-----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, MD8nHSRmYr06x0hGODQuxJPJcet9vba+9dH5289x4YzSk3NG39ePVDiMUpxr1YbD 2SlJ2UGTDPSp9XHBNTgc3Q== 0000070684-01-500004.txt : 20010409 0000070684-01-500004.hdr.sgml : 20010409 ACCESSION NUMBER: 0000070684-01-500004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 002-17039 FILM NUMBER: 1591130 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-K405 1 nwl10k.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512) 836-1010 (Address of Principal Executive Offices) (Telephone Number) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: EXEMPT 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the common stock (based upon the closing price) held by non-affiliates of the Registrant at March 19, 2001, was approximately $206,354,000. As of March 19, 2001, the number of shares of Registrant's common stock outstanding was: Class A - 3,308,487 and Class B - 200,000. PART I ITEM 1. BUSINESS (a) General Development of Business Life Insurance and Annuity Operations National Western Life Insurance Company (hereinafter referred to as "National Western," "Company," or "Registrant") is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states, the District of Columbia, and four U.S. territories or possessions. National Western is also licensed in Haiti, and although not otherwise licensed, accepts applications from and issues policies to residents of various countries in Central and South America, the Caribbean, and the Pacific Rim. Such policies are underwritten, accepted, and issued in the United States upon applications submitted by independent contractor broker-agents. The Company's operations are generally segmented as follows: domestic life insurance, international life insurance, and annuity operations. During 2000, the Company recorded approximately $418 million in premium revenues, universal life, and investment annuity contract deposits. New life insurance issued during 2000 approximated $1.7 billion, and the total amount in force at year-end 2000 was $9.7 billion. As of December 31, 2000, the Company had total consolidated assets of $3.7 billion. Competition: The life insurance business is highly competitive, and National Western competes with over 1,400 stock and mutual companies. Best's Agents Guide To Life Insurance Companies, an authoritative life insurance publication, lists companies by total admitted assets, net premiums written, and life insurance in force. As of December 31, 1999, the most recent date for which information is available, National Western ranked 149 in total admitted assets, 198 in net premiums written, and 235 in life insurance in force among over 1,400 life insurance companies domiciled in the United States. Life insurance companies compete not only on product design and price, but on policyowner service and marketing and sales efforts. National Western believes that its products, premium rates, policyowner service, and marketing efforts are generally competitive with those of other life insurance companies selling similar types of insurance. Mutual insurance companies may have certain competitive advantages over stock companies in that the policies written by them are participating policies and their profits inure to the benefit of their policyholders. The Company no longer writes participating policies, and such policies represent a minor portion of the Company's life insurance in force at December 31, 2000. There has been an ongoing consolidation of companies within the life insurance industry in recent years. It appears this consolidation process may continue as entities acquire other insurance companies, blocks of insurance business, or even related businesses. The reasons for the consolidations are numerous and include, among others, strengthening market share, diversifying into other lines of insurance, improving marketing and distribution channels, and economies of scale. For whatever reasons, this consolidation trend in the insurance industry will likely continue to affect competition. In addition to competition within the life insurance industry, National Western and other insurance companies face competition from other industries. Banks, brokerage firms, and other financial institutions also market insurance products or other competing products such as mutual funds. The continued growth and popularity of mutual funds and equity holdings has attracted large amounts of investment funds. Many mutual funds also allow tax deferred features through individual retirement accounts, 401(k) plans, and other qualified methods which compete directly with the Company's tax deferred annuity products. In 1999 Federal legislation was enacted, the Financial Services Modernization Act, which allows affiliations of banks and insurance companies through holding companies. Although this legislation does not allow a bank to engage in insurance underwriting through a subsidiary of the bank, it could significantly affect competition through increased involvement of banks in the marketing and distribution of insurance products. Insurance companies that are significantly larger than National Western may have a competitive advantage, as they may be able to form affiliations more easily with large, dominant banking institutions. Along with the potential increased competition, technology and the Internet are affecting how life insurance companies do business. As consumers become more comfortable with purchases and transactions over the Internet, insurance companies will have to evaluate the extent to which they need to integrate the Internet into their marketing and distribution of products. While insurance products can be complex and typically require more conventional sales methods, certain insurance products are more like commodities which can be readily sold over the Internet. Insurance companies that are able to address the needs of consumers through the use of current technologies and the Internet may have competitive advantages over those companies that are not able to integrate new technologies into their businesses. Financial strength ratings of insurance companies also directly affect competitive positions within the industry. Most insurance companies obtain one or more ratings from independent rating agencies. National Western is rated "A- (excellent)" by A.M. Best Company. A.M. Best's ratings evaluate factors affecting the overall performance of an insurance company in order to provide an opinion of the Company's financial strength, operating performance, and ability to meet its obligations to policyholders. Ratings range from A++ (superior) to F (in liquidation). The "A-" rating identifies companies which have, on balance, demonstrated excellent financial strength, operating performance, and market profile when compared to the standards established by A.M. Best. These companies, in the opinion of A.M. Best, have a strong ability to meet their ongoing obligations to policyholders. National Western has also been assigned an "A+ (strong)" by Standard and Poor's Corporation. A Standard & Poor's rating is an opinion of the financial security characteristics of an insurance organization with respect to its ability to pay under its insurance policies and contracts in accordance with their terms. Ratings range from AAA (extremely strong) to CC (extremely weak) and R (regulatory supervision). In general, the above-described ratings are developed and based on factors that are of more importance to policyholders, agents, and marketing organizations than to investors. The use of these financial strength ratings are very important in the marketing efforts for insurance companies. While upgrades in ratings could be very positive for marketing efforts, declines in ratings could adversely affect product sales and persistency of policies currently in force. Agents and Employees: National Western has 228 employees at its principal executive office. Its insurance operations are conducted primarily through broker-agents, which numbered 7,368 at December 31, 2000. The agency operations are supervised by Senior Vice Presidents of domestic and international marketing. The Company's agents are independent contractors who are compensated on a commission basis. General agents receive overriding first-year and renewal commissions on business written by agents under their supervision. Many of the domestic marketing agents are contracted through independent marketing organizations. These organizations have well developed agent networks and extensive experience, financial resources, and success in marketing life insurance and annuity products. The international broker- agents are independent contractors and are a significantly smaller group than the domestic force. However, these broker-agents have been carefully selected and are proven producers, many of whom have submitted policy applications to the Company for 20 or more years. A significant portion of the Company's universal life and investment annuity contracts were sold through three marketing agencies in recent years. Combined business from these agencies accounted for approximately 30% of total direct premium revenues and universal life and investment annuity contract deposits for 2000. These same three marketing agencies accounted for 28% of total direct premium revenues and universal life and investment annuity contract deposits for 1999 and 1998. Types of Insurance Written: National Western offers a broad portfolio of individual whole life, universal life and term insurance plans, endowments, and annuities, including standard supplementary riders. Annuities sold include flexible premium deferred annuities, single premium deferred annuities, and single premium immediate annuities. These products can be tax qualified or nonqualified annuities. Although the Company sells equity-indexed annuities, no variable life or annuity products are currently offered. Except for a small employee health plan and a small number of existing individual accident and health policies, the Company does not write any new policies in the accident and health markets. Distributions of the Company's direct premium revenues and deposits by types of products are provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Investment annuities: Single premium deferred $ 108,600 129,430 131,716 Flexible premium deferred 195,938 229,623 278,605 Single premium immediate 24,464 30,510 20,682 Total annuities 329,002 389,563 431,003 Universal life insurance 70,514 69,906 69,647 Traditional life and other 18,105 19,154 20,237 Total direct premiums collected $ 417,621 478,623 520,887
Years Ended December 31, 2000 1999 1998 (In thousands) First year and single premiums: Investment annuities $ 318,392 375,406 412,443 Life insurance 20,864 20,479 22,145 Total first year and single 339,256 395,885 434,588 Renewal premiums: Investment annuities 10,610 14,157 18,560 Life insurance 67,755 68,581 67,739 Total renewal 78,365 82,738 86,299 Total direct premiums collected $ 417,621 478,623 520,887
The underwriting policy of the Company requires medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance desired. The Company has no maximum for issuance of life insurance on any one life. However, the Company's general policy is to reinsure that portion of any risk in excess of $200,000 on the life of any one individual. Also, following general industry practice, policies are issued on substandard risks. Geographical Distribution of Business: For the year 2000, insurance and annuity policies held by residents of the State of Texas and California each accounted for 11% of premium revenues, universal life, and investment annuity contract deposits from direct business, while policies held by residents of Pennsylvania, Michigan, and Ohio accounted for approximately 9%, 8%, and 6%, respectively. All other states of the United States accounted for 37% of premium revenues and deposits from direct business. The remaining 18% of premium revenues and deposits were derived from the Company's policies issued to foreign nationals, primarily in Central and South America, almost all of which was for individual life insurance. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) United States domestic products: Investment annuities $ 316,649 385,019 429,309 Life insurance 27,104 28,435 30,878 Total domestic products 343,753 413,454 460,187 International products: Investment annuities 12,353 4,544 1,694 Life insurance 61,515 60,625 59,006 Total international products 73,868 65,169 60,700 Total direct premiums collected $ 417,621 478,623 520,887
Approximately 69% of the direct life insurance premiums collected during 2000 was from international insurance brokers acting as independent contractors. Foreign business is produced by various independent brokers, primarily in Central and South America, and forwarded to the United States for underwriting, acceptance, and issuance. The Company maintains strict controls on the business it accepts from such foreign independent brokers, as well as its underwriting procedures for such business. Except for a small block of business, a currency clause is included in each foreign policy stating that premium and claim "dollars" refer to lawful currency of the United States. Traditional and universal life products are available in the international market to individuals in upper socioeconomic classes. By providing coverage exclusively to this group, the results typically produce a higher average policy size, strong persistency, and claims experience similar to that in the United States. Investments: State insurance statutes prescribe the nature, quality, and percentage of the various types of investments which may be made by insurance companies and generally permit investments in qualified state, municipal, federal, and foreign government obligations, corporate bonds, preferred and common stock, real estate, and real estate first lien mortgages where the value of the underlying real estate exceeds the amount of the mortgage lien by certain required percentages. The following table shows the distribution of the Company's investments:
December 31, 2000 1999 1998 1997 1996 Securities held to maturity 65.7% 66.2% 64.7% 65.2% 67.6% Securities available for sale 22.8 22.1 23.4 22.6 19.0 Mortgage loans 6.1 5.7 5.6 6.3 7.0 Policy loans 3.4 3.6 4.0 4.7 5.1 Other investments 2.0 2.4 2.3 1.2 1.3 Totals 100.0% 100.0% 100.0% 100.0% 100.0%
The following table shows investment results for the periods indicated:
Net Realized Unrealized Invested Investment Gains (Losses) Gains Year Assets Income (A) On Investments (Losses) (B) (In thousands) 2000 $ 3,223,803 210,654 (19,242) (4,870) 1999 3,250,679 242,980 4,481 (22,412) 1998 3,138,084 233,844 2,384 2,218 1997 2,877,340 217,446 (1,588) 3,929 1996 2,770,931 214,302 1,612 (5,342) Notes to Table: (A) Net investment income is after deduction of investment expenses, but before realized gains (losses) on investments and Federal income taxes. (B) Unrealized gains and losses, net of effects of deferred policy acquisition costs and taxes, relate only to those investment securities classified as available for sale.
