations $ 24,094 22,610 Net realized gains (losses) on investments (4,168) 3,691 Net earnings $ 19,926 26,301 Basic Earnings Per Share: Earnings from operations $ 6.88 6.47 Net realized gains (losses) on investments (1.19) 1.05 Net earnings $ 5.69 7.52 Diluted Earnings Per Share: Earnings from operations $ 6.85 6.40 Net realized gains (losses) on investments (1.19) 1.05 Net earnings $ 5.66 7.45
Consolidated Operating Results: For the six months ended June 30, 2000, earnings from operations, excluding net realized gains and losses on investments, totaled $24,094,000 compared to $22,610,000 for the same period of 1999. This 6.6% increase in earnings is largely attributable to higher universal life and investment annuity contract revenues. Additionally, while life insurance benefit claims were significantly higher in the first six months of 2000, this increase was largely offset by reductions in traditional policy liabilities. The Company recorded realized losses on investments, net of taxes, totaling $4,168,000 for the six months ended June 30, 2000, compared to gains of $3,691,000 for the first six months of 1999. The losses in 2000 are primarily due to a permanent impairment writedown for a specific debt security which defaulted during the second quarter as previously described. The 1999 gains were primarily from sales and calls of investments in debt securities totaling $2,099,000, 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 National Western'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 six months ended June 30, 1999, as the entire $14,125,000 settlement payment was accrued and reported as a loss in the third quarter of 1998. Segment Operations Summary of Segment Earnings A summary of segment earnings for the six months ended June 30, 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: June 30, 2000 $ 3,670 4,267 14,499 1,658 24,094 June 30, 1999 $ 2,798 3,595 14,751 1,466 22,610
Domestic Life Insurance Operations Earnings for the domestic life insurance operating segment were $3,670,000 and $2,798,000 for the six months ended June 30, 2000 and 1999, respectively. The increase in earnings is primarily due to lower policy benefits and other operating expenses. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Six Months Ended June 30, Domestic Life Insurance Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 11,937 12,280 Net investment income 13,035 12,678 Other income 22 67 Total premiums and other revenue 24,994 25,025 Benefits and expenses: Policy benefits 8,198 8,700 Amortization of deferred policy acquisition costs 2,198 2,392 Universal life insurance contract interest 4,640 4,885 Other operating expenses 4,383 4,819 Total benefits and expenses 19,419 20,796 Segment earnings before Federal income taxes 5,575 4,229 Federal income taxes 1,905 1,431 Segment earnings $ 3,670 2,798
Revenues from domestic life insurance operations include life insurance premiums on traditional type products and revenues from universal life insurance. Concentration on sales of universal life insurance as opposed to traditional products continue to result in increases in cost of insurance revenues and declines in traditional premiums. A comparative detail of premiums and contract revenues is provided below:
Six Months Ended June 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 6,060 5,784 Surrender charges 958 883 Policy fees and other revenues 613 643 Traditional life insurance premiums 4,306 4,970 Totals $ 11,937 12,280
Actual universal life insurance deposits, which are recorded directly to policyholder liabilities upon receipt, for the six months ended June 30, 2000 and 1999 are detailed below.
Six Months Ended June 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 2,891 2,375 Renewal premiums 7,344 7,260 Totals $ 10,235 9,635
Consistent with the second quarter of 2000, policy benefits were lower for the six months ended June 30, 2000, totaling $8,198,000 compared to $8,700,000 for the comparable 1999 period. The decrease is due to reduction in traditional policy liabilities which were partially offset by higher life insurance benefit claims. Other operating expenses totaled $4,383,000 and $4,819,000 for the six months ended June 30, 2000 and 1999, respectively. As previously described for the quarters ended June 30, 2000 and 1999, expenses for 2000 were lower as 1999 expenses include an additional accrual for state income taxes. International Life Insurance Operations Earnings for the international life insurance operating segment were $4,267,000 and $3,595,000 for the six months ended June 30, 2000 and 1999, respectively. Earnings for 2000 were higher primarily due to increases in universal life insurance revenues and lower policy benefits . A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Six Months Ended June 30, International Life Insurance Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 21,708 20,744 Net investment income 11,419 10,903 Other income 29 53 Total premiums and other revenue 33,156 31,700 Benefits and expenses: Policy benefits 7,794 8,407 Amortization of deferred policy acquisition costs 6,951 6,562 Universal life insurance contract interest 7,886 6,894 Other operating expenses 4,043 4,403 Total benefits and expenses 26,674 26,266 Segment earnings before Federal income taxes 6,482 5,434 Federal income taxes 2,215 1,839 Segment earnings $ 4,267 3,595
A comparative detail of premiums and contract revenues, which reflects the increase in universal life insurance revenues as previously described, is provided below:
Six Months Ended June 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 15,283 14,513 Surrender charges 3,773 3,663 Policy fees and other revenues 1,722 1,785 Traditional life insurance premiums 930 783 Totals $ 21,708 20,744
Actual universal life insurance deposits collected for the six months ended June 30, 2000 and 1999 are detailed below. Increases in current year premiums are partially due to improved economic conditions during 2000 in the international Central and South American markets.
