-----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, R/J9Iep0MBvS4LKNKBAT5e6A4mYJWKWcyWTiDk80aBbw1HS7Zd2FgvU4t2bmdPY2 S2lg3loXGqEx2wFlAkERqQ== /in/edgar/work/0000070684-00-000012/0000070684-00-000012.txt : 20001116 0000070684-00-000012.hdr.sgml : 20001116 ACCESSION NUMBER: 0000070684-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 768737 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 September 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 November 10, 2000, the number of shares of Registrant's common stock outstanding was: Class A - 3,303,155 and Class B - 200,000. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information: Page Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 2000 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Earnings For the Three Months Ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Earnings For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Three Months Ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 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 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share For the Three Months Ended September 30, 2000 and 1999 (Unaudited) Exhibit 11 - Computation of Earnings per Share For the Nine Months Ended September 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) September 30, December 31, ASSETS 2000 1999 Cash and investments: Securities held to maturity, at amortized cost $ 2,129,024 2,151,924 Securities available for sale, at fair value 723,906 717,948 Securities held to maturity, for possible losses ($4,215 and $4,104) 202,224 183,902 Policy loans 113,953 117,309 Index options 16,277 32,820 Other long-term investments 39,765 32,766 Cash and short-term investments 11,432 14,010 Total cash and investments 3,236,581 3,250,679 Deferred policy acquisition costs 390,043 369,665 Accrued investment income 46,452 47,756 Federal income tax receivable - 237 Deferred Federal income tax asset 3,058 - Other assets 21,030 14,491 $ 3,697,164 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) September 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 160,449 165,020 Universal life and investment annuity contracts 2,974,022 2,983,060 Other policyholder liabilities 27,926 24,103 Federal income taxes payable: Current 2,429 4,763 Deferred - 4,659 Other liabilities 37,455 25,701 Total liabilities 3,202,281 3,207,306 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,302,155 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 25,090 25,028 Accumulated other comprehensive loss (13,200) (3,566) Retained earnings 479,491 450,559 Total stockholders' equity 494,883 475,522 $ 3,697,164 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 September 30, 2000 and 1999 (Unaudited) (In thousands except per share amounts)
2000 1999 Premiums and other revenue: Life and annuity premiums $ 2,658 2,559 Universal life and investment annuity contract revenues 23,082 21,131 Net investment income 52,829 44,562 Other income 149 8,583 Realized gains (losses) on investments (124) 191 Total premiums and other revenue 78,594 77,026 Benefits and expenses: Life and other policy benefits 10,484 9,654 Decrease in liabilities for future policy benefits (1,357) (941) Amortization of deferred policy acquisition costs 15,009 9,705 Universal life and investment annuity contract interest 33,701 32,565 Other operating expenses 7,112 6,973 Total benefits and expenses 64,949 57,956 Earnings before Federal income taxes 13,645 19,070 Provision (benefit) for Federal income taxes: Current 7,927 (1,136) Deferred (3,288) 7,620 Total Federal income taxes 4,639 6,484 Net earnings $ 9,006 12,586 Basic Earnings Per Share: Net earnings $ 2.57 3.60 Diluted Earnings Per Share: Net earnings $ 2.56 3.57 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands except per share amounts)
2000 1999 Premiums and other revenue: Life and annuity premiums $ 7,930 8,351 Universal life and investment annuity contract revenues 69,369 63,321 Net investment income 159,384 167,118 Other income 403 8,860 Realized gains (losses) on investments (6,536) 5,869 Total premiums and other revenue 230,550 253,519 Benefits and expenses: Life and other policy benefits 30,077 26,807 Decrease in liabilities for future policy benefits (4,850) (1,590) Amortization of deferred policy acquisition costs 37,187 29,711 Universal life and investment annuity contract interest 103,112 118,169 Other operating expenses 21,189 21,502 Total benefits and expenses 186,715 194,599 Earnings before Federal income taxes 43,835 58,920 Provision (benefit) for Federal income taxes: Current 17,432 11,988 Deferred (2,529) 8,045 Total Federal income taxes 14,903 20,033 Net earnings $ 28,932 38,887 Basic Earnings Per Share: Net earnings $ 8.26 11.11 Diluted Earnings Per Share: Net earnings $ 8.22 11.01 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Net earnings $ 9,006 12,586 Other comprehensive income (loss), net of effects of deferred policy acquisition costs and taxes: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 2,455 (3,518) Reclassification adjustment for gains included in net earnings (25) (529) Amortization of net unrealized gains related to transferred securities (156) (114) Net unrealized gains (losses) on securities 2,274 (4,161) Foreign currency translation adjustments 650 335 Other comprehensive income (loss) 2,924 (3,826) Comprehensive income $ 11,930 8,760 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Net earnings $ 28,932 38,887 Other comprehensive income (loss), net of effects of deferred policy acquisition costs and taxes: Unrealized losses on securities: Unrealized holding losses arising during period (5,319) (15,464) Reclassification adjustment for losses (gains) included in net earnings 4,178 (2,577) Amortization of net unrealized gains related to transferred securities (335) (145) Unrealized losses on securities transferred during period from held to maturity to available for sale (9,166) - Net unrealized losses on securities (10,642) (18,186) Foreign currency translation adjustments 1,008 257 Other comprehensive loss (9,634) (17,929) Comprehensive income $ 19,298 20,958 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 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 62 129 Balance at end of period 25,090 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 (10,642) (18,186) Balance at end of period (17,054) (2,186) Foreign currency translation adjustments: Balance at beginning of year 2,846 2,634 Change in translation adjustments during period 1,008 257 Balance at end of period 3,854 2,891 Accumulated other comprehensive income (loss) at end of period (13,200) 705 Retained earnings: Balance at beginning of year 450,559 391,334 