Regulation: The Company is subject to regulation by the supervisory agency of each state or other jurisdiction in which it is licensed to do business. These agencies have broad administrative powers, including the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, the form and content of mandatory financial statements, capital, surplus, and reserve requirements, as well as the previously mentioned regulation of the types of investments which may be made. The Company is required to file detailed financial reports with each state or jurisdiction in which it is licensed, and its books and records are subject to examination by each. In accordance with the insurance laws of the various states in which the Company is licensed and the rules and practices of the National Association of Insurance Commissioners, examination of the Company's records routinely takes place every three to five years. These examinations are supervised by the Company's domiciliary state, with representatives from other states participating. The most recent completed examination of National Western covered the five-year period ended December 31, 1997. The examination was conducted by the Colorado Division of Insurance. A final report disclosing the examination results was received by the Company in February, 2000. The report contained no financial adjustments and no issues which had an impact on the operations of the Company. However, the report did include recommendations for improvements in the Company's facultative reinsurance documentation and disaster recovery plans. The Company has appropriately addressed the facultative reinsurance documentation issues and is currently in the process of working on improvements to existing disaster recovery plans. Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners (NAIC). The NAIC is an association of state insurance commissioners, regulators, and support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has recently completed a comprehensive process of codifying statutory accounting practices and procedures. Other than specific individual state laws, the codification results will be the only source of prescribed statutory accounting practices. The Company's state of domicile, Colorado, has adopted the new codified statutory accounting practices and procedures. Insurance companies must adopt these new statutory accounting practices in 2001, which will result in significant changes to existing practices used in the preparation of statutory financial statements. The Company is currently in the process of finalizing the implementation of the new accounting practices, as the first statutory financial statements filed under the new rules will be for the quarter ended March 31, 2001. National Western currently anticipates the financial effects of implementation will be to increase statutory capital and surplus by approximately $3 million as of January 1, 2001. The Company's statutory capital and surplus as of December 31, 2000, before the effects of the rule changes was $396 million. Also of particular importance, the NAIC has established risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. The Company has calculated its RBC level and has determined that its capital and surplus is significantly in excess of the threshold requirements. Additionally, the Company's RBC level will remain significantly in excess of threshold requirements after implementation of the new statutory accounting procedures as described above. In addition to RBC requirements, insurance companies are also monitored by the NAIC through its Insurance Regulatory Information System (IRIS). IRIS consists of two systems, the original IRIS system and the Financial Analysis and Solvency Tracking System. The original IRIS consists of two phases. The first is a statistical phase during which key financial ratio results are generated from the NAIC data base, which contains financial information obtained from insurers' statutory annual statements. The second, an analytical phase, is a review of the annual statements and financial ratios by experienced financial examiners. The ratios of companies are compared against usual ranges to identify trends or areas requiring additional review or analysis. Typically, three or more ratios outside the usual ranges can result in increased regulatory scrutiny. All of the Company's ratios for 2000 were within usual ranges, with one exception. National Western exceeded a ratio which measures the percentage change in premium income from 1999 to 2000. Based on statutory financial statements, the Company's decrease in premium income in 2000 reflected a change which exceeded the IRIS threshold. This ratio reflects the Company's decreased sales of annuities in 2000 compared to the previous year, primarily due to lower sales of equity-indexed annuities resulting from volatile and unfavorable stock market conditions. The RBC regulation and IRIS system developed by the NAIC are examples of its involvement in the regulatory process. Additionally, new regulations are routinely published by the NAIC as model acts or model laws. The NAIC encourages adoption of these model acts by all states to provide uniformity and consistency among state insurance regulations. While the insurance industry is primarily regulated by state governments, Federal regulation also affects the industry in various areas such as pension regulations, securities laws, and Federal taxation. For example, annuity and insurance products have certain income tax advantages for policyholders compared to other savings investments such as certificates of deposits and taxable bonds. Unlike many other investments, increases in the contract values of annuity and life insurance products are not subject to income taxation until these values are actually paid to and received by the policyholder. At various times, the Federal government has considered revising or eliminating this income tax deferral. Such a change, if ever enacted, could have an adverse effect on the Company's ability to sell certain annuity and insurance products. Additionally, current tax law reflects an individual capital gains tax rate of 20%. Because many consumers purchase annuities and life insurance for their tax deferral advantages over other investments or retirement products, a reduction in the Federal income tax rate for capital gains could diminish the appeal of life and annuity products and increase the attractiveness of competing products. Although National Western has not experienced any significant impact on its sales, changes could have the potential to adversely impact Company and industry wide sales. There have also been various proposals in past years to modify the existing Federal income tax laws. While the following have been getting little attention in recent years, some proposals outline measures to implement a "flat tax" structure that would lower the marginal tax rates for many taxpayers. Other proposals call for eliminating the existing income tax and implementing a "consumption based tax." Adoption of any of these new methods, particularly a consumption based tax, could have adverse effects on the insurance industry, as the value of annuity and life insurance products with income tax deferral advantages would be lessened or minimized. However, it is impossible to predict what changes, if any, will be made to the existing Federal income tax structure and the timing of any such changes. Discontinued Brokerage Operations In addition to life insurance and annuity operations, the Company had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Declines in both sales revenues and earnings were the principal reasons for ceasing brokerage operations. The declines resulted primarily from adverse bond market conditions and adverse publicity about litigation. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy reorganization was completed in January, 1999, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. The brokerage segment is reported as discontinued operations throughout this report and in the accompanying financial statements. The bankruptcy and ultimate settlement are more fully described in Note 9, Commitments and Contingencies, in the accompanying consolidated financial statements and in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. Other Operations National Western's primary business encompasses its life insurance and annuity operations, but the Company also has small real estate, nursing home, and other investments through wholly owned subsidiaries. These operations are substantially less in scope and significance to National Western's consolidated financial operations. However, as more fully described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, these operations do enhance the Company's consolidated results contributing $3.1 million, $3.2 million, and $2.2 million to consolidated earnings for the years 2000, 1999, and 1998, respectively. (b) Financial Information About Industry Segments A summary of financial information for the Company's industry segments follows:
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) Revenues, excluding realized gains (losses): 2000 $ 50,189 66,573 189,159 6,036 311,957 1999 49,762 64,751 227,583 4,906 347,002 1998 51,257 62,578 214,049 3,346 331,230 Segment earnings:(A) 2000 $ 6,124 6,719 25,059 3,146 41,048 1999 8,209 6,798 38,068 3,238 56,313 1998 6,395 6,397 27,508 2,224 42,524 Segment assets:(B) 2000 $ 402,840 387,979 2,834,344 47,684 3,672,847 1999 404,234 380,154 2,844,465 39,247 3,668,100 1998 412,538 373,201 2,692,330 19,285 3,497,354 Notes to Table: (A) These amounts exclude realized gains and losses on investments and losses from discontinued operations, net of taxes. (B) These amounts exclude assets of discontinued operations and other unallocated assets.
Additional information concerning these industry segments is included in Item 1.(a). (c) Narrative Description of Business Included in Item 1.(a). (d) Financial Information About Geographic Areas Included in Item 1.(a) and Note 14, Segment and Other Operating Information, of the accompanying financial statements. ITEM 2. PROPERTIES The Company leases approximately 72,000 square feet of office space in Austin, Texas. This lease expires in 2010 and specifies lease payments that gradually increase over the term of the lease. Currently, lease payments are $487,500 per year plus taxes, insurance, maintenance, and other operating costs. Additionally, the Company's wholly owned subsidiary, The Westcap Corporation, owns two buildings in Austin, Texas, that total approximately 21,000 square feet that are leased and utilized by the Company. The Company's affiliate, Regent Care Building, Limited Partnership, owns a 46,000 square foot building in Reno, Nevada, which is leased and utilized by another of the Company's affiliates, Regent Care Operations, Limited Partnership, for use in its nursing home operations. Lease costs and related operating expenses for facilities of the Company's subsidiaries are currently not significant in relation to the Company's consolidated financial statements. Additionally, the intercompany lease costs related to The Westcap Corporation and the nursing home have been eliminated for consolidated reporting purposes. ITEM 3. LEGAL PROCEEDINGS The Westcap Corporation Bankruptcy 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, which judgment was entered by the District Court on February 28, 2001, for Westcap. The City Colleges filed a motion for rehearing en banc with the Fifth Circuit Court of Appeals which was denied. The City Colleges filed an application for writ of certiorari with the United States Supreme Court which was denied in late February, 2001, because it was filed too late. The City Colleges filed with the Supreme Court a motion to extend the time for filing its application for writ of certiorari, which motion was denied March 26, 2001. The above-described favorable ruling does not affect the current consolidated financial statements of National Western Life Insurance Company, as no liability had been previously accrued by National Western for the Bankruptcy/ District Court judgments against Westcap. However, in view of the Court of Appeals decision and the new judgment entered by the District Court, National Western will be entitled to recover a portion of the settlement of the Westcap bankruptcy, but not to exceed $600,000. The Company anticipates the recovery amount will be determined and paid during 2001 and will be reflected in the Company's consolidated financial statements at such time. While Westcap is a wholly owned subsidiary of the Company, the Company is not a party to the bankruptcy or the initial judgments against Westcap by the bankruptcy court and the United States District Court. The lawsuit of The City Colleges directly against National Western was stayed in September, 1994, pending resolution of The City Colleges' claim against Westcap. Following the initial judgment against Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted by the United States District Court in Illinois, and The City Colleges filed an amended complaint seeking to hold the Company liable for the claim allowed in the bankruptcy court against Westcap under the "control person" provision of the Texas Securities Act. The suit seeks approximately $56 million plus fees and costs. The Company filed jurisdictional and venue motions to have the case transferred to the United States District Court for the Western District of Texas, which motions were agreed to by the Plaintiff, and the case 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 has been awaiting the final outcome of the Westcap bankruptcy discussed above. However, based on the decision of the Fifth Circuit Court of Appeals and the denial of appeal by the United States Supreme Court, the Company has now filed with the United States District Court for the Western District of Texas a motion for summary judgment and dismissal of the lawsuit. Regardless of the outcome of the motion for summary judgment, 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 consolidated 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 relating to this suit has been recognized in National Western's consolidated financial statements. National Western Life Insurance Company is also currently a defendant in several other lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may arise from these lawsuits would not have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The principal market on which the common stock of the Company trades is The Nasdaq Stock Market under the symbol NWLIA. The high and low sales prices for the common stock for each quarter during the last two years are shown in the following table:
High Low 2000: First Quarter $ 81 68-1/2 Second Quarter 80 67 Third Quarter 78 68-1/2 Fourth Quarter 104-7/8 70-1/4 1999: First Quarter $ 123-1/2 103 Second Quarter 105-1/2 94-1/8 Third Quarter 102-1/4 83 Fourth Quarter 87-3/4 68-5/8
(b) Equity Security Holders The number of stockholders of record on December 31, 2000, was as follows:
Class A Common Stock 5,825 Class B Common Stock 2
(c) Dividends The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors and will depend on factors such as earnings, capital requirements, and the operating and financial condition of the Company. Presently, the Company's capital requirements are such that it intends to follow a policy of retaining any earnings in order to finance the development of business and to meet regulatory requirements for capital. A strong capital position is important not only for the protection of existing policyholders, but also in the successful marketing of Company products to new customers. ITEM 6. SELECTED FINANCIAL DATA The following five-year financial summary includes comparative amounts taken from the audited financial statements. Earnings Information:
Years Ended December 31, 2000 1999 1998 1997 1996 (In thousands except per share amounts) Revenues: Life and annuity premiums $ 9,717 11,310 13,165 15,812 16,611 Universal life and investment annuity contract revenues 90,640 83,768 83,169 80,250 75,966 Net investment income 210,654 242,980 233,844 217,446 214,302 Other income 946 8,944 1,052 354 2,718 Realized gains (losses) on investments (19,242) 4,481 2,384 (1,588) 1,612 Total revenues 292,715 351,483 333,614 312,274 311,209 Expenses: Policyholder benefits 35,078 32,456 32,441 35,285 33,313 Amortization of deferred policy acquisition costs 47,948 39,148 40,415 39,934 30,361 Universal life and investment annuity contract interest 137,711 162,302 158,889 145,200 151,475 Other operating expenses 29,427 27,764 35,504 27,560 25,722 Total expenses 250,164 261,670 267,249 247,979 240,871 Earnings before Federal income taxes and discontinued operations 42,551 89,813 66,365 64,295 70,338 Federal income taxes 14,011 30,588 17,347 21,723 24,123 Earnings from continuing operations 28,540 59,225 49,018 42,572 46,215 Losses from discontinued operations - - (14,125) (1,000) - Net earnings $ 28,540 59,225 34,893 41,572 46,215 Diluted Earnings Per Share: (A) Earnings from continuing operations $ 8.11 16.78 13.87 12.09 13.17 Losses from discontinued operations - - (4.00) (0.28) - Net earnings $ 8.11 16.78 9.87 11.81 13.17 Balance Sheet Information: Total assets $ 3,697,956 3,682,828 3,518,003 3,225,563 3,120,829 Total liabilities $ 3,197,850 3,207,306 3,079,638 2,824,700 2,767,969 Stockholders' equity $ 500,106 475,522 438,365 400,863 352,860 Note to Table: (A) - Earnings per share amounts for 1996 have been restated in accordance with the implementation of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
ITEM 7. 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, the District of Columbia, and four U.S. territories or possessions. It is also licensed in Haiti, and although not otherwise licensed, the Company accepts applications from and issues policies to residents of various Central and South American, Caribbean, and Pacific Rim countries. Such policies are underwritten, accepted, and issued in the United States. A distribution of the Company's direct premium revenues and deposits by domestic and international products is provided below:
Years Ended December 31, 2000 1999 1998 United States domestic products: Investment annuities 75.8% 80.5% 82.4% Life insurance 6.5 5.9 5.9 Total domestic products 82.3 86.4 88.3 International products: Investment annuities 3.0 0.9 0.3 Life insurance 14.7 12.7 11.4 Total international products 17.7 13.6 11.7 Total direct premiums collected 100.0% 100.0% 100.0%
Insurance Operations - Domestic The Company's domestic operations concentrate marketing efforts on federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are annuities, universal life insurance, and traditional life insurance, which includes both term and whole life products. The majority of products sold are the Company's annuities, which include single and flexible premium deferred annuities, single premium immediate annuities, and equity-indexed annuities. Most of these annuities can be sold as tax qualified or nonqualified products. National Western markets and distributes its domestic products primarily through independent marketing organizations (IMOs). These IMOs assist the Company in recruiting, contracting, and managing agents. The Company currently has over 65 IMOs contracted for sales of life and annuity products. Insurance Operations - International The Company's international operations focus on foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance products are issued primarily to residents of countries in Central and South America, the Caribbean, and the Pacific Rim. Issuing policies to residents in countries in these different regions provides diversification that helps to minimize large fluctuations that could arise due to various economic, political, and competitive pressures that may occur from one country to another. Products issued to international residents are almost entirely universal life and traditional life insurance products. However, certain annuity and investment contracts are also available. International production is from independent contractor broker-agents, many of whom have been submitting policy applications to National Western for 20 or more years. The Company continues to expand the countries from which it will accept applications to include those of South American and Pacific Rim countries which have higher growth potential than others. There are inherent risks of accepting international applications 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 accepts applications from 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 with the international products and its strong contractual agreements with its independent broker- agent relationships, which in many cases exceed 20 years, help minimize risks and problems when issuing products to foreign nationals. Other In addition to the life insurance business, the Company had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy reorganization was completed in January, 1999, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. Accordingly, the brokerage segment is reported as discontinued operations throughout this report and in the accompanying financial statements. INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities. Investments in debt and equity securities are classified and reported as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. At December 31, 2000, approximately 26% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are not classified as held to maturity are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected in accumulated other comprehensive income or loss. 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 December 31, 2000 and 1999. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and policy loans.