Six Months Ended June 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 6,499 5,886 Renewal premiums 17,912 17,464 Totals $ 24,411 23,350
Annuity Operations Earnings for the annuity operating segment were $14,499,000 and $14,751,000 for the six months ended June 30, 2000 and 1999, respectively. Consistent with the second quarter results as previously described, earnings for the six months ended June 30, 2000, were lower than 1999 due to the Company's equity- indexed annuity business. However, increases in annuity contract revenues, primarily from policy surrender charges, mitigated much of this effect. Higher amortization of deferred policy acquisition costs resulting from the increased level of surrenders also tempered the revenue increases. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Six Months Ended June 30, Annuity Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 17,914 14,958 Net investment income 79,342 96,760 Other income 203 157 Total premiums and other revenue 97,459 111,875 Benefits and expenses: Policy benefits 108 (603) Amortization of deferred policy acquisition costs 13,029 11,052 Annuity contract interest 56,885 73,825 Other operating expenses 5,411 5,307 Total benefits and expenses 75,433 89,581 Segment earnings before Federal income taxes 22,026 22,294 Federal income taxes 7,527 7,543 Segment earnings $ 14,499 14,751
Premiums and annuity contract revenues were up $2,956,000, or 19.8%, from $14,958,000 in 1999 to $17,914,000 in 2000. This increase is due to higher surrender charge revenues from single-tier annuities. As previously described for the three months ended June 30, 2000, actual policy surrenders were abnormally high during the second quarter of 2000 resulting in increased revenues. However, this unusually high rate of surrenders has slowed through the first portion of the third quarter of 2000. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Six Months Ended June 30, 2000 1999 (In thousands) Surrender charges: Two-tier annuities $ 8,466 8,567 Single-tier annuities 6,428 3,408 Total surrender charges 14,894 11,975 Payout annuity and other revenues 2,984 2,944 Traditional annuity premiums 36 39 Totals $ 17,914 14,958
Annuity deposits for 2000 reflect a decline of 11.1% compared to the same period of 1999, resulting from decreases in equity-indexed annuity deposits. Sales of these annuities continue to slow, largely a result of volatility in the stock market as previously described for the quarter ended June 30, 2000. Some of the decline in equity-indexed annuity sales is being countered with increases in sales of other deferred annuities, which reflect growth of 6.1% for 2000. Actual annuity deposits collected for the six months ended June 30, 2000 and 1999 are detailed below.