Net earnings 28,932 38,887 Balance at end of period 479,491 430,221 Total stockholders' equity $ 494,883 459,455 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from operating activities: Net earnings $ 28,932 38,887 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 103,112 118,169 Surrender charges and other policy revenues (33,597) (29,131) Realized losses (gains) on investments 6,536 (5,869) Accrual and amortization of investment income (3,492) (3,761) Depreciation and amortization 816 735 Decrease in insurance receivables and other assets 305 6,309 Decrease (increase) in accrued investment income 1,304 (976) Increase in deferred policy acquisition costs (8,503) (18,795) Decrease in liability for future policy benefits (4,850) (1,590) Increase (decrease) in other policyholder liabilities 3,823 (536) Decrease in Federal income taxes payable (3,840) (4,067) Increase (decrease) in other liabilities 11,754 (25,342) Decrease in value of index options 15,961 12,039 Other (582) (364) Net cash provided by operating activities 117,679 85,708 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity - - Securities available for sale 15,167 50,897 Other investments 22,546 15,910 Proceeds from maturities and redemptions of: Securities held to maturity 24,215 59,573 Securities available for sale 31,971 46,808 Purchases of: Securities held to maturity (64,815) (178,121) Securities available for sale (20,935) (115,600) Other investments (29,114) (31,679) Principal payments on mortgage loans 13,068 36,113 Cost of mortgage loans acquired (30,949) (29,315) Decrease in policy loans 3,356 7,155 Decrease in assets of discontinued operations - 48 Decrease in liabilities of discontinued operations - (48) Other (6,831) (982) Net cash used in investing activities (42,321) (139,241) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In thousands)
2000 1999 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 274,336 310,217 Return of account balances on universal life and investment annuity contracts (352,335) (277,433) Issuance of common stock under stock option plan 63 132 Net cash provided by (used in) financing activities (77,936) 32,916 Net decrease in cash and short-term investments (2,578) (20,617) Cash and short-term investments at beginning of year 14,010 24,508 Cash and short-term investments at end of period $ 11,432 3,891 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 September 30, 2000, and the results of its operations for the three months and nine months ended September 30, 2000 and 1999, and its cash flows for the nine months ended September 30, 2000 and 1999. The results of operations for the three months and nine months ended September 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:
Nine Months Ended September 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 nine months ended September 30, 2000 and 1999. (3) LEGAL PROCEEDINGS On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company or National Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company. The suit sought rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993, and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western was named as a "controlling person" of the Westcap defendants. In the meantime, Westcap filed Chapter 11 bankruptcy, and The City Colleges filed a claim in the bankruptcy court against Westcap. The claim was tried before the bankruptcy court, and in September, 1997, a $56,173,000 judgment was entered against Westcap favorable to The City Colleges. Westcap appealed this decision to the United States District Court for the Southern District of Texas (Houston Division). On July 24, 1998, the District Court affirmed the orders of the bankruptcy court with respect to their underlying conclusion that Westcap was liable to The City Colleges under the Texas Securities Act, but the Court vacated the orders and remanded them to the bankruptcy court to determine the correct amount of damages in a manner consistent with the Court's opinion and the Texas Securities Act. The bankruptcy court on November 16, 1998, entered an order allowing a claim of The City Colleges against the Westcap estate of $51,738,868. Westcap appealed the bankruptcy court's and District Court's judgment to the United States Court of Appeals for the Fifth Circuit, New Orleans, Louisiana. Westcap prevailed in this appeal in an October 13, 2000, decision by the Appellate Court which reversed the $51,738,868 judgment entered in 1998 by the District Court and the bankruptcy court in favor of The City Colleges. The Appellate Court ruled in favor of Westcap and determined that there had been no violations by Westcap of the Texas securities laws. The Appellate Court remanded the case to the District Court for entry of a new judgment in favor of Westcap. The Appellate decision is subject to further review by the Fifth Circuit Court of Appeals upon filed motion for rehearing en banc on November 3, 2000, and possible appeal to the United States Supreme Court by The City Colleges. The ruling does not affect the consolidated financial statements of National Western Life Insurance Company as no liability had been previously accrued for the District Court judgment. However, National Western will be entitled to recover a portion of the settlement of the Westcap bankruptcy, but not to exceed $600,000, should the Appellate Court decision become final. While Westcap is a wholly owned subsidiary of the Company, the Company is not a party to the bankruptcy or the judgment against Westcap by the bankruptcy court or the United States District Court. The lawsuit of The City Colleges against the Company was stayed in September, 1994, pending resolution of The City Colleges' claim against Westcap. Following the judgment against Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted by the United States District Court in Illinois, and The City Colleges filed an amended complaint seeking to hold the Company liable for the claim allowed in the bankruptcy court against Westcap under the "control person" provision of the Texas Securities Act. The suit seeks approximately $56 million plus fees and costs. The maximum sought by The City Colleges will be determined by the final amount allowed The City Colleges in the Westcap bankruptcy appeal discussed above. The Company filed jurisdictional and venue motions to have the case transferred to the United States District Court for the Western District of Texas, which motions were agreed to by the Plaintiff, and the case is now pending in the United States District Court for the Western District of Texas, where the parties have engaged in discovery activities. The case is awaiting the final outcome of the Westcap bankruptcy appeal discussed above. If the current decision of the Fifth Circuit Court of Appeals in the bankruptcy case becomes final, the Company will move to dismiss the City Colleges case. Otherwise, the Company believes it has reasonable and adequate defenses to the suit. Although the alleged damages, if sustained, would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. Accordingly, no provision for any liability that may result from this suit has been recognized in National Western's financial statements. (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 nine months ended September 30, 2000 and 1999 is provided below. Selected Segment Information:
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) September 30, 2000: Selected Balance Sheet Items: Deferred policy acquisition costs $ 73,821 76,350 239,872 - 390,043 Total segment assets 403,336 383,636 2,843,253 42,851 3,673,076 Future policy benefits 319,319 297,756 2,517,396 - 3,134,471 Other policyholder liabilities 9,442 7,929 10,555 - 27,926 Three Months Ended September 30, 2000: Condensed Income Statements: Premiums and contract revenues $ 5,609 11,654 8,477 - 25,740 Net investment income 6,607 5,693 39,936 593 52,829 Other income 3 8 84 54 149 Total revenues 12,219 17,355 48,497 647 78,718 Policy benefits 4,125 4,955 47 - 9,127 Amortization of deferred policy acquisition costs 1,357 3,540 10,112 - 15,009 Universal life and investment annuity contract interest 2,459 3,981 27,261 - 33,701 Other operating expenses 1,980 2,036 2,729 367 7,112 Federal income taxes 782 967 2,839 94 4,682 Total expenses 10,703 15,479 42,988 461 69,631 Segment earnings $ 1,516 1,876 5,509 186 9,087 Nine Months Ended September 30, 2000: Condensed Income Statements: Premiums and contract revenues $ 17,546 33,362 26,391 - 77,299 Net investment income 19,642 17,112 119,278 3,352 159,384 Other income 25 37 287 54 403 Total revenues 37,213 50,511 145,956 3,406 237,086 Policy benefits 12,323 12,749 155 - 25,227 Amortization of deferred policy acquisition costs 3,555 10,491 23,141 - 37,187 Universal life and investment annuity contract interest 7,099 11,867 84,146 - 103,112 Other operating expenses 6,363 6,079 8,140 607 21,189 Federal income taxes 2,687 3,182 10,366 955 17,190 Total expenses 32,027 44,368 125,948 1,562 203,905 Segment earnings $ 5,186 6,143 20,008 1,844 33,181
Selected Segment Information:
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) September 30, 1999: Selected Balance Sheet Items: Deferred policy acquisition costs $ 71,207 75,765 209,268 - 356,240 Total segment assets 406,900 374,964 2,786,552 36,140 3,604,556 Future policy benefits 323,374 289,023 2,486,952 - 3,099,349 Other policyholder liabilities 9,185 7,196 7,038 - 23,419 Three Months Ended September 30, 1999: Condensed Income Statements: Premiums and contract revenues $ 6,194 11,075 6,421 - 23,690 Net investment income 6,318 5,484 32,335 425 44,562 Other income (35) (21) 8,639 - 8,583 Total revenues 12,477 16,538 47,395 425 76,835 Policy benefits 3,194 4,663 856 - 8,713 Amortization of deferred policy acquisition costs 1,222 2,872 5,611 - 9,705 Universal life and investment annuity contract interest 2,430 3,503 26,632 - 32,565 Other operating expenses 1,965 2,073 2,935 - 6,973 Federal income taxes 1,245 1,164 3,864 144 6,417 Total expenses 10,056 14,275 39,898 144 64,373 Segment earnings $ 2,421 2,263 7,497 281 12,462 Nine Months Ended September 30, 1999: Condensed Income Statements: Premiums and contract revenues $ 18,474 31,819 21,379 - 71,672 Net investment income 18,996 16,387 129,095 2,640 167,118 Other income 32 32 8,796 - 8,860 Total revenues 37,502 48,238 159,270 2,640 247,650 Policy benefits 11,894 13,070 253 - 25,217 Amortization of deferred policy acquisition costs 3,614 9,434 16,663 - 29,711 Universal life and investment annuity contract interest 7,315 10,397 100,457 - 118,169 Other operating expenses 6,784 6,476 8,242 - 21,502 Federal income taxes 2,676 3,003 11,407 893 17,979 Total expenses 32,283 42,380 137,022 893 212,578 Segment earnings $ 5,219 5,858 22,248 1,747 35,072
Reconciliations of segment information to the Company's consolidated financial statements are provided below:
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 (In thousands) Premiums and Other Revenue: Premiums and contract revenues $ 25,740 23,690 77,299 71,672 Net investment income 52,829 44,562 159,384 167,118 Other income 149 8,583 403 8,860 Realized gains (losses) on investments (124) 191 (6,536) 5,869 Total consolidated premiums and other revenue $ 78,594 77,026 230,550 253,519
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 (In thousands) Federal Income Taxes: Total segment Federal income taxes $ 4,682 6,417 17,190 17,979 Taxes (benefits) on realized gains (losses) on investments (43) 67 (2,287) 2,054 Total consolidated Federal income taxes $ 4,639 6,484 14,903 20,033
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 (In thousands) Net Earnings: Total segment earnings $ 9,087 12,462 33,181 35,072 Realized gains (losses) on investments, net of taxes (81) 124 (4,249) 3,815 Total consolidated net earnings $ 9,006 12,586 28,932 38,887
September 30, 2000 1999 (In thousands) Assets: Total segment assets $ 3,673,076 3,604,556 Other unallocated assets 24,088 21,653 Total consolidated assets $ 3,697,164 3,626,209
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:
Nine Months Ended September 30, 2000 1999 United States domestic market: Investment annuities 77.0% 80.8% Life insurance 6.3 6.1 Total domestic market 83.3 86.9 International market: Investment annuities 2.8 0.9 Life insurance 13.9 12.2 Total international market 16.7 13.1 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 September 30, 2000, approximately 25.8% 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 September 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 September 30, December 31, 2000 1999 Debt securities 87.7% 87.8% Mortgage loans 6.2 5.7 Policy loans 3.5 3.6 Index options 0.5 1.0 Equity securities 0.5 0.5 Real estate 0.4 0.4 Other 1.2 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) September 30, 2000 $ 103,652 76,586 73,929 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 $76,586,000 at September 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. Upon the transfers, the unrealized losses were recorded as a component of accumulated other comprehensive loss. 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. Upon the transfer, the unrealized losses were recorded as a component of accumulated other comprehensive loss. Reductions to investment income due to this security totaled $734,000 for the nine months ended September 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.