Percent of Investments 2000 1999 Debt securities 88.0% 87.8% Mortgage loans 6.1 5.7 Policy loans 3.4 3.6 Equity securities 0.5 0.5 Real estate 0.4 0.4 Index options 0.2 1.0 Other 1.4 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). As of December 31, 2000, 1999, and 1998, the Company's debt securities portfolio consisted of the following mix of securities based on amortized cost:
Percent of Debt Securities 2000 1999 1998 Corporate 54.5% 55.6% 53.9% Mortgage-backed securities 21.0 20.9 22.5 Public utilities 13.6 13.0 13.3 Asset-backed securities 8.0 7.8 7.0 Foreign governments 1.8 1.8 1.9 States & political subdivisions 0.8 0.6 1.1 U.S. government 0.3 0.3 0.3 Totals 100.0% 100.0% 100.0%
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 potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, 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) December 31, 2000 $ 113,018 82,764 75,700 2.6% 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 $82,764,000 at December 31, 2000. This increase is due to downgrades of investment grade debt securities as opposed to purchases of such holdings. Historically, the Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio. During 2000, the Company transferred eight securities from held to maturity to securities available for sale due to significant deterioration of the issuing companies' creditworthiness. Based on the financial condition of the issuing companies, complete recovery of National Western's investments in several of the securities is not expected. As a result, the Company recorded other than temporary impairment writedowns for these securities at the time of the transfer. The writedowns were reflected as realized losses on investments for the year ended December 31, 2000. Details of the securities at the time of transfer are provided below. Additional unrealized losses totaling $11,041,000 resulting from transferring these securities to available for sale, net of the effects of taxes and deferred policy acquisition costs, were recorded as a component of accumulated other comprehensive loss.
At Time of Transfer Number Amortized of Cost After Realized Securities Writedowns Losses (In thousands except number of securities) During the quarter ended: March 31, 2000 4 $ 49,528 - June 30, 2000 1 8,250 (6,750) September 30, 2000 - - - December 31, 2000 3 29,878 (2,750) Totals 8 $ 87,656 (9,500)
Of the four securities transferred during the first quarter of 2000, one of the securities was deemed to have had an other than temporary impairment in 1999. As a result, the Company recorded a realized loss totaling $3,492,000 related to the security for the year ended December 31, 1999. Another one of these securities continued to experience credit deterioration subsequent to this transfer in the first quarter of 2000. Accordingly, the Company determined that a complete recovery of the investment was no longer expected and, therefore, recorded a realized loss totaling $5,163,000 for this security in the fourth quarter of 2000. The Company records other than temporary impairment writedowns typically based on estimated recovery values which are often significantly in excess of current market values. Quoted market prices are often significantly lower due to limited buyer demand for the securities and due to uncertainty as to the timing of possible bankruptcy proceedings. Realized losses on investments related to writedowns of debt securities totaled $14,671,000 for the year ended December 31, 2000. During 2000, the Company also sold several debt securities primarily for tax planning purposes. Realized losses incurred during 2000 related to these sales totaled $4,394,000. Additionally, only two of the Company's securities were in default at December 31, 2000. Reductions to investment income due to these securities totaled $990,000 for the year ended December 31, 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 for 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.
December 31, 2000 1999 AAA and U.S. government 30.0% 28.7% AA 8.4 8.8 A 31.4 34.1 BBB 27.3 25.9 BB and other below investment grade 2.9 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 now total only 21.0% at December 31, 2000, which is comparable to the life insurance industry average. The majority of this reduction was achieved by shifting investments into corporate securities and public utilities, as these holdings have increased from 47.0% in 1994 to 68.1% in 2000. Also, most of these additions have been noncallable corporates, which help reduce prepayment and call risks. The Company has recently begun to buy mortgage-backed securities again, with small purchases in 2000. However, there are no current plans to significantly increase mortgage-backed security holdings as a percentage of the total portfolio. 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 December 31, 2000, CMOs represent approximately 95% 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. The amortized cost and estimated fair values of investments in debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value (In thousands) Due in one year or less $ 12,133 12,109 Due after one year through five years 824,548 816,079 Due after five years through ten years 1,032,683 987,752 Due after ten years 174,168 173,911 2,043,532 1,989,851 Mortgage and asset-backed securities 838,150 842,268 Totals $ 2,881,682 2,832,119
At December 31, 2000, the Company's debt and equity securities were classified as follows:
Unrealized Fair Amortized Gains Value Cost (Losses) (In thousands) Securities held to maturity: Debt securities $ 2,113,286 2,116,619 (3,333) Securities available for sale: Debt securities 718,833 765,063 (46,230) Equity securities 16,277 12,669 3,608 Totals $ 2,848,396 2,894,351 (45,955)
As detailed above, debt securities classified as held to maturity comprise the majority of the Company's securities portfolio, while equity securities continue to be a small component of the portfolio. Unrealized losses totaling $45,955,000 on the securities portfolio at December 31, 2000, are a reflection of market interest rates at year-end. The fair values, or market values, of fixed income debt securities correlate to external market interest rate conditions. Because the interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise. However, market values may fluctuate for other reasons, such as changing economic conditions or increasing event-risk concerns. The correlation between market values and interest rates is reflected in the tables below.
December 31, 2000 1999 1998 (In thousands except percentages) Debt securities - fair value $ 2,832,119 2,786,442 2,844,590 Debt securities - amortized cost $ 2,881,682 2,880,777 2,714,043 Fair value as a percentage of amortized cost 98.3% 96.7% 104.8% Unrealized gains (losses) at year-end $ (49,563) (94,335) 130,547 Ten-year U.S. Treasury bond - increase (decrease) in yield for the year (1.3)% 1.8% (1.0)%
Unrealized Gains (Losses) Unrealized At At Gains December 31, December 31, (Losses) 2000 1999 During 2000 (In thousands) Securities held to maturity: Debt securities $ (3,333) (67,430) 64,097 Securities available for sale: Debt securities (46,230) (26,905) (19,325) Equity securities 3,608 3,245 363 Totals $ (45,955) (91,090) 45,135
As reflected above, changes in interest rates typically have a significant impact on the market values of the Company's debt securities. The Company would expect similar results in the future from any significant upward or downward movement in market rates. While the decrease in unrealized losses is partially due to the realization of certain losses through other than temporary impairment writedowns as previously described, the substantial decrease in unrealized losses during 2000 is due to a significant decrease in interest rates. Market interest rates of the ten-year U.S. Treasury bond declined approximately 130 basis points from year-end 1999. However, because the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in market values have relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required, which would realize market gains or losses. Changes in fair values of securities due to changes in market interest rates is an example of market risk. Market risk is the risk of change in market values of financial instruments due to changes in interest rates, currency exchange rates, commodity prices, or equity prices. The most significant market risk exposure for National Western is interest rate risk. The Company manages interest rate risk through on-going cash flow testing required for insurance regulatory purposes. Computer models are used to perform cash flow testing under various commonly used stress test interest rate scenarios to determine if existing assets would be sufficient to meet projected liability outflows. Management strives to closely match the durations of its assets and liabilities. Sensitivity analysis allows the Company to measure the potential gain or loss in fair value of its interest-sensitive instruments and to seek to protect its economic value and achieve a predictable spread between what is earned on invested assets and what is paid on liabilities. The Company seeks to minimize the impact of interest risk through surrender charges that are imposed to discourage policy surrenders. Interest rate changes can be anticipated and risk may be limited due to management actions regarding asset and liability instruments. However, potential changes in the values of financial instruments indicated by hypothetical interest changes will likely be different from actual changes experienced, and the differences may be material. Market risk-sensitive assets of the Company include debt securities, equity securities which are almost entirely preferred stocks, mortgage and other 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 following table illustrates the market risk sensitivity of the Company's interest rate-sensitive assets. The table shows the effect of a change in interest rates on the fair value of the portfolio. The data is prepared using models that measure the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points.