Six Months Ended June 30, 2000 1999 (In thousands) Deferred annuities: Equity-indexed $ 61,322 89,919 Other 104,077 98,105 Total deferred annuities 165,399 188,024 Immediate annuities 14,000 13,667 Totals $ 179,399 201,691
Net investment income for the six months ended June 30, 2000 and 1999 totaled $79,342,000 and $96,760,000, respectively. Declines in fair values of index options resulted in a reduction to net investment income totaling $14,215,000 for the six months ended June 30, 2000. For the comparable 1999 period, increases in fair values of index options resulted in additions to net investment income totaling $7,527,000. Index options are used to hedge the equity return component of the Company's equity-indexed annuities. Fluctuations in the income from index options correlates to the performance of the stock market, more specifically the S&P 500 Index. The significant decline in investment income resulting from the index options is substantially offset by lower annuity contract interest expense. Annuity contract interest was $56.9 million in 2000 compared to $73.8 million in 1999. As previously described for the quarter ended June 30, 2000, the decrease is primarily due to lower interest credited on equity-indexed annuities resulting from the volatility and decline in the S&P 500 Index. Also as described above, decreases in index option income were experienced during the six months ended June 30, 2000, reflecting the hedging policy implemented for the equity-indexed annuity business. However, differences between income from index options and contract interest credited to policyholders will occur for several reasons as previously explained in detail for the three months ended June 30, 2000. Amortization for the six months ended June 30, 2000 and 1999 totaled $13,029,000 and $11,052,000, respectively. The increase in amortization is directly related to the increase in annuity policy surrenders as previously described. Other Operations As previously described for the six months ended June 30, 2000, National Western has small real estate, nursing home, and other investment operations through its wholly owned subsidiaries. Earnings for these other operations totaled $1,658,000 and $1,466,000 for the six months ended June 30, 2000 and 1999, respectively. Currently, most of the income from these operations is from a life interest in the Libbie Shearn Moody Trust. 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 $77.1 million and $54.1 million for the six months ended June 30, 2000 and 1999, respectively. Net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $26.4 million for the first six months of 1999, but reflected cash outflows of $44.8 million for the comparable period of 2000. The negative cash flow in the Company's deposit product operations is primarily due to abnormally high annuity surrenders during the second quarter of 2000. While increased surrenders may continue, this high rate of surrenders has slowed significantly in the first portion of the third quarter. Premium deposits have also been lower in the first six months of 2000 due to lower equity- indexed annuity sales, which have been affected by the volatility in the stock market. The Company primarily used cash generated from operations and some short-term borrowings to manage this negative cash flow during the second quarter. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $39.0 million and $77.5 million for the six months ended June 30, 2000 and 1999, respectively. The Company 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 $482.9 million at June 30, 2000, reflecting an increase of $7.4 million from December 31, 1999. The increase in capital is primarily from net earnings of $19.9 million, offset by an increase in net unrealized losses on investment securities totaling $12.9 million during the first six months 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 June 30, 2000, was $137.91. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 23, 2000, the stockholders voted upon the following matters at the annual stockholders meeting: (a) The election of Class A directors to serve one-year terms. The results of the voting were as follows:
For Against Robert L. Moody 2,730,195 33,800 Arthur O. Dummer 2,730,005 33,990 Harry L. Edwards 2,730,005 33,900 E. J. Pederson 2,730,205 33,790
(b) The election of Class B directors to serve one-year terms. The results of the voting were as follows:
For Against E. Douglas McLeod 200,000 - Charles D. Milos 200,000 - Frances A. Moody 200,000 - Ross R. Moody 200,000 - Russell S. Moody 200,000 - Louis E. Pauls, Jr. 200,000 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 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 No reports on Form 8-K were filed during the quarter ended June 30, 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: August 18, 2000 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director (Authorized Officer) Date: August 18, 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: August 18, 2000 /S/ Vincent L. Kasch Vincent L. Kasch Vice President - Controller and Assistant Treasurer (Principal Accounting Officer) EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended June 30, 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 and after assumed conversions: Net earnings $ 7,593 12,198 Denominator: Basic earnings per share - weighted-average shares 3,501 3,499 Effect of dilutive stock options 18 31 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,519 3,530 Basic earnings per share: Net earnings $ 2.17 3.49 Diluted earnings per share: Net earnings $ 2.16 3.46
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Six Months Ended June 30, 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 and after assumed conversions: Net earnings $ 19,926 26,301 Denominator: Basic earnings per share - weighted-average shares 3,501 3,499 Effect of dilutive stock options 18 34 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,519 3,533 Basic earnings per share: Net earnings $ 5.69 7.52 Diluted earnings per share: Net earnings $ 5.66 7.45
EX-27 2 0002.txt
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 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 712,117 2,138,688 2,063,393 16,069 202,024 12,355 3,250,302 2,638 6,650 392,123 3,717,084 3,146,581 0 15,026 10,835 23,000 0 0 3,502 479,426 3,717,084 51,559 106,555 (6,412) 254 85,511 22,178 14,077 30,190 10,264 19,926 0 0 0 19,926 5.69 5.66 0 0 0 0 0 0 00 Consists of $5,272 revenues from traditional contracts subject to FAS 60 accounting treatment and $46,287 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $19,593 benefits paid to policyholders, $(3,493) decrease in reserves on traditional contracts and $69,411 interest on universal life and investment annuity contracts.
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