September 30, December 31, 2000 1999 AAA and U.S. government 28.2% 28.7% AA 8.0 8.8 A 33.8 34.1 BBB 27.3 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 reduced 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 at September 30, 2000, totaled only 20.0% which is comparable to the life insurance industry average. 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 69.7% at September 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 September 30, 2000, CMOs represent approximately 93% 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 September 30, 2000, the Company's debt and equity securities were classified as follows:
Fair Amortized Unrealized Value Cost Gains (Losses) (In thousands) Securities held to maturity: Debt securities $ 2,077,757 2,129,024 (51,267) Securities available for sale: Debt securities 707,892 762,448 (54,556) Equity securities 16,014 12,669 3,345 Totals $ 2,801,663 2,904,141 (102,478)
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 $102,478,000 on the securities portfolio at September 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 September 30, 2000, is detailed below:
Change in Unrealized Gains (Losses) Unrealized At At Gains (Losses) September 30, June 30, During 3rd 2000 2000 Quarter 2000 (In thousands) Securities held to maturity: Debt securities $ (51,267) (75,295) 24,028 Securities available for sale: Debt securities (54,556) (59,846) 5,290 Equity securities 3,345 3,315 30 Totals $ (102,478) (131,826) 29,348
While unrealized losses did decrease during the third quarter of 2000 as reflected above, unrealized losses at September 30, 2000, have still increased 13% from year-end 1999. Unrealized losses have increased for the year even though market interest rates of the ten year U.S. Treasury bond actually decreased approximately 64 basis points during this nine month period. With lower market interest rates, it would be expected that market values of debt securities would be higher. However, market values actually decreased over the nine months ended September 30, 2000, because of the substantial widening of the yield premium for corporate bonds over comparable Treasury securities. Approximately 70% 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 had relatively small effects on the Company's financial statements. 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 nine 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 $202,224,000 and $183,902,000, or 6.2% and 5.7% of total invested assets, at September 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 September 30, 2000, and December 31, 1999, was as follows:
September 30, December 31, Geographic Region: 2000 1999 West South Central 53.9% 58.8% Mountain 23.8 20.5 Pacific 10.7 11.0 South Atlantic 4.5 5.1 East South Central 3.8 4.2 Other 3.3 0.4 Totals 100.0% 100.0%
September 30, December 31, Property Type: 2000 1999 Retail 61.1% 56.1% Office 24.0 27.4 Hotel/Motel 6.3 7.2 Land/Lots 3.2 2.5 Nursing Homes 2.0 2.4 Apartment 1.0 1.6 Other 2.4 2.8 Totals 100.0% 100.0%
As of September 30, 2000, the allowance for possible losses on mortgage loans was $4,215,000. Additions to the allowance of $111,000 were made for the three and nine months ended September 30, 2000, and were reflected as realized losses on investments in the accompanying financial statements. 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 $3,012,000 and $3,014,000 at September 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 nine months ended September 30, 2000, the reductions in interest income due to nonaccrual and restructured mortgage loans were approximately $232,000. For the nine months ended September 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 $12,047,000 and $11,388,000 at September 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 $588,000 and $698,000 for the nine months ended September 30, 2000 and 1999. Also during the first nine months of 2000 and 1999, the Company sold real estate properties resulting in realized gains on investments totaling $255,000 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 nine months ended September 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 SEPTEMBER 30, 2000 AND 1999 Consolidated Operations Summary of Consolidated Operating Results A summary of operating results for the three months ended September 30, 2000 and 1999 is provided below:
Three Months Ended September 30, 2000 1999 (In thousands except per share data) Revenues: Revenues, excluding realized investment gains (losses) and index options $ 85,020 89,886 Index options (6,302) (13,051) Realized gains (losses) on investments (124) 191 Total revenues $ 78,594 77,026 Earnings: Earnings from operations $ 9,087 12,462 Net realized gains (losses) on investments (81) 124 Net earnings $ 9,006 12,586 Basic Earnings Per Share: Earnings from operations $ 2.59 3.56 Net realized gains (losses) on investments (0.02) 0.04 Net earnings $ 2.57 3.60 Diluted Earnings Per Share: Earnings from operations $ 2.58 3.53 Net realized gains (losses) on investments (0.02) 0.04 Net earnings $ 2.56 3.57
Consolidated Operating Results: Earnings from operations, excluding net realized gains and losses on investments, totaled $9,087,000 for the quarter ended September 30, 2000, compared to $12,462,000 for the third quarter of 1999. Earnings for the current quarter were affected by the Company's annuity business. Although slowing in the third quarter, the Company has experienced higher policy surrenders for certain annuity products in 2000. As a result, amortization of deferred policy acquisition costs was higher this quarter primarily due to effects from the Company's periodic refinements to its actuarial assumptions. Although to a lesser extent, earnings for the quarter ended September 30, 2000, were also lower due to reductions in investment income and higher universal life and annuity contract interest expenses. Earnings from operations for the comparable 1999 third quarter included two significant items. The Company experienced a decrease in 1999 third quarter earnings of over $5 million from equity-indexed annuity business due to significant volatility and declines in the S&P 500 Index. Equity-indexed annuities combine features associated with traditional fixed annuities with an option to have interest rates linked in part to an equity index, the S&P 500 Index. The second significant item affecting third quarter 1999 earnings was the resolution of pending litigation which resulted in additional income to the Company totaling $5,513,000, net of taxes. While there continues to be significant volatility and declines in the S&P 500 Index during 2000, including the third quarter, the financial impact on the Company's equity- indexed annuity business was significantly less than the comparable 1999 third quarter. Revenues for the quarters ended September 30, 2000 and 1999 totaled $78,594,000 and $77,026,000, respectively. Excluding index option revenues, realized investment gains and losses, and nonrecurring litigation settlement income, third quarter 2000 revenues totaled $85,020,000 compared to $81,404,000. This reflects revenue growth of 4.4% over comparable 1999 quarterly results. The Company recorded realized losses on investments, net of taxes, totaling $81,000 for the quarter ended September 30, 2000, compared to gains of $124,000 for the third quarter of 1999. The loss in the third quarter of 2000 is primarily due to additions to the allowances for mortgage loan losses totaling $111,000. The 1999 gains were primarily from sales of investments in debt securities, net of permanent impairment adjustments for debt securities and mortgage loans. Universal Life and Investment Annuity Contract Revenues: Contract revenues increased during the quarter ended September 30, 2000 totaling $23,082,000 compared to $21,131,000 for the comparable 1999 period. This increase of over 9.2% is primarily due to higher annuity surrender charge income. Surrenders for single-tier annuities were significantly higher during the third quarter of 2000. Net Investment Income: Net investment income increased 18.6% from the third quarter of 1999, primarily due to increases 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. Although there was an increase in index option fair values in the 2000 third quarter compared to the same period of 1999, value changes for these options still reduced investment income in both periods. The reductions to investment income from index options for the quarters ended September 30, 2000 and 1999 totaled $6,302,000 and $13,051,000, respectively. The significant reductions are directly attributable to the volatility and declines in the S&P 500 Index. While net investment income decreased due to these options, these reductions were partially offset by lower annuity contract interest expense as the credited return on the Company's equity-indexed annuities are also based on the same S&P 500 Index. Investment income from mortgage loans has increased from $3,821,000 for the third quarter of 1999 to $4,695,000 for the comparable 2000 quarter. This increase is consistent with the 20% increase in mortgage loans from September 30, 1999 to September 30, 2000. A detail of net investment income is provided below:
Three Months Ended September 30, 2000 1999 (In thousands) Investment income: Debt securities $ 51,712 51,347 Mortgage loans 4,695 3,821 Policy loans 2,056 2,024 Index options (6,302) (13,051) Other investment income 1,144 1,034 Total investment income 53,305 45,175 Investment expenses 476 613 Net investment income $ 52,829 44,562
Life and Other Policy Benefits: Policy benefits in the third quarter of 2000 increased 8.6% over the 1999 third quarter. The higher expenses were primarily due to increases totaling $307,000 and $483,000 in life insurance benefit claims and surrenders of traditional products, respectively. However, much of the increase in traditional surrender expense was offset by corresponding decreases in liabilities for future policy benefits. A comparative detail of life and other policy benefits is provided below:
Three Months Ended September 30, 2000 1999 (In thousands) Life insurance benefit claims $ 6,813 6,506 Surrenders of traditional products 3,341 2,858 Other policy benefits 330 290 Totals $ 10,484 9,654
Amortization of Deferred Policy Acquisition Costs: Amortization of deferred policy acquisition costs was significantly higher in 2000 totaling $15,009,000 compared to $9,705,000 in 1999. These expenses represent the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. As described in more detail in the annuity operations section, amortization was higher primarily relating to higher annuity policy surrenders during 2000. 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 $33.7 million and $32.6 million for the quarters ended September 30, 2000 and 1999, respectively. Federal Income Taxes: Federal income taxes include no unusual items as effective tax rates for the quarters ended September 30, 2000 and 1999 were both 34.0%. Segment Operations Summary of Segment Earnings A summary of segment earnings for the quarters ended September 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: September 30, 2000 $ 1,516 1,876 5,509 186 9,087 September 30, 1999 $ 2,421 2,263 7,497 281 12,462
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 $1,516,000 and $2,421,000 for the three months ended September 30, 2000 and 1999, respectively. The decrease in earnings in 2000 is primarily due to lower premiums and contract revenues and higher policy benefits. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Three Months Ended September 30, Domestic Life Insurance Operations: 2000 1999 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 5,609 6,194 Net investment income 6,607 6,318 Other income 3 (35) Total premiums and other revenue 12,219 12,477 Benefits and expenses: Policy benefits 4,125 3,194 Amortization of deferred policy acquisition costs 1,357 1,222 Universal life insurance contract interest 2,459 2,430 Other operating expenses 1,980 1,965 Total benefits and expenses 9,921 8,811 Segment earnings before Federal income taxes 2,298 3,666 Federal income taxes 782 1,245 Segment earnings $ 1,516 2,421
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 September 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 3,048 2,993 Surrender charges 413 416 Policy fees and other revenues 333 535 Traditional life insurance premiums 1,815 2,250 Totals $ 5,609 6,194
Actual universal life insurance deposits collected for the quarters ended September 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. While the Company did experience higher collected deposits in the first two quarters of 2000, deposits were down in the third quarter primarily due to lower first year premiums.
Three Months Ended September 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 599 1,626 Renewal premiums 3,388 3,614 Totals $ 3,987 5,240
Policy benefits were higher in the third quarter of 2000 totaling $4,125,000 compared to $3,194,000 for the comparable 1999 period. The increase is due to higher surrenders of traditional products net of related changes in policy liabilities. Life insurance benefit claims were relatively consistent between quarters. Universal life insurance contract interest remained relatively constant at $2,459,000 in 2000 compared to $2,430,000 in 1999. This is consistent with the relative stable to declining size of this block of business. 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. 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 $1,876,000 and $2,263,000 for the quarters ended September 30, 2000 and 1999, respectively. Earnings in 2000 were somewhat lower due to higher amortization of deferred policy acquisition costs and contract interest, partially offset by increases in premiums and contract revenues. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Three Months Ended September 30, 2000 1999 (In thousands) International Life Insurance Operations: Premiums and other revenue: Premiums and contract revenues $ 11,654 11,075 Net investment income 5,693 5,484 Other income 8 (21) Total premiums and other revenue 17,355 16,538 Benefits and expenses: Policy benefits 4,955 4,663 Amortization of deferred policy acquisition costs 3,540 2,872 Universal life insurance contract contract interest 3,981 3,503 Other operating expenses 2,036 2,073 Total benefits and expenses 14,512 13,111 Segment earnings before Federal income income taxes 2,843 3,427 Federal income taxes 967 1,164 Segment earnings $ 1,876 2,263
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 September 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 7,772 7,406 Surrender charges 2,091 2,330 Policy fees and other revenues 964 1,050 Traditional life insurance premiums 827 289 Totals $ 11,654 11,075
Actual universal life insurance deposits collected for the quarters ended September 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 September 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 3,638 3,618 Renewal premiums 9,868 9,783 Totals $ 13,506 13,401
Life insurance benefit claims, which are reflected in policy benefits for segment reporting purposes, were slightly higher in 2000 at $3,532,000 compared to $3,324,000 in 1999. Mortality claims fluctuate from period to period and 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. Amortization of deferred policy acquisition costs increased $668,000 from $2,872,000 in 1999 to $3,540,000 in 2000. These expenses represent the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Universal life insurance contract interest increased from $3,503,000 in 1999 to $3,981,000 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 $5,509,000 and $7,497,000 for the quarters ended September 30, 2000 and 1999, respectively. Earnings for 2000 were down from 1999 primarily due to higher amortization of deferred policy acquisition costs, but offset significantly by higher net investment income, higher premium and contract revenues, and lower traditional policy benefits. Third quarter 1999 earnings were affected by several significant items which substantially offset each other. Results for the 1999 third quarter include higher income from a litigation settlement, offset by decreases in surrender charge revenues and lower earnings from the Company's equity-indexed annuity business. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Three Months Ended September 30, 2000 1999 (In thousands) Annuity Operations: Premiums and other revenue: Premiums and contract revenues $ 8,477 6,421 Net investment income 39,936 32,335 Other income 84 8,639 Total premiums and other revenue 48,497 47,395 Benefits and expenses: Policy benefits 47 856 Amortization of deferred policy acquisition costs 10,112 5,611 Annuity contract interest 27,261 26,632 Other operating expenses 2,729 2,935 Total benefits and expenses 40,149 36,034 Segment earnings before Federal income taxes 8,348 11,361 Federal income taxes 2,839 3,864 Segment earnings $ 5,509 7,497
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 42% in 2000 compared to 1999 due to increases in surrender charges primarily from single-tier annuities. Although actual policy surrenders for two-tier annuities were basically stable, policy surrenders for single-tier annuities were abnormally high increasing 51% in the third quarter of 2000 from the comparable period of 1999. Although slowing in the third quarter, the Company has also experienced higher annuity policy surrenders in the first and second quarters of 2000. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Three Months Ended September 30, 2000 1999 (In thousands) Surrender charges: Two-tier annuities $ 3,109 3,088 Single-tier annuities 3,888 1,826 Total surrender charges 6,997 4,914 Payout annuity and other revenues 1,464 1,487 Traditional annuity premiums 16 20 Totals $ 8,477 6,421
Actual annuity deposits collected for the quarters ended September 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 September 30, 2000 1999 (In thousands) Deferred annuities: Equity-indexed $ 21,669 33,572 Other 52,938 50,271 Total deferred annuities 74,607 83,843 Immediate annuities 5,940 9,457 Totals $ 80,547 93,300