Fair Values of Assets Changes in Interest Rates in Basis Points -200 - 100 0 + 100 + 200 (In thousands) Assets: Debt and equity securities $ 3,085,945 2,967,724 2,848,396 2,727,035 2,606,254 Mortgage loans 213,680 205,981 198,331 191,108 184,324 Policy loans 147,326 136,757 127,382 119,028 111,554 Other loans 18,630 17,737 16,903 16,124 15,395 Index options 5,065 5,232 5,402 5,575 5,750
The debt securities portfolio includes primarily noncallable corporate and public utility bonds, mortgage-backed securities, and asset-backed securities. Expected maturities of debt securities may differ from contractual maturities due to call or prepayment provisions. The model assumes that prepayments on mortgage-backed securities are influenced by agency and pool types, the level of interest rates, loan age, refinancing incentive, month of the year, and underlying coupon. During periods of declining interest rates, principal payments on mortgage-backed securities and collateralized mortgage obligations increase as the underlying mortgages are prepaid. Conversely, during periods of rising interest rates, the rate of prepayment slows. Both of these situations can expose the Company to the possibility of asset/liability cash flow and yield mismatch. The model uses a proprietary method of sampling interest rate paths along with a mortgage prepayment model to derive future cash flows. The initial interest rates used are based on the current U.S. Treasury yield curve as well as current mortgage rates for the various types of collateral in the portfolio. Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings. Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as the base rates at December 31, 2000. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts. In addition to the securities analyzed 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 (S&P 500 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, 2000. A 100 basis point interest rate decline would decrease net earnings for 2001 by approximately $325,000, based on the Company's projections. A 100 basis point increase in interest rates would increase net earnings by approximately $275,000, 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, 2000, 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 proven to result 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 $195,665,000 and $183,902,000, or 6.1% and 5.7% of total invested assets, at December 31, 2000 and 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 region of the United States and by property type as of December 31, 2000 and 1999, was as follows:
December 31, Geographic Region: 2000 1999 West South Central 57.1% 58.8% Mountain 20.0 20.5 Pacific 11.0 11.0 South Atlantic 4.6 5.1 East South Central 3.8 4.2 All other 3.5 0.4 Totals 100.0% 100.0%
December 31, Property Type: 2000 1999 Retail 62.0% 56.1% Office 23.0 27.4 Hotel/Motel 6.5 7.2 Land/Lots 3.1 2.5 Nursing homes 2.0 2.4 Apartment 1.0 1.6 All other 2.4 2.8 Totals 100.0% 100.0%
As of December 31, 2000, the allowance for possible losses on mortgage loans was $4,215,000. This balance reflects a net addition of $111,000 during 2000 which was recognized as a realized loss on investments. The allowance was adjusted as a result of general increases of $402,000, offset by a reduction in the allowance of $291,000 due to the complete repayment of an impaired mortgage loan. Net reductions to the allowance totaling $536,000 were recognized as realized gains on investments in the Company's 1999 financial statements. The allowance was adjusted primarily as a result of the complete repayment of an impaired mortgage loan resulting in an allowance reduction totaling $895,000, partially offset by an unrelated general increase totaling $359,000. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, 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. At December 31, 2000 and 1999, the Company had mortgage loan principal balances on nonaccrual status of $2,983,000 and $3,014,000, 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. The Company had mortgage loan principal balances with restructured terms totaling $7,749,000 and $8,572,000 at December 31, 2000 and 1999, respectively. For the years ended December 31, 2000 and 1999, the reductions in interest income due to nonaccrual and restructured mortgage loans totaled approximately $309,000 and $273,000, respectively. The contractual maturities of mortgage loan principal balances at December 31, 2000, are as follows:
Principal Due (In thousands) Due in one year or less $ 25,580 Due after one year through five years 69,707 Due after five years through ten years 103,147 Due after ten years through fifteen years 2,113 Due after fifteen years 44 Total $ 200,591
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $14,683,000 and $11,388,000 at December 31, 2000 and 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 $1,063,000 and $1,037,000 for the years ended December 31, 2000 and 1999, respectively. The Company does not anticipate significant changes in overall operating results in 2001. Exclusive of the operating results, sales of properties produced realized gains on investments totaling $255,000 and $1,419,000 in 2000 and 1999, respectively. The Company monitors the conditions and market values of these properties on a regular basis. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. During 2000 the Company recorded a $420,000 realized investment loss for the writedown in value of an office building that is currently for sale. No realized losses were recognized in 1999 due to declines in values of real estate properties. RESULTS OF OPERATIONS Consolidated Operations Summary of Consolidated Operating Results A summary of operating results, net of taxes, for the years ended December 31, 2000, 1999, and 1998 is provided below:
Years Ended December 31, 2000 1999 1998 (In thousands except per share data) Revenues: Revenues, excluding realized gains (losses) on investments and index options $ 344,225 336,283 323,173 Index options (32,268) 10,719 8,057 Realized gains (losses) on investments (19,242) 4,481 2,384 Total revenues $ 292,715 351,483 333,614 Earnings: Earnings from continuing operations, excluding realized gains (losses) on investments $ 41,048 56,313 47,468 Losses from discontinued brokerage operations - - (14,125) Net realized gains (losses) on investments (12,508) 2,912 1,550 Net earnings $ 28,540 59,225 34,893 Basic Earnings Per Share: Earnings from continuing operations, excluding realized gains (losses) on investments $ 11.72 16.09 13.58 Losses from discontinued brokerage operations - - (4.04) Net realized gains (losses) on investments (3.57) 0.83 0.44 Net earnings $ 8.15 16.92 9.98 Diluted Earnings Per Share: Earnings from continuing operations, excluding realized gains (losses) on investments $ 11.66 15.96 13.43 Losses from discontinued brokerage operations - - (4.00) Net realized gains (losses) on investments (3.55) 0.82 0.44 Net earnings $ 8.11 16.78 9.87
Consolidated Operating Results: For the year ended December 31, 2000, the Company recorded net earnings of $28,540,000 compared to net earnings of $59,225,000 and $34,893,000 for 1999 and 1998, respectively. Consolidated net earnings for 2000 were significantly lower than 1999 and 1998 due to realized investment losses and the Company's equity-indexed annuity business. The Company recorded realized losses on investments, net of taxes, totaling $12,508,000 for the year ended December 31, 2000. Of the total realized investment losses, $9,536,000 of the losses were due to other than temporary impairment writedowns for debt securities. The majority of the remaining losses were from sales of investments in debt securities. The losses on the sales were realized primarily for tax planning purposes. The decline in the Company's 2000 net earnings was also largely a result of deteriorating stock market conditions during the year, which impacted the Company's equity-indexed annuity business. Because of the declines in the S&P 500 Index during 2000, the Company recorded significant decreases in investment income resulting from realized and unrealized losses on index options, which are used to hedge the equity return component of equity-indexed annuities. The S&P 500 Index decline also resulted in lower interest credited to equity-indexed annuity contracts. However, primarily because of policy liabilities related to minimum guaranteed interest rates, the reduction in annuity contract interest expense was much less than the decline in investment income. In addition to the above items, the Company also experienced higher life insurance benefit claims during 2000 than in the previous two years. Benefit claims were approximately 20% higher in 2000 than 1999. The combination of these results contributed to the lower earnings for 2000. Earnings for 1999 were significantly higher than 2000 and 1998 earnings, as 1999 includes additional income totaling $5,513,000, net of taxes, from the resolution of pending litigation relating to a former general agency. Additionally, the Company recorded realized gains on investments, net of taxes, totaling $2,912,000 for 1999 compared to gains of $1,550,000 for 1998 and losses of $12,508,000 for 2000. The gains in 1999 were primarily from sales and calls of investments in debt securities and a sale of investment real estate. While earnings for 1999 were significantly higher, earnings for 1998 were abnormally low due to several nonrecurring items, the most significant of which was the bankruptcy settlement of the Company's wholly owned subsidiary, The Westcap Corporation, totaling $14,125,000. This settlement was reflected as a loss from discontinued brokerage operations in 1998. The other nonrecurring items affecting earnings for 1998 include a lawsuit settlement and a pension plan related transaction. Parties involved in the Diffie, et al vs. National Western Life Insurance Company and National Annuity Programs, Inc. class action litigation filed a joint motion in District Court for preliminary approval of a settlement agreement among the parties. This settlement was approved by the Court in January, 1999, and, as a result, the Company paid $5,000,000 to settle the litigation. This amount was accrued in the Company's financial statements in 1998, thereby reducing earnings $3,250,000, after taxes. Also during 1998, the Company transferred pension obligations and administrative responsibilities of its nonqualified defined benefit plan to a pension administration firm. The financial effects of the transaction resulted in additional pension expense in 1998 totaling $1,653,000, net of taxes, as the amount paid upon transfer exceeded the recorded pension liabilities as required for financial reporting purposes. However, as a result of the transfer, substantially all future pension and administrative liabilities and expenses under the plan are now the responsibility of the new firm. Net Investment Income: A detail of net investment income is provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Investment income: Debt securities $ 210,194 204,294 195,425 Mortgage loans 18,395 16,262 16,943 Index options (32,268) 10,719 8,057 Policy loans 8,120 8,232 9,252 Other investment income 9,253 7,501 7,783 Total investment income 213,694 247,008 237,460 Investment expenses 3,040 4,028 3,616 Net investment income $ 210,654 242,980 233,844
As indicated by the table above, net investment income increased in 1999 from 1998 levels, but then declined substantially in 2000. The large decrease in 2000 is due to declines in fair values of index options totaling $32,268,000 compared to income from these investments totaling $10,719,000 and $8,057,000 in 1999 and 1998, respectively. Index options are derivative financial instruments used to hedge the equity return component of the Company's equity- indexed annuity products, which were first introduced for sale in 1997. Any gains or losses from the sale or expiration of the options, as well as period- to-period changes in fair values, are reflected as net investment income. However, increases or decreases in income 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 reduction to investment income from index options was due to poor stock market conditions during 2000, more specifically the performance of the S&P 500 Index. Index options are intended to act as hedges to match closely the returns on the S&P 500 Index. With the decline in this index in 2000, the index option values likewise declined. While income from index options was lower, the contract interest expense for the Company's equity-indexed annuities was also substantially lower. Although income from index options declined, the Company experienced significant growth in income from debt securities, mortgage loans, and other investments. While debt security balances at year-end 2000 and 1999 were comparable, average balances were significantly higher in 2000 than the previous year. This was the primary contributor to the growth in debt securities investment income during 2000. In fact, net cash flow from operations continues to be invested primarily in high quality debt securities as in previous years. However, the Company has increased its investments in mortgage loans over the past two years resulting in additional income from these investments. Mortgage loans totaled $174.9 million at December 31, 1998, and now total over $195 million at year-end 2000. This has helped enhance the Company's overall investment yield while increasing mortgage loan investment income to $18,395,000 for the year ended December 31, 2000, compared to $16,262,000 and $16,943,000 for 1999 and 1998, respectively. Other investment income was also higher for 2000, totaling $9,253,000 compared to income of $7,501,000 and $7,783,000 for 1999 and 1998, respectively. The majority of this increase is due to profit participation earnings related to other equity-type loans on income producing real estate properties. Although the Company has minimal holdings in these type loans, these investments have been profitable, are related to high quality properties, and are supported by strong borrower guarantees. An analysis of net investment income also involves a review of market interest rates. Interest rates continued to decline in 1998 from 1997 and 1996 rates. In 1999, interest rates reversed this trend by increasing significantly, and in 2000 interest rates have again declined. However, changes in market rates affect the Company's portfolio yield slowly because of the relatively small volume of new investment purchases during a year in comparison to the size of the overall investment portfolio. As a result, although yields on new investment purchases did increase during 1999, the Company's overall yield on average invested assets declined from 1998. Also, because of lower premium production and higher policy surrenders during 2000, purchases of new debt securities were substantially lower in 2000 than 1999 and 1998. As a result, changes in market rates during 2000 had less impact on the Company's investment yield than in prior years, producing relatively comparable yields between 2000 and 1999. Yields were also somewhat affected by the change in the mix of the investment portfolio. Mortgage loans have typically had significantly higher yields than the Company's investments in debt securities, and average mortgage loan holdings increased in 2000, which helped enhance yields. Detailed below is the Company's investment performance for 2000, 1999, and 1998. This analysis excludes index options, as these derivative financial instruments are used solely for hedging purposes for the Company's equity- indexed annuity products. Income from the options is intended to offset interest credited to policyholders for the equity return component on these products.
Years Ended December 31, 2000 1999 1998 (In thousands except percentages) Net investment income, excluding index options $ 242,922 232,261 225,787 Average invested assets, at amortized cost $ 3,269,475 3,177,303 2,986,350 Yield on average invested assets 7.43% 7.31% 7.56%
Realized Gains and Losses on Investments: The Company recorded realized losses of $19.2 million in 2000 compared to realized gains of $4.5 million and $2.4 million in 1999 and 1998, respectively. The losses in 2000 consist primarily of other than temporary impairment writedowns for investments in debt securities totaling $14,671,000. The Company records impairment writedowns when a decline in value is considered other than temporary and full recovery of the investment is not expected. Sales of debt securities during 2000, primarily for tax planning purposes, also resulted in realized losses totaling $4,394,000. Additionally, the Company recorded a $420,000 realized loss during 2000 for the writedown in value of a real estate investment property. The gains in 1999 consist primarily of gains from sales and calls of debt securities totaling $6,250,000, offset by other than temporary impairment writedowns of $4,403,000. The Company also recognized gains totaling $1,963,000 on real estate, the majority of which was from the sale of a real estate property owned by the Company's subsidiary, NWL 806 Main, Inc. The gains in 1998 were primarily from gains on debt securities totaling $1.3 million, substantially all of which related to securities that were called. Realized gains in 1998 also include $300,000 related to a deficiency settlement agreement on a mortgage loan that was foreclosed in 1994. 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. Average credited rates, calculated based on policy reserves for the Company's universal life and investment annuity business, have generally declined since 1997, which is consistent with declines in market interest rates. However, as previously described for net investment income, market interest rates rose in 1999 and then began to decline again in 2000. 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. Raising policy credited rates can typically have an impact sooner than higher market rates on the Company's investment portfolio yield, making it more difficult to maintain the current interest spread. The difference between yields earned over policy credited rates is often referred to as the interest spread. Contract interest totaled $137.7 million, $162.3 million, and $158.9 million in 2000, 1999, and 1998, respectively. The increase in 1999 is primarily attributable to interest totaling $20,480,000 and $12,980,000 in 1999 and 1998, respectively, for the Company's equity-indexed annuity products. The substantial decrease in 2000 is related to negative contract interest of $2.9 million, also due to equity-indexed annuities. The decline in the S&P 500 Index during 2000 resulted in the reversal of contract interest previously recognized as the equity-return component of these annuities declined substantially, reducing the amount to be paid to policyholders. As previously described, the Company purchases index options to hedge interest to be credited on these products. The income provided by the index options substantially offsets the interest credited to the policyholders, subject to minimum guaranteed policy interest rates. However, during periods of decline by the S&P 500 Index, index options may produce reductions in investment income, but contract interest expense is also reduced during these periods. Because of the volatility in the equity-indexed annuities and the related hedging program, the Company separately analyzes average credited rates on its other products. Excluding the Company's equity-indexed annuity products, average credited rates for 2000, 1999, and 1998, were 5.47%, 5.51%, and 5.67%, respectively. The Company's interest rate spread has been approximately 2% in recent years, although this spread fluctuates for the reasons previously described above. Other Operating Expenses: Other operating expenses totaled $29,427,000, $27,764,000, and $35,504,000 for the years ended December 31, 2000, 1999, and 1998, respectively. However, when including investment related expenses, which are netted against investment income for reporting purposes, operating and investment expenses totaled $32,467,000, $31,792,000, and $39,120,000 for 2000, 1999, and 1998, respectively. This reflects an increase of only 2.1% in 2000 over 1999 levels due primarily to higher agency convention expenses. The higher expenses in 1998 are due to the nonrecurring costs related to a lawsuit settlement and transfer of the Company's nonqualified defined benefit plan to a pension administration firm as previously described. The relationships between other operating expenses and investment expenses were impacted in 2000 by a new cost allocation study between insurance segments and investment related activities. The study has resulted in lower investment expenses compared to operating expenses than in previous years. Federal Income Taxes: Federal income taxes on earnings from continuing operations for 2000, 1999, and 1998 reflect effective tax rates of 32.9%, 34.1%, and 26.1%, respectively, which are lower than the expected Federal rate of 35%. The 2000 effective tax rate decreased from 1999 and is lower than the Federal rate of 35% primarily due to tax-exempt investment income related to municipal securities and dividends-received deductions on income from stocks. The 1998 effective tax rate is significantly lower due to tax benefits totaling $4,944,000, resulting from the Company's subsidiary brokerage losses. Correspondingly, losses on discontinued operations for 1998 totaling $14,125,000 do not include any tax benefits relating to the brokerage subsidiary. This tax reporting treatment is in accordance with the Company's tax allocation agreement with its subsidiaries. On a consolidated basis, Federal income taxes reflect consistent effective tax rates of 32.9%, 34.1%, and 33.2% for 2000, 1999, and 1998, respectively. Discontinued Brokerage Operations: On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. As a result of brokerage losses and the resulting bankruptcy, National Western's investment in Westcap was completely written off during 1995. However, a $1,000,000 cash infusion was made to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as a loss from discontinued operations in 1997. Losses from the discontinued brokerage operations have been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. By order dated August 28, 1998, the United States Bankruptcy Court, Southern District of Texas, Houston Division, confirmed and approved the Third Amended Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation and Westcap Enterprises, Inc. Pursuant to the Plan, National Western received credit for the $1,000,000 previously contributed to Westcap in bankruptcy in March, 1997, and paid an additional $14,125,000 to compromise and settle (i) all claims of Westcap against National Western, and (ii) all claims and litigation of certain settling creditors of Westcap who have alleged federal or state securities law "control person" violations by National Western relating to Westcap's brokerage business, in exchange for full and complete releases from all of such claims, litigation, and alleged violations. The bankruptcy reorganization was completed in January, 1999, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. Although the $14,125,000 settlement was paid by National Western on January 13, 1999, the settlement payment was reflected in the accompanying financial statements as a loss from discontinued operations in 1998. Any additional losses will depend on the results of The City Colleges lawsuit filed against National Western on March 28, 1994, for alleged federal or state securities law "control person" violations relating to Westcap, and which is pending in the United States District Court, Western District of Texas, as more fully described in Item 3, Legal Proceedings. As described in detail in Item 3, there have been recent rulings favorable to National Western relating to Westcap bankruptcy claims. As a result, the Company has now filed with the United States District Court a motion for summary judgment and dismissal of the suit. Regardless of the outcome of the motion for summary judgment, National Western believes it has reasonable and adequate defenses to this suit and, accordingly, no amounts have been accrued in National Western's financial statements for potential losses relating to such suit. Additionally, as a result of the favorable rulings regarding the Westcap bankruptcy claims, National Western will be entitled to recover a portion of the settlement of the Westcap bankruptcy, but not to exceed $600,000. The Company anticipates the recovery amount will be determined and paid during 2001 and will be reflected in the Company's financial statements at such time. Segment Operations Summary of Segment Earnings A summary of segment earnings from continuing operations for the years ended December 31, 2000, 1999, and 1998 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes, and discontinued brokerage operations.
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) Segment earnings: 2000 $ 6,124 6,719 25,059 3,146 41,048 1999 8,209 6,798 38,068 3,238 56,313 1998 6,395 6,397 27,508 2,224 42,524
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 include 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 managing 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 $6,124,000, $8,209,000, and $6,395,000 for 2000, 1999, and 1998, respectively. The higher 1999 earnings were primarily a result of higher universal life insurance revenues, lower other operating expenses, and lower policy benefits, which consists substantially of life insurance death claims. Earnings for 2000 were more comparable to 1998 earnings, primarily due to policy benefits increasing from the lower 1999 levels to an amount more consistent with 1998 benefits. Also, although results for 2000 include lower other operating expenses than 1998, this decrease was offset by higher amortization of deferred policy acquisition costs. A comparative analysis of results of operations for the Company's domestic life insurance segment is detailed below:
Years Ended December 31, Domestic Life Insurance Operations: 2000 1999 1998 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 23,864 24,668 24,296 Net investment income 26,295 25,054 26,211 Other income 30 40 750 Total premiums and other revenue 50,189 49,762 51,257 Benefits and expenses: Policy benefits 17,299 15,547 17,932 Amortization of deferred policy acquisition costs 4,305 3,387 2,954 Universal life insurance contract interest 10,183 9,826 9,963 Other operating expenses 9,183 8,563 10,786 Total benefits and expenses 40,970 37,323 41,635 Segment earnings before Federal income taxes 9,219 12,439 9,622 Federal income taxes 3,095 4,230 3,227 Segment earnings $ 6,124 8,209 6,395
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. In fact, traditional life insurance premiums have declined from $10,069,000 in 1998 to $9,460,000 and $8,519,000 in 1999 and 2000, respectively. Because of the Company's emphasis on universal life insurance products, this trend is likely to continue. 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:
Years Ended December 31, 2000 1999 1998 (In thousands) Universal life insurance: Cost of insurance $ 12,191 11,881 10,684 Surrender charges 1,796 1,815 2,040 Policy fees and other revenues 1,358 1,512 1,503 Traditional life insurance premiums 8,519 9,460 10,069 Totals $ 23,864 24,668 24,296
Actual universal life insurance deposits collected for the years ended December 31, 2000, 1999, and 1998 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.
Years Ended December 31, 2000 1999 1998 (In thousands) Universal life insurance: First year and single premiums $ 4,664 5,010 6,944 Renewal premiums 14,205 14,384 14,014 Totals $ 18,869 19,394 20,958
As reflected above, the Company is experiencing declines in first year and single premium production. This is partially due to the intense competition within the U.S. life insurance market. However, the Company's life insurance in force for universal life products continues small and steady increases, resulting in higher cost of insurance revenues as detailed earlier. Other income for 2000, 1999, and 1998 totaled $30,000, $40,000, and $750,000, respectively. The significantly higher income in 1998 was primarily due to proceeds totaling $444,000 received from the U.S. government in 1998 related to previous litigation involving a failed savings and loan institution. The litigation involved the Company's previous investment in bonds of the financial institution and subsequent losses incurred upon its failure. The financial institution had also purchased life insurance from National Western, the cash values of which served as collateral for the bonds. Policy benefits were significantly lower in 1999, totaling $15.5 million compared to $17.3 million and $17.9 million for 2000 and 1998, respectively. These benefits consist primarily of life insurance death claims which are subject to fluctuations from period to period. The benefits in 1999 were lower than recent historical experience. Amortization of deferred policy acquisition costs totaled $4.3 million, $3.4 million, and $3.0 million for 2000, 1999, and 1998, respectively. These expenses represent the amortization of the costs of acquiring or producing new business, which consist primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level of policy surrenders. Universal life insurance contract interest has remained relatively constant at $10.2 million, $9.8 million, and $10.0 million in 2000, 1999, and 1998, respectively. This is consistent with the relative slow growth and stable size of this block of business along with minimal adjustments of policy credited rates. Other operating expenses were significantly higher in 1998, totaling $10.8 million compared to $9.2 million and $8.6 million in 2000 and 1999, respectively. The higher 1998 expenses are due to increased pension expenses from the transfer of the Company's nonqualified defined benefit plan as previously described and other increases primarily in salaries, agent conventions, and marketing related expenses such as travel and printing costs. International Life Insurance Operations The Company's international life insurance operations focus is on foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance sales are primarily from countries in Central and South America, the Caribbean, and the Pacific Rim. Issuing policies to residents in numerous countries in these different regions provides diversification that helps to minimize large fluctuations in sales that can occur due to various economic, political, and competitive pressures that may occur from one country to another. Products issued 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 contractor broker-agents, many of whom have been submitting policy applications to National Western for 20 or more years. Earnings for the international life insurance operating segment were $6,719,000, $6,798,000, and $6,397,000 for 2000, 1999, and 1998, respectively. Earnings for 2000 and 1999 were relatively comparable, while somewhat higher than 1998 results. Although the Company experienced increases in universal life insurance contract revenues in 2000 and 1999, the higher revenues were tempered by higher policy benefits and universal life insurance contract interest. Although other operating expenses were lower in 2000, amortization of deferred policy acquisition costs increased to a level comparable to 1998. A comparative analysis of results of operations for the Company's international life insurance segment is detailed below:
Years Ended December 31, International Life 2000 1999 1998 Insurance Operations: (In thousands) Premiums and other revenue: Premiums and contract revenues $ 43,665 43,018 40,606 Net investment income 22,864 21,692 21,940 Other income 44 41 32 Total premiums and other revenue 66,573 64,751 62,578 Benefits and expenses: Policy benefits 17,548 16,451 14,112 Amortization of deferred policy acquisition costs 15,413 14,647 15,836 Universal life insurance contract interest 15,148 13,923 13,432 Other operating expenses 8,349 9,429 9,573 Total benefits and expenses 56,458 54,450 52,953 Segment earnings before Federal income taxes 10,115 10,301 9,625 Federal income taxes 3,396 3,503 3,228 Segment earnings $ 6,719 6,798 6,397
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' efforts are also focused more on universal life insurance, and, as a result, revenues from these products continue to increase, while premiums from traditional products decline. Cost of insurance revenues continue to increase as the international block of business grows, reflecting increases of 5.6% and 6.9% in 2000 and 1999 over the respective prior years. Additionally, surrender charge revenues were 27.0% higher in 1999 compared to 1998, which corresponds directly to an unusually high increase in universal life insurance policy surrenders of 27.5%. Surrender charge revenues declined somewhat in 2000 from the higher level in 1999. A comparative detail of premiums and contract revenues is provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Universal life insurance: Cost of insurance $ 31,052 29,411 27,508 Surrender charges 7,680 8,077 6,359 Policy fees and other revenues 3,801 3,755 3,726 Traditional life insurance premiums 1,132 1,775 3,013 Totals $ 43,665 43,018 40,606
Actual universal life insurance deposits collected for the years ended December 31, 2000, 1999, and 1998 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. Deposits and universal life insurance in force continue to grow, which corresponds to the previously described increases in cost of insurance revenues.