Although total annuity deposits for the quarter ended September 30, 2000, were lower than the comparable 1999 period, the decline is primarily attributable to equity-indexed annuities. While sales have been 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 nine months of 2000, which is consistent with volatility in the stock market. Net investment income for annuity operations for the third quarters of 2000 and 1999 totaled $39,936,000 and $32,335,000, respectively. Declines in fair values of index options resulted in reductions to net investment income totaling $6,302,000 and $13,051,000 for the quarters ended September 30, 2000 and 1999. These significant declines are directly attributable to the declines in the S&P 500 Index over the same periods. While net investment income was lower due to these options, these reductions were partially offset by lower annuity contract interest expense as the credited interest on the Company's equity-indexed annuities are also based on the same S&P 500 Index. The correlation of investment income with annuity contract expense is explained in more detail below. 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 $10,112,000 and $5,611,000, respectively. The increase in amortization is related to increases in annuity surrenders. Although slowing in the third quarter, the Company has experienced higher policy surrenders for certain annuity products in 2000. As a result, amortization of deferred policy acquisition costs was higher this quarter primarily due to effects from the Company's periodic refinements to its actuarial assumptions. Annuity contract interest was $27,261,000 in 2000 compared to $26,632,000 in 1999. Contract interest amounts can be affected significantly by the Company's equity-indexed annuities which have interest rates that are linked in part to the S&P 500 Index. The substantial decline of the S&P 500 Index in the third quarter of 1999 resulted in lower interest credited to equity- indexed annuity contracts. However, primarily because of policy liability reserving treatments related to minimum guaranteed interest rates, the reduction in annuity contract interest expense was much less than the decline in net investment income. 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 the costs of the index options are essentially amortized against net investment income as the options are marked to fair value each reporting period. The costs of options are covered by additional income earned on debt securities purchased with equity-indexed annuity premiums. Other differences are due to asset fees charged against policyholder contract interest, surrenders and death benefits on annuities within the annual hedging period, and inherent differences between index option fair values and policy liability reserving treatments related to minimum guaranteed interest rates. The impact of these equity-indexed annuity issues decreased annuity operations earnings by over $5 million, net of taxes, for the third quarter of 1999. The Company's equity-indexed annuity products are long-term policies with contractual periods of either nine or fifteen years. The Company routinely analyzes the profitability of its equity-indexed annuity products under numerous economic scenarios, including both positive and negative equity market conditions. Although earnings may not be level or constant for this product due to timing of market conditions and policy liability reserving methods, the Company anticipates the equity-indexed annuities will be profitable over the long-term contractual periods of the policies. Although annuity operations earnings were significantly lower due to its equity-indexed annuity business for the third quarter of 1999, the Company recorded nonrecurring income resulting from a lawsuit settlement that essentially offset the lower earnings. As a result of the litigation settlement, which involved an independent marketing organization under contract with the Company, accrued commission liabilities were released by the Company in the quarter ended September 30, 1999, resulting in additional other income of $8,482,000, or $5,513,000, net of taxes. Other Operations Earnings for other operations totaled $186,000 and $281,000 for the third 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. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Consolidated Operations Summary of Consolidated Operating Results A summary of operating results for the nine months ended September 30, 2000 and 1999 is provided below:
Nine Months Ended September 30, 2000 1999 (In thousands except per share data) Revenues: Revenues, excluding realized investment gains (losses) and index options $ 257,603 253,174 Index options (20,517) (5,524) Realized gains (losses) on investments (6,536) 5,869 Total revenues $ 230,550 253,519 Earnings: Earnings from operations $ 33,181 35,072 Net realized gains (losses) on investments (4,249) 3,815 Net earnings $ 28,932 38,887 Basic Earnings Per Share: Earnings from operations $ 9.47 10.02 Net realized gains (losses) on investments (1.21) 1.09 Net earnings $ 8.26 11.11 Diluted Earnings Per Share: Earnings from operations $ 9.43 9.93 Net realized gains (losses) on investments (1.21) 1.08 Net earnings $ 8.22 11.01
Consolidated Operating Results: For the nine months ended September 30, 2000, earnings from operations, excluding net realized gains and losses on investments, totaled $33,181,000 compared to $35,072,000 for the same period of 1999. This 5.4% decrease in earnings is largely attributable to higher amortization of deferred policy acquisition costs as previously described for the quarter ended September 30, 2000. However, these higher costs were substantially offset by an increase in universal life and investment annuity contract revenues of 9.6% for the nine months ended September 30, 2000, over the comparable 1999 period. Additionally, while life insurance benefit claims were significantly higher in the first nine months of 2000, this increase was largely mitigated by reductions in traditional policy liabilities. The Company recorded realized losses on investments, net of taxes, totaling $4,249,000 for the nine months ended September 30, 2000, compared to gains of $3,815,000 for the first nine 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. 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 costs is not expected. Overall, the Company's debt securities portfolio remains high quality with small holdings of below investment grade securities. The 1999 gains were primarily from sales and calls of investments in debt securities totaling $2,662,000, 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 described for the three months ended September 30, 1999, equity- indexed annuity issues decreased net earnings by over $5 million in 1999. Also affecting year-to-date 1999 earnings was the resolution of pending litigation which resulted in additional other income to the Company totaling $8,482,000, or $5,513,000 net of taxes. 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 nine months ended September 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 nine months ended September 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: September 30, 2000 $ 5,186 6,143 20,008 1,844 33,181 September 30, 1999 $ 5,219 5,858 22,248 1,747 35,072
Domestic Life Insurance Operations Earnings for the domestic life insurance operating segment were $5,186,000 and $5,219,000 for the nine months ended September 30, 2000 and 1999, respectively. While premiums and contract revenues were lower and policy benefits were higher for the nine months ended September 30, 2000, these negative impacts to earnings were substantially reduced by increases in net investment income and lower other operating expenses. These balancing fluctuations resulted in the relatively comparable net earnings between 2000 and 1999. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Nine Months Ended September 30, 2000 1999 (In thousands) Domestic Life Insurance Operations: Premiums and other revenue: Premiums and contract revenues $ 17,546 18,474 Net investment income 19,642 18,996 Other income 25 32 Total premiums and other revenue 37,213 37,502 Benefits and expenses: Policy benefits 12,323 11,894 Amortization of deferred policy acquisition costs 3,555 3,614 Universal life insurance contract interest 7,099 7,315 Other operating expenses 6,363 6,784 Total benefits and expenses 29,340 29,607 Segment earnings before Federal income taxes 7,873 7,895 Federal income taxes 2,687 2,676 Segment earnings $ 5,186 5,219
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:
Nine Months Ended September 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 9,108 8,777 Surrender charges 1,371 1,299 Policy fees and other revenues 946 1,178 Traditional life insurance premiums 6,121 7,220 Totals $ 17,546 18,474
Actual universal life insurance deposits, which are recorded directly to policyholder liabilities upon receipt, for the nine months ended September 30, 2000 and 1999 are detailed below.
Nine Months Ended September 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 3,490 4,001 Renewal premiums 10,732 10,874 Totals $ 14,222 14,875
Consistent with the third quarter of 2000, policy benefits were higher for the nine months ended September 30, 2000, totaling $12,323,000 compared to $11,894,000 for the comparable 1999 period. The increase is due to higher life insurance benefit claims and surrenders of traditional products net of related changes in policy liabilities. Other operating expenses totaled $6,363,000 and $6,784,000 for the nine months ended September 30, 2000 and 1999, respectively. 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 $6,143,000 and $5,858,000 for the nine months ended September 30, 2000 and 1999, respectively. The 4.9% increase in net earnings is primarily due to higher cost of insurance revenues and net investment income, tempered by increases in expenses, primarily contract interest. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Nine Months Ended September 30, 2000 1999 (In thousands) International Life Insurance Operations: Premiums and other revenue: Premiums and contract revenues $ 33,362 31,819 Net investment income 17,112 16,387 Other income 37 32 Total premiums and other revenue 50,511 48,238 Benefits and expenses: Policy benefits 12,749 13,070 Amortization of deferred policy acquisition costs 10,491 9,434 Universal life insurance contract interest 11,867 10,397 Other operating expenses 6,079 6,476 Total benefits and expenses 41,186 39,377 Segment earnings before Federal income taxes 9,325 8,861 Federal income taxes 3,182 3,003 Segment earnings $ 6,143 5,858
A comparative detail of premiums and contract revenues, which reflects the increase in universal life cost of insurance revenues as previously described, is provided below:
Nine Months Ended September 30, 2000 1999 (In thousands) Universal life insurance: Cost of insurance $ 23,055 21,919 Surrender charges 5,864 5,993 Policy fees and other revenues 2,686 2,835 Traditional life insurance premiums 1,757 1,072 Totals $ 33,362 31,819
Actual universal life insurance deposits collected for the nine months ended September 30, 2000 and 1999 are detailed below. Increases in current year premiums are due to improving economic conditions during 2000 in the international Central and South American markets and higher sales production from the Pacific Rim market.
Nine Months Ended September 30, 2000 1999 (In thousands) Universal life insurance: First year and single premiums $ 10,137 9,504 Renewal premiums 27,780 27,247 Totals $ 37,917 36,751
Universal life insurance contract interest increased from $10,397,000 in 1999 to $11,867,000 in 2000. The increase in contract interest is consistent with growth in the universal life insurance business. Interest is also higher due to increasing policyholder persistency bonuses credited to specific international products. Certain products are credited with bonus interest if the policies remain in force for specified time periods. Annuity Operations Earnings for the annuity operating segment were $20,008,000 and $22,248,000 for the nine months ended September 30, 2000 and 1999, respectively. Consistent with the third quarter results as previously described, earnings for the nine months ended September 30, 2000, were lower than 1999 primarily due to higher amortization of deferred policy acquisition costs. However, increases in annuity contract revenues, primarily from policy surrender charges, mitigated a significant portion of this effect. Also, as previously described for the third quarter results, year-to-date earnings for 1999 were affected by several significant items which substantially negated each other. Results for the nine months ended September 30, 2000, include higher income from a litigation settlement, offset by decreases in surrender charge revenues and lower earnings from the Company's equity-indexed annuity business. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Nine Months Ended September 30, 2000 1999 (In thousands) Annuity Operations: Premiums and other revenue: Premiums and contract revenues $ 26,391 21,379 Net investment income 119,278 129,095 Other income 287 8,796 Total premiums and other revenue 145,956 159,270 Benefits and expenses: Policy benefits 155 253 Amortization of deferred policy acquisition costs 23,141 16,663 Annuity contract interest 84,146 100,457 Other operating expenses 8,140 8,242 Total benefits and expenses 115,582 125,615 Segment earnings before Federal income taxes 30,374 33,655 Federal income taxes 10,366 11,407 Segment earnings $ 20,008 22,248
Premiums and annuity contract revenues were up $5,012,000, or 23.4%, from $21,379,000 in 1999 to $26,391,000 in 2000. This increase is due to higher surrender charge revenues from single-tier annuities. As previously described for the third quarter results, actual policy surrenders were abnormally high through the first nine months of 2000 resulting in increased revenues. However, the surrenders peaked in the second quarter and have begun to slow in the third quarter of 2000. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Nine Months Ended September 30, 2000 1999 (In thousands) Surrender charges: Two-tier annuities $ 11,575 11,655 Single-tier annuities 10,316 5,234 Total surrender charges 21,891 16,889 Payout annuity and other revenues 4,448 4,431 Traditional annuity premiums 52 59 Totals $ 26,391 21,379
Annuity deposits for 2000 reflect a decline of 11.9% compared to the same period of 1999, resulting substantially 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 September 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 5.8% for 2000. Actual annuity deposits collected for the nine months ended September 30, 2000 and 1999 are detailed below.