Years Ended December 31, 2000 1999 1998 (In thousands) Universal life insurance: First year and single premiums $ 14,520 14,084 13,575 Renewal premiums 37,125 36,428 35,114 Totals $ 51,645 50,512 48,689
Policy benefits, which consist primarily of life insurance death claims, were abnormally high in 2000 at $17.5 million compared to $16.5 million and $14.1 million for 1999 and 1998, respectively. As previously described for domestic life insurance operations, mortality claims fluctuate from period to period. These deviations, which can at times be significant, are not uncommon in the life insurance industry. However, as the international block of life insurance in force grows, life insurance death claims will naturally trend higher. 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 were higher in 1998, totaling $15.8 million compared to $15.4 million and $14.6 million in 2000 and 1999, respectively. Changes in anticipated future gross profits resulted in retrospective adjustments to deferred policy acquisition costs, which produced higher amortization in 1998 relative to 2000 and 1999. Universal life insurance contract interest has risen steadily from $13.4 million in 1998 to $13.9 million and $15.1 million in 1999 and 2000, respectively. The increases in contract interest are consistent with growth in the universal life insurance business. Interest is also higher in 2000 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. Other operating expenses totaled $8.3 million, $9.4 million, and $9.6 million in 2000, 1999, and 1998, respectively. The higher 1998 expenses are attributable to the same reasons as previously described for domestic life insurance operations. Additionally, expenses for 2000 were lower, which were impacted partially due to a new cost allocation study between segments and investment related activities. Annuity Operations The Company's annuity operations are almost exclusively in the United States. Like the Company's domestic life insurance operations, annuities are marketed in 43 states and the District of Columbia using independent agents, brokers, and independent marketing organizations (IMOs). For most of these organizations, annuity sales are much more significant than life insurance sales and are the primary focus of their business operations. Although some of the Company's annuities and investment contracts are available to the international market, current sales are small relative 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 are 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 $25,059,000, $38,068,000, and $27,508,000 for 2000, 1999, and 1998, respectively. Earnings for 2000 were significantly lower due to the Company's equity-indexed annuity business. As described in more detail later in this section, segment earnings for annuity operations declined largely as a result of deteriorating stock market conditions during 2000 and the corresponding impact on equity-indexed annuity products and index options used to hedge the equity return component of these annuities. Earnings were reduced approximately $5 million due to this block of business. Earnings for 1999 were significantly higher than 2000 and 1998 primarily due to income resulting from a lawsuit settlement totaling $5,513,000, net of taxes. Earnings for 1999 were also enhanced from increases in net investment income over annuity contract interest. Additionally, 1998 earnings were negatively impacted by a class action lawsuit settlement totaling $3,250,000, net of taxes. A comparative analysis of results of operations for the Company's annuity segment is detailed below:
Years Ended December 31, Annuity Operations: 2000 1999 1998 (In thousands) Premiums and other revenue: Premiums and contract revenues $ 32,828 27,392 31,432 Net investment income 156,014 191,328 182,347 Other income 317 8,863 270 Total premiums and other revenue 189,159 227,583 214,049 Benefits and expenses: Policy benefits 231 458 397 Amortization of deferred policy acquisition costs 28,230 21,114 21,625 Annuity contract interest 112,380 138,553 135,494 Other operating expenses 10,593 9,772 15,145 Total benefits and expenses 151,434 169,897 172,661 Segment earnings before Federal income taxes 37,725 57,686 41,388 Federal income taxes 12,666 19,618 13,880 Segment earnings $ 25,059 38,068 27,508
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. Total surrender charge revenues were up 26% in 2000 compared to 1999 due to increases in surrender charges from single-tier annuities. While actual policy surrenders for two-tier annuities decreased slightly in 2000, policy surrenders for single-tier annuities were abnormally high, increasing 54% in 2000 from the previous year, resulting in the significant increase in related revenues. Much of the increased surrender activity was in the second and third quarters of 2000, and the activity returned to more normal levels in the fourth quarter. Although single-tier annuity surrenders have been higher, the decline in two-tier annuity surrenders and related income is not unexpected and could continue, since this is a closed block of business. The Company has not sold two-tier annuities since 1992. A comparative detail of the components of premiums and annuity contract revenues is provided below.
Years Ended December 31, 2000 1999 1998 (In thousands) Surrender charges: Two-tier annuities $ 14,150 14,394 17,898 Single-tier annuities 12,761 6,951 6,799 Total surrender charges 26,911 21,345 24,697 Payout annuity and other revenues 5,851 5,972 6,652 Traditional annuity premiums 66 75 83 Totals $ 32,828 27,392 31,432
Actual annuity deposits collected for the years ended December 31, 2000, 1999, and 1998 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.
Years Ended December 31, 2000 1999 1998 (In thousands) Deferred annuities: Equity-indexed $ 99,876 153,503 222,486 Other 204,662 205,550 187,835 Total deferred annuities 304,538 359,053 410,321 Immediate annuities 24,464 30,510 20,682 Totals $ 329,002 389,563 431,003
Although annuity sales were significantly higher in 1998 than in prior years, sales in 2000 and 1999 decreased 15.5% and 9.6%, respectively. However, premium production in 2000 and 1999 totaling $329.0 million and $389.6 million is still significantly higher than 1997 and 1996 sales, which totaled $241.0 million and $273.2 million, respectively. The strong growth in 1998 was primarily attributable to the Company's new equity-indexed annuity product, as it was first introduced in late 1997. Sales continue to be strong in the Company's other deferred annuity products, as deposits collected have increased from $187.8 million in 1998 to $204.7 million in 2000. Although sales were lower in 2000 and 1999, equity-indexed annuities are a significant 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, including costs of index options used to hedge the equity return component of these annuities and lower policyholder asset fees, can reduce potential credited interest to policyholders. The lower production level continued throughout 2000, which is consistent with the poor performance of the stock market. Depressed stock market conditions made the equity-indexed annuities less appealing, as the potential for higher credited interest for policyholders was significantly diminished. Net investment income for 2000, 1999, and 1998 totaled $156,014,000, $191,328,000, and $182,347,000, respectively. The increase in investment income of 4.9% in 1999 is consistent with the growth in annuity segment assets of 5.7% for the same period. The large decrease in net investment income in 2000 is due to declines in fair values of index options totaling $32,268,000. As previously described, index options are derivative financial instruments used to hedge the equity return component of the Company's equity-indexed annuity products. Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in fair values, are reflected as net investment income. The reduction to investment income from index options was due to the decline in the performance of the stock market during 2000, more specifically the S&P 500 Index. Excluding index option income or losses from investment income in the annuity segment results in net investment income totaling $188,282,000, $180,609,000, and $174,290,000 for 2000, 1999, and 1998, respectively. These amounts reflect the growth in investment income which is more consistent with the growth in the annuity segment business. Although investment income in 2000 was substantially lower due to index options, the contract interest expense for the Company's equity-indexed annuities was significantly lower also as described in more detail below. Other income was relatively insignificant in 2000 and 1998, totaling $317,000 and $270,000, respectively. However, other income for 1999 totaled $8,863,000, which includes $8.5 million in income relating to litigation involving an independent marketing organization. As more fully described in Note 9, Commitments and Contingencies, in the accompanying financial statements, National Western Life Insurance Company, National Annuity Programs, Inc. (NAP), and others executed a settlement agreement for a pending declaratory judgment lawsuit. NAP was an independent marketing general agency under contract with the Company that hired and supervised agents marketing annuity products on behalf of the Company. The contract was entered into in 1983 and amended in 1994. The Company alleged that during the course of the contract NAP violated its terms and conditions, among other things. By the settlement, each party dismisses with prejudice all claims asserted by them in the lawsuit. The Company was also released from any claims for any funds and other rights arising under the contract. Additionally, the Company paid in 1999 all valid claims for unpaid commissions to sub-agents of NAP who wrote business for the Company under the contract. As a result of the settlement, accrued bonus commissions relating to the NAP contract totaling $8,482,000 were released, as they are no longer considered a liability to NAP and will not be paid. Accordingly, the release of these accrued commissions from liabilities in 1999 resulted in additional income of $8,482,000, before taxes. Any future renewal premiums received by the Company on currently issued and in force annuity policies written by NAP sub-agents under the contract could generate additional commissions for such sub-agents. The payment of such future commissions is subject to and conditioned upon receipt of such renewal premiums by the Company and compliance by the sub- agents with the terms of the agents' contracts with the Company and NAP. Annuity contract interest for 2000, 1999, and 1998 totaled $112.4 million, $138.6 million, and $135.5 million, respectively. While general increases in contract interest are expected due to the growth in the size of the annuity block of business, fluctuations in interest are due to equity-indexed annuities in force and the higher or lower credited rates that may be paid on these policies. Increases in 1999 and 1998 are largely due to increases in annuities in force from sales of equity-indexed annuities and higher credited interest that were paid on these policies. Contract interest on equity- indexed annuities totaled $20,480,000 and $12,980,000 in 1999 and 1998, respectively. However, contract interest on equity-indexed annuities in 2000 was actually a negative $2.9 million due to the decline in the S&P 500 Index during the year. This decline resulted in the reversal of contract interest previously recognized as the equity-return component of these annuities decreased substantially, reducing the amount to be paid to policyholders. The relationship of contract interest for equity-indexed annuities and the income from index options used as hedges are important factors in analyzing the results of this product. Differences between income from index options and contract interest credited to policyholders will occur for several reasons, some of which may only be timing differences between the recognition of income and expenses. One reason is that the costs of the index options are essentially amortized against net investment income, as the options are marked to fair value each reporting period. The costs of options are covered by additional income earned on debt securities purchased with equity-indexed annuity premiums. Other differences are due to asset fees charged against policyholder contract interest, surrenders, and death benefits on annuities within the annual hedging period and inherent differences between index option fair values and policy liability reserves related to minimum guaranteed interest rates. Another important factor regarding these products is that during periods of poor stock market performance, asset fees charged against policyholder contract interest may be significantly lower. This can reduce the current profitability of these annuities. The impact of these equity-indexed annuity issues decreased annuity operations earnings for 2000 by approximately $5 million, net of taxes. While results for 2000 were reduced by this block of business, 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 from period to period 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. 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, 1999, and 1998 totaled $28.2 million, $21.1 million, and $21.6 million, respectively. The increase in amortization in 2000 is related to increases in single-tier annuity surrenders as previously described. Although slowing in the fourth quarter, the Company experienced significantly higher policy surrenders for certain products in 2000. As a result, amortization of deferred policy acquisition costs was higher for 2000 due to effects from the Company's periodic refinements to its actuarial assumptions. The higher amortization also tempered the impact of higher surrender charge revenues produced by the increased policy surrenders. Other operating expenses totaled $10,593,000, $9,772,000, and $15,145,000 for 2000, 1999, for 1998, respectively. Expenses for 2000 were somewhat higher than the 1999 level. As previously described for international operations, 2000 expenses were impacted partially due to a new cost allocation study between segments and investment related activities. Expenses for 1998 were unusually high primarily due to two nonrecurring items as previously described in the summary of consolidated operating results. Additional pension expenses were incurred in 1998 related to the Company's transfer of its nonqualified defined benefit plan to a pension administration firm. Also included in 1998 expenses is a $5,000,000 lawsuit settlement for the Diffie, et al vs. National Western Life Insurance Company and National Annuity Programs, Inc. class action litigation. The litigation involved various issues regarding sales of the Company's annuities. Other Operations National Western's primary business encompasses its domestic and international life insurance operations and its annuity operations. However, National Western also has small real estate, 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 to Westcap, and the subsidiary is now operating as a real estate management company. Earnings for these other operations totaled $3,146,000, $3,238,000, and $2,224,000 for 2000, 1999, and 1998, respectively. Earnings increased beginning in 1999 primarily due to income from the real estate properties that were transferred from National Western to Westcap. Most of the income from the Company's subsidiaries is from a life interest in the Libbie Shearn Moody Trust. This asset was owned by National Western Life Insurance Company prior to 1997 but was transferred to NWL Services, Inc., in 1997. Gross income distributions from the Trust totaled $3,643,000, $3,595,000, and $3,451,000 in 2000, 1999, and 1998, 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. Operating losses, before taxes, from nursing home operations and related activities totaled approximately $850,000 for the period from inception to December 31, 2000. These losses were not unexpected given initial start-up costs and issues during the first year of operations. The Company expects profitable operations in 2001. LIQUIDITY AND CAPITAL RESOURCES Liquidity The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet cash needs are the Company's securities available for sale portfolio, net cash provided by operations, and bank line of credit. The Company's investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $60 million on its bank line of credit for short-term cash needs. A primary liquidity concern for the Company's 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 $139 million, $118 million, and $131 million in 2000, 1999, and 1998, respectively. The lower cash flow in 1999 is largely a result of lawsuit and bankruptcy settlement payments as described in detail in Note 9, Commitments and Contingencies, in the accompanying financial statements. Net cash flows from the Company's deposit product operations, which include universal life and investment annuity products, totaled $47 million in 1999 and $113 million in 1998. However, these operations incurred net cash outflows in 2000 totaling $98 million. 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 significantly during the fourth quarter of 2000. Premium deposits were also lower in 2000 due to lower equity-indexed annuity sales, which have been affected by the volatility and poor performance of 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 $113 million, $187 million, and $159 million in 2000, 1999, and 1998, respectively. The Company again expects significant cash flows from these sources in 2001 at levels consistent with the past year. 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 2001. Stockholders' equity totaled $500.1 million at December 31, 2000, reflecting an increase of $24.6 million from 1999. The increase in capital is primarily from net earnings of $28.5 million, reduced by net unrealized losses on investment securities totaling $4.9 million. The decline in values of investment securities is a result of lower market values of the Company's holdings in its securities available for sale portfolio. Book value per share at December 31, 2000, was $142.71, reflecting a 5.1% increase for the year. CHANGES IN ACCOUNTING PRINCIPLES Derivative Instruments and Hedging Activities 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 Derivatives Implementation Group (DIG) of the FASB addressed this policy liability issue, and only recently in December, 2000, released guidance for the liability calculation. The DIG guidance was approved by FASB at its meeting on March 14, 2001. Because of the lack of guidance and delayed approval by FASB, companies are allowed additional time to implement the new policy liability method for equity-indexed annuities. National Western will implement the new method effective April 1, 2001, as provided by changes to the implementation guidance. The Company is continuing its review of the final guidance and is in the process of making system programming changes to calculate policy liabilities under the new method. This method requires that the option portion of the contract be identified and accounted for as an embedded derivative, while the insurance portion of the contract is recorded independently as an annuity contract. Preliminary calculations indicate that if the new method were to be implemented on January 1, 2001, policy liabilities may be reduced. However, the final impact of the change has yet to be determined. The difference in policy liability calculations is not anticipated to be material to the Company's financial position, although it could be significant to net income for the year ended December 31, 2001. Any finally determined adjustment will be reported in net income as a cumulative effect of a change in accounting principle in the second quarter of 2001. As part of the implementation of SFAS No. 133, companies may reconsider the appropriateness of classifications of debt securities in the following categories: held to maturity, available for sale, and trading. Companies may need to reallocate security holdings in light of the new accounting requirements. Therefore, at the date of adoption of SFAS No. 133, an entity may transfer securities held to maturity into the available for sale category or the trading category. Such transfers from the held to maturity category at the date of initial adoption will not call into question a company's intent to hold other debt securities to maturity in the future. National Western has reviewed its current classification of securities and made the decision to transfer $294 million of debt securities at amortized cost from securities held to maturity to securities available for sale. The net unrealized holding losses on the transferred securities totaled $5.1 million, after effects of deferred taxes and deferred policy acquisition costs. This adjustment will be reflected in the Company's financial statements in other comprehensive income as a cumulative effect of a change in accounting principle as of January 1, 2001. The Company also made the determination to transfer debt securities with fair values totaling $112 million from securities available for sale to securities held to maturity as of January 1, 2001. The transfers were recorded at fair values, and the unrealized holding loss totaling $647,000 at the date of transfer will continue to be reported in accumulated other comprehensive income or loss but will be amortized to interest income over the remaining life of the security. The unrealized loss is net of effects of deferred taxes and deferred policy acquisition costs. The transfer of securities from available for sale to held to maturity will have no effect on the net earnings of the Company. REGULATORY AND OTHER ISSUES Statutory Accounting Practices Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners (NAIC). The NAIC is an association of state insurance commissioners, regulators, and support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has recently completed a comprehensive process of codifying statutory accounting practices and procedures. Other than specific individual state laws, the codification results will be the only source of prescribed statutory accounting practices. The Company's state of domicile, Colorado, has adopted the new codified statutory accounting practices and procedures. Insurance companies must adopt these new statutory accounting practices in 2001, which will result in significant changes to existing practices used in the preparation of statutory financial statements. The Company is currently in the process of finalizing the implementation of the new accounting practices, as the first statutory financial statements filed under the new rules will be for the quarter ended March 31, 2001. National Western currently anticipates the financial effects of implementation will be to increase statutory capital and surplus by approximately $3 million as of January 1, 2001. The Company's statutory capital and surplus as of December 31, 2000, before the effects of the rule changes was $396 million. Risk-Based Capital Requirements The NAIC established risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. Due to statutory laws prohibiting public dissemination of certain RBC information, the Company has chosen not to publish its RBC ratios or levels. However, the Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in the Investments in Debt and Equity Securities section. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is reported in Attachment A beginning on page __. See Index to Financial Statements and Schedules on page __ for a list of financial information included in Attachment A. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in auditors or disagreements with auditors which are reportable pursuant to Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors The following information as of January 31, 2001, is furnished with respect to each director. All terms expire in June of 2001.
Principal Occupation During Last Five First Name of Director Years and Directorships Elected Age Robert L. Moody Chairman of the Board and Chief 1963 65 (1) (3) (4) (5) Executive Officer of the Company; Investments, Galveston, Texas Ross R. Moody President and Chief Operating Officer 1981 38 (1) (3) of the Company, Austin, Texas Arthur O. Dummer President, The Donner Company, 1980 67 (1) (2) (3) Salt Lake City, Utah Harry L. Edwards Retired; Former President and Chief 1969 79 Operating Officer of the Company, Austin, Texas E. Douglas McLeod Director of Development, The Moody 1979 59 (4) Foundation, Galveston, Texas Charles D. Milos Senior Vice President of the Company, 1981 55 (1) (3) Galveston, Texas Frances A. Moody Executive Director, 1990 31 (4) The Moody Foundation, Dallas, Texas, 1997 - present; Investments, Dallas, Texas, 1992 - 1997 Russell S. Moody Investments, Austin, Texas 1988 39 (4) Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 65 (2) Investments, Galveston, Texas E. J. Pederson Executive Vice President, 1992 53 (2) The University of Texas Medical Branch, Galveston, Texas (1) Member of Executive Committee; (2) Member of Audit Committee; (3) Member of Investment Committee; (4) Director of American National Insurance Company of Galveston, Texas; (5) Director of The Moody National Bank of Galveston, Texas.
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody, Mr. Ross Moody, and Mr. Russell Moody. (b) Identification of Executive Officers The following is a list of the Company's executive officers, their ages, and their positions and offices as of January 31, 2001.
Name of Officer Age Position (Year elected to position) Robert L. Moody 65 Chairman of the Board and Chief Executive Officer (1963-1968, 1971-1980, 1981), Director Ross R. Moody 38 President and Chief Operating Officer (1992), Director Robert L. Busby, III 63 Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (1992) Charles P. Baley 62 Senior Vice President - Information Services (1990) Richard M. Edwards 48 Senior Vice President - International Marketing (1990) Paul D. Facey 49 Senior Vice President - Chief Actuary (1992) Charles D. Milos 55 Senior Vice President - Investment Analyst (1990), Director James P. Payne 56 Senior Vice President - Secretary (1998) Patricia L. Scheuer 49 Senior Vice President - Chief Investment Officer (1992)
(c) Identification of Certain Significant Employees None. (d) Family Relationships There are no family relationships among the officers listed except that Mr. Robert Moody is the father of Mr. Ross Moody. There are no arrangements or understandings pursuant to which any officer was elected. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors. (e) Business Experience All of the executive officers listed above have served in various executive capacities with the Company for more than five years. (f) Involvement in Certain Legal Proceedings There are no events pending, or during the last five years, under any bankruptcy act, criminal proceedings, judgments, or injunctions material to the evaluation of the ability and integrity of any director or executive officer. ITEM 11. EXECUTIVE COMPENSATION (b) Summary Compensation Table
Long Term Compensation No. of Securities Annual Compensation Underlying All Other Name and Salary Bonus Options Compensation Principal Position Year (A) (B) (C) (D) 1Robert L. Moody 2000 $ 1,227,962 $ - - $ 372,803 Chairman of the 1999 1,173,965 - - 322,229 Board and Chief 1998 1,124,174 - 13,000 254,333 Executive Officer 2Ross R. Moody 2000 450,418 - - 26,145 President and 1999 440,630 - - 31,299 Chief Operating 1998 422,496 25,000 12,500 64,457 Officer 3Richard M. Edwards 2000 168,212 64,038 - 13,919 Senior 1999 163,301 77,909 - 14,435 Vice President- 1998 159,064 9,605 2,500 10,110 International Marketing 4Robert L. 2000 222,577 - - 13,073 Busby, III 1999 205,025 - - 12,254 Senior Vice 1998 193,889 - 1,500 11,576 President - Chief Administrative Officer, Chief Financial Officer and Treasurer 5Charles D. Milos 2000 189,477 10,000 - 11,680 Senior Vice 1999 177,445 - - 10,332 President - 1998 167,566 - 3,500 9,467 Investment Analyst Notes to Summary Compensation Table: (A) Salary includes directors' fees from National Western Life Insurance Company and its subsidiaries. (B) Bonuses include employment and performance related bonuses which are occasionally granted. (C) Represents stock options granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan. (D) All other compensation includes primarily employer contributions made to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on behalf of the employee. However, this item also includes taxable income for Robert L. Moody, related to his assignment of excess insurance on the Libbie Shearn Moody Trust of approximately $348,000, $299,000, and $232,000 in 2000, 1999, and 1998, respectively. This item also includes various expense allowances for Ross R. Moody in 1999 and 1998 of approximately $5,000 and $42,000, respectively.
(c) Option/SAR Grants Table During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The purpose of the Plan is to align the personal financial incentives of key personnel with the long-term growth of the Company and the interests of the Company's stockholders through the ownership and performance of the Company's Class A, $1.00 par value, common stock, to enhance the Company's ability to retain key personnel, and to attract outstanding prospective employees and directors. The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares. All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The Committee approved the issuance of nonqualified stock options to selected officers of the Company during 1998 totaling 48,500. Additionally, during 1998 the Committee granted 10,000 nonqualified, nondiscretionary stock options to Company directors. No nonqualified stock options were issued in 2000 and 1999. The directors' stock options vest 20% annually following one full year of service to the Company from the date of grant. The officers' stock options vest 20% annually following three full years of service to the Company from the date of grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant. (d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table For the year ended December 31, 2000, detailed below is stock option information for the Company's named executive officers:
Number of Shares Securities Underlying Value of Unexercised Acquired Unexercised Options In-The-Money Options On Value Exercis- Unexercis- Exercis- Unexercis- Name Excercise Realized able able able able 1 Robert L. - $ - 23,160 39,240 $1,229,189 $ 1,121,748 Moody 2 Ross R. - - 6,300 19,400 319,309 366,560 Moody 3 Richard M. - - 2,100 5,900 100,770 132,139 Edwards 4 Robert L. 1,000 48,438 200 4,500 3,588 141,089 Busby, III 5 Charles D. - - 2,760 6,140 124,104 118,437 Milos
(e) Long-Term Incentive Plan Awards Table None. (f) Defined Benefit or Actuarial Plan Disclosure The Company currently has two employee defined benefit plans for the benefit of its employees and officers. A brief description and formulas by which benefits are determined for each of the plans are detailed as follows: Qualified Defined Benefit Plan - This plan covers all full-time employees and officers of the Company and provides benefits based on the participant's years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are calculated as the sum of the following: (1) 50% of the participant's final 5-year average annual eligible compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date. This result is multiplied by a fraction which is the participant's years of benefit service at December 31, 1990, divided by the participant's years of benefit service at normal retirement date. (2) 1.5% of the participant's eligible compensation earned during each year of benefit service after December 31, 1990. Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are calculated as 1.5% of their compensation earned during each year of benefit service. Non-Qualified Defined Benefit Plan - This plan covers those officers who were in the position of senior vice president or above prior to 1991 and other employees who have been designated by the President of the Company as being in the class of persons who are eligible to participate in the plan. This plan also provides benefits based on the participant's years of service and compensation. However, no minimum funding standards are required. The benefit to be paid pursuant to this Plan to a Participant who retires at his normal retirement date shall be equal to (a) minus (b) minus (c) where: (a) is the benefit which would have been payable at the participant's normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that Plan had continued without change, and, (b) is the benefit which actually becomes payable under the terms of the Qualified Defined Benefit Plan at the participant's normal retirement date, and, (c) is the actuarially equivalent life annuity which may be provided by an accumulation of 2% of the participant's compensation for each year of service on or after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date. In no event will the benefit be greater than the benefit which would have been payable at normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that plan had continued without change. The estimated annual benefits payable to the named executive officers upon retirement, at normal retirement age, for the Company's defined benefit plans are as follows:
Estimated Annual Benefits Qualified Non-Qualified Defined Defined Name Benefit Plan Benefit Plan Totals 1 Robert L. Moody $ 127,109 391,541 518,650 2 Ross R. Moody 92,043 - 92,043 3 Richard M. Edwards 69,171 74 69,245 4 Robert L. Busby, III 48,233 36,334 84,567 5 Charles D. Milos 54,579 15,479 70,058
During 1998 the Company transferred the pension obligations and administrative responsibilities of the non-qualified defined benefit plan to a pension administration firm. Upon transfer, the Company made a payment to the firm to cover current and future liabilities and administration of the plan. However, as more fully described in Note 7, Pension Plans, of the accompanying financial statements, National Western retains certain contingent liabilities with respect to the plan. (g) Compensation of Directors All directors of the Company currently receive $18,000 a year and $500 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors. An additional $500 is paid for each committee meeting attended. However, a director attending multiple meetings on the same day receives only one meeting fee. The amounts paid pursuant to these arrangements are included in the summary compensation table under Item 11(b). The directors and their dependents are also insured under the Company's group insurance program. During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan), as more fully described in Item 11(c). Directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Nonemployee directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. On May 19, 1995, the Committee approved the issuance of 7,000 nonqualified, nondiscretionary stock options to nonemployee Company directors, with each such director receiving 1,000 stock options. On June 19, 1998, the stockholders approved the issuance of 10,000 nonqualified, nondiscretionary stock options to all Company directors, with each such director receiving 1,000 stock options. Directors of the Company's subsidiary, NWL Investments, Inc., receive $250 annually. Nonemployee directors of the Company's subsidiary, NWL Services, Inc., receive $1,000 per board meeting attended. Directors of the Company's downstream subsidiaries, Regent Care General Partner, Inc., and Regent Care Operations General Partner, Inc., receive $250 per board meeting attended. (h) Employment Contracts and Termination of Employment and Change-in-Control Arrangements One of the named executive officers, Richard M. Edwards, had a bonus compensation contract with the Company during 2000. The contract consisted of several components in which certain levels of Company performance relating to annuity account balances, life insurance persistency rates, life insurance premiums, and annuity contract deposits were required in order to earn bonuses. Compensation bonuses paid to Mr. Edwards are disclosed in part (b) of this item. (i) Report on Repricing of Options/SARs None. (j) Compensation Committee Interlocks and Insider Participation The Company's Board of Directors performs the functions of an executive compensation committee. The Board is responsible for developing and administering the policies that determine executive compensation. Additionally, a separate Compensation and Stock Option Committee, comprised of outside, independent directors, determines compensation for the three highest- paid Company executives. The committee also performs various projects relating to executive compensation at the request of the Board of Directors. Those directors serving on the committee include Arthur O. Dummer, Harry L. Edwards, and E. J. Pederson. Mr. Robert Moody, Mr. Ross Moody, and Mr. Charles Milos serve as directors and also serve as officers and employees of National Western Life Insurance Company. Mr. Ross Moody serves as an officer and director of the Company's wholly owned subsidiaries, The Westcap Corporation, NWL 806 Main, Inc., NWL Investments, Inc., NWL Properties, Inc., NWL Financial, Inc., NWL Services, Inc., Regent Care Limited Partner, Inc., and Regent Care Operations Limited Partner, Inc. Mr. Charles Milos serves as an officer and director of The Westcap Corporation, Regent Care General Partner, Inc., and Regent Care Operations General Partner, Inc. and as an officer of NWL 806 Main, Inc., NWL Investments, Inc., NWL Properties, Inc., NWL Financial, Inc., NWL Services, Inc., Regent Care Limited Partner, Inc., and Regent Care Operations Limited Partner, Inc. Mr. Robert Moody is an officer of NWL Services, Inc. Mr. Arthur Dummer is an officer and director of NWL Services, Inc., and Regent Care Operations General Partner, Inc., and a director of Regent Care General Partner, Inc. Mr. Harry Edwards serves as a director and was formerly an officer of National Western Life Insurance Company. The Donner Company, 100% owned by Mr. Dummer, who is a director of National Western Life Insurance Company and an officer and director of NWL Services, Inc., and Regent Care Operations General Partner, Inc. and a director of Regent Care General Partner, Inc., was paid $84,332 in 2000 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. No compensation committee interlocks exist with other unaffiliated companies. (k) Board Compensation Committee Report on Executive Compensation The Company's Board of Directors determines and approves executive compensation, along with developing and administering the policies that determine executive compensation. Executive compensation, including that of the chief executive officer, is comprised primarily of a base salary. The salary is adjusted annually based on a performance review of the individual as well as the performance of the Company as a whole. The president and chief executive officer make recommendations annually to the Board of Directors regarding such salary adjustments. The review encompasses the following factors: (1) contributions to the Company's short and long-term strategic goals, including financial goals such as Company revenues and earnings, (2) achievement of specific goals within the individual's realm of responsibility, (3) development of management and employees within the Company, and (4) performance of leadership within the industry. These policies are reviewed periodically by the Board of Directors to ensure the support of the Company's overall business strategy and to attract and retain key executives. As previously described, a separate Compensation and Stock Option Committee, comprised of outside, independent directors, determines compensation for the three highest-paid Company executives. The committee also performs various projects relating to executive compensation at the request of the Board of Directors. The policies used by the Compensation and Stock Option Committee in determining compensation are similar to those described above for all other Company executives. (1) Performance Graph The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the Nasdaq - U.S. Companies Index and the Nasdaq Insurance Stock Index. The graph assumes that the value of the Company's common stock and each index was $100 at December 31, 1995, and that all dividends were reinvested. For the purpose of this electronic filing, the coordinates of the graph have been provided below:
December 31, 1995 1996 1997 1998 1999 2000 National Western Life Insurance Company 100.00 155.4 181.2 209.8 122.5 184.0 Nasdaq Stock Market (US Companies) 100.00 123.0 150.7 212.5 394.9 237.7 Nasdaq Insurance Stocks 100.00 114.0 167.3 149.0 115.6 145.2
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners Set forth below is certain financial information concerning persons who are known by the Company to own beneficially more than 5% of any class of the Company's common stock on December 31, 2000:
Amount and Nature of Beneficial Name and Address Title Ownership Percent of of Record and of Beneficial Owners Class Beneficially Class Robert L. Moody Class A Common 1,160,896 35.13% 2302 PostOffice Class B Common 198,074 99.04% Street, Suite 702 Galveston, Texas Westport Asset Class A Common 359,400 10.88% Management, Inc. 253 Riverside Avenue Westport, Connecticut Tweedy Browne Company Class A Common 325,629 9.85% 350 Park Avenue New York, New York FMR Corp. Class A Common 170,000 5.14% 82 Devonshire Street Boston, Massachusetts
(b) Security Ownership of Management The following table sets forth as of December 31, 2000, information concerning the beneficial ownership of the Company's common stock by all directors, named executive officers, and all directors and executive officers of the Company as a group:
Amount and Nature of Title Beneficial Ownership Percent Directors of Record and of and Officers Class Beneficially Class Directors and Named Executive Officers: Robert L. Moody Class A Common 1,160,896 35.13% Class B Common 198,074 99.04% Ross R. Moody Class A Common* 625 .02% Class B Common* 482 .24% Directors: Arthur O. Dummer Class A Common 310 .01% Class B Common - - Harry L. Edwards Class A Common 20 - Class B Common - - E. Douglas McLeod Class A Common 10 - Class B Common - - Charles D. Milos Class A Common 528 .02% Class B Common - - Frances A. Moody Class A Common 1,850 .06% Class A Common* 625 .02% Class B Common* 482 .24% Russell S. Moody Class A Common 1,850 .06% Class A Common* 625 .02% Class B Common* 482 .24% Louis E. Pauls, Jr. Class A Common 110 - Class B Common - - E. J. Pederson Class A Common 100 - Class B Common - - Named Executive Officers: Robert L. Busby, III Class A Common - - Class B Common - - Richard M. Edwards Class A Common 303 .01% Class B Common - - Directors and Executive Class A Common 1,168,330 35.36% Officers as a Group Class B Common 199,520 99.76% * Shares are owned indirectly by the respective directors, through the Three R Trusts. The Three R Trusts are four Texas trusts for the benefit of the children of Robert L. Moody (Robert L. Moody Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody). The Three R Trusts own a total of 2,500 Class A common stock shares and 1,926 Class B common stock shares.
(c) Changes in Control None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with Management and Others The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of National Western Life Insurance Company, was paid $84,332 in 2000 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. Moody Insurance Group, Inc., was paid $426,057 in commissions in 2000 pursuant to an agency contract with National Western Life Insurance Company. Moody Insurance Group, Inc., is wholly owned by Mr. Robert L. Moody, Jr. Mr. Robert L. Moody, Jr., is an employee of the Company and the son of Mr. Robert L. Moody, who serves as a director and chief executive officer of the Company, the brother of Mr. Ross R. Moody, who serves as a director and president of the Company, and the brother of Mr. Russell S. Moody and Ms. Frances A. Moody, who serve as directors of the Company. The commissions paid were based on premiums and deposits totaling approximately $19,218,000 from sales of National Western life insurance and annuity products by Moody Insurance Group, Inc., and Mr. Robert L. Moody, Jr., in 2000. In addition, Mr. Robert L. Moody, Jr., personally received $593 in commissions in 2000 pursuant to an agency contract between himself and the Company. Jay W. Balentine is the son-in-law of Robert L. Moody. Jay W. Balentine has a 100% ownership interest in JWB Development Corporation. Jay W. Balentine also has a 19.8% limited partner interest in Regent Management Services, Limited Partnership (a Nevada limited partnership); a 20.0% interest in RCC Management Services, Inc. (the general partner of Regent Management Services, Limited Partnership); and is also president of RCC Management Services, Inc. On or about March 29, 2000, National Western Life Insurance Company purchased Nevada Health Development II, Limited Partnership, from its partners, JWB Development Corporation (1% general partner interest), Three R Trusts (50% limited partner interest), and Jay W. Balentine (49% limited partner interest). The Three R Trusts are four Texas trusts for the benefit of the children of Robert L. Moody (Robert L. Moody, Jr., Ross R. Moody, and Russell S. Moody are the sons of Robert L. Moody, and Frances A. Moody is the daughter of Robert L. Moody). This transaction involved the purchase of a nursing home in Reno, Nevada, owned by Nevada Health Development II, Limited Partnership, and a merger into a partnership owned by corporations that are wholly owned subsidiaries of National Western. The result was that the nursing home became the sole property of a subsidiary of National Western Life Insurance Company. Further, the financing for that purchase was ultimately by a mortgage loan totaling $7,000,000 from National Western to a subsidiary, Regent Care Building, Limited Partnership (a Nevada limited partnership). Further, as a result of that purchase, and the following merger of Nevada Health Development II, Limited Partnership, into Regent Care Building, Limited Partnership, another subsidiary