Nine Months Ended September 30, 2000 1999 (In thousands) Deferred annuities: Equity-indexed $ 82,991 123,491 Other 157,015 148,376 Total deferred annuities 240,006 271,867 Immediate annuities 19,940 23,124 Totals $ 259,946 294,991
Net investment income for the nine months ended September 30, 2000 and 1999 totaled $119.3 million and $129.1 million, respectively. Declines in fair values of index options resulted in reductions to net investment income totaling $20,517,000 and $5,524,000 for the nine months ended September 30, 2000 and 1999, respectively. 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. However, as more fully described for third quarter 1999 results, primarily because of policy liability reserving treatments related to minimums guaranteed interest rates, the reduction in 1999 annuity contract interest expense was much less than the decline in net investment income. Annuity contract interest was $84.1 million in 2000 compared to $100.5 million in 1999. 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 nine months ended September 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 September 30, 2000. Amortization for the nine months ended September 30, 2000 and 1999 totaled $23,141,000 and $16,663,000, respectively. The increase in amortization is related to the increase in annuity policy surrenders as previously described for the three months ended September 30, 2000. Other Operations As previously described for the three months ended September 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 $1,844,000 and $1,747,000 for the nine months ended September 30, 2000 and 1999, respectively. Currently, most of the income from these 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. 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 start up expenses in 2000 could generate minimum operating losses of approximately $900,000, before taxes. Currently, operating losses before taxes from initial start up costs totaled approximately $540,000 for the period from inception to September 30, 2000. 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 $117.7 million and $85.7 million for the nine months ended September 30, 2000 and 1999, respectively. Net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $32.8 million for the first nine months of 1999, but reflected cash outflows of $78.0 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 2000. While increased surrenders may continue, this high rate of surrenders has slowed from its peak in the second quarter. Premium deposits have also been lower in the first nine 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. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $56.2 million and $106.4 million for the nine months ended September 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 $494.9 million at September 30, 2000, reflecting an increase of $19.4 million from December 31, 1999. The increase in capital is primarily from net earnings of $28.9 million, offset by an increase in net unrealized losses on investment securities totaling $10.6 million during the first nine 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 September 30, 2000, was $141.31. CHANGES IN ACCOUNTING PRINCIPLES In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June, 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," was issued deferring SFAS No. 133, which will now be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement defines several designations of derivatives based on the instrument's intended use and specifies the appropriate accounting treatment for changes in the fair value of the derivative based on its resulting designation. In June, 2000, the FASB also issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amends SFAS No. 133 for certain specifically identified derivative instruments and hedging activities. This statement is to be adopted concurrently with SFAS No. 133. The Company currently sells equity-indexed annuities that contain an equity return component for policyholders which is an embedded derivative instrument. The Company purchases index options, which are also derivative instruments, to hedge this equity return component. The index options are reported at fair value in the Company's financial statements, which is in accordance with SFAS No. 133 requirements. The Company also uses a fair value approach in recording policy liabilities for the equity-indexed annuities. However, one of the more complex and challenging aspects of interpreting and implementing SFAS No. 133 is how the insurance industry is to apply the statement's provisions to policy liabilities for equity-indexed products. The Derivative Implementation Group of the FASB is in the process of addressing this policy liability issue and has only recently released what may ultimately be definitive guidance. The Company is still in the process of reviewing the guidance provided by the Derivatives Implementation Group. The initial review indicates that the policy liability methodology is somewhat different from the Company's, even though both calculations follow a fair value approach. Additional review and system programming will be completed by the Company during the fourth quarter of 2000 to determine policy liabilities under the new method. Until this process is completed, the Company is unable to determine if there will be any material changes to total policy liabilities for its equity-indexed annuities. As a result, the ultimate implementation of SFAS No. 133 could have a significant effect on the Company's results of operations. The Company expects to implement the new statement in the first quarter of 2001. 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 1. LEGAL PROCEEDINGS As more fully described in note 3 to the accompanying financial statements, National Western Life Insurance Company's wholly owned subsidiary, The Westcap Corporation, has prevailed in an October 13, 2000, decision issued by the United States Court of Appeals for the Fifth Circuit, New Orleans, Louisiana. The Court of Appeals decision reversed a $51,738,868 judgment entered in 1998 by the United States District Court for the Southern District of Texas (Houston Division) and the United States Bankruptcy Court in Houston in favor of The City Colleges of Chicago. The Appellate Court ruled in favor of The Westcap Corporation and determined that there had been no violations by The Westcap Corporation of the Texas securities laws. The Appellate Court remanded the case to the U.S. District Court for entry of a new judgment in favor of Westcap. The Appellate decision is subject to further review by the Fifth Circuit Court of Appeals upon filed motion for rehearing en banc on November 3, 2000, and possible appeal to the United States Supreme Court by The City Colleges of Chicago. The ruling does not affect the consolidated financial statements of National Western Life Insurance Company as no liability had been previously accrued for the District Court judgment. However, National Western will be entitled to recover a portion of the settlement of the Westcap bankruptcy, but not to exceed $600,000, should the Appellate Court decision become final. 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 A report on Form 8-K dated October 13, 2000, was filed by the Company disclosing the favorable court decision for the Company's wholly owned subsidiary, The Westcap Corporation, as described above in Item 1, Legal Proceedings. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL WESTERN LIFE INSURANCE COMPANY (Registrant) Date: November 10, 2000 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director (Authorized Officer) Date: November 10, 2000 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: November 10, 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 September 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 $ 9,006 12,586 Denominator: Basic earnings per share - weighted-average shares 3,502 3,501 Effect of dilutive stock options 18 27 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,520 3,528 Basic earnings per share: Net earnings $ 2.57 3.60 Diluted earnings per share: Net earnings $ 2.56 3.57
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Nine Months Ended September 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 $ 28,932 38,887 Denominator: Basic earnings per share - weighted-average shares 3,501 3,499 Effect of dilutive stock options 18 32 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,519 3,531 Basic earnings per share: Net earnings $ 8.26 11.11 Diluted earnings per share: Net earnings $ 8.22 11.01
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 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 707,892 2,129,024 2,077,757 16,014 202,224 12,047 3,236,581 11,432 3,329 390,043 3,697,164 3,134,471 0 16,123 11,803 0 0 0 3,502 491,381 3,697,164 77,299 159,384 (6,536) 403 128,339 37,187 21,189 43,835 14,903 28,932 0 0 0 28,932 8.26 8.22 0 0 0 0 0 0 000 Consists of $7,930 revenues from traditional contracts subjct to FAS 60 accounting treatment and $69,369 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $30,077 benefits paid to policyholders, $(4,850) decrease in reserves on traditional contracts and $103,112 interest on universal life and investment annuity contracts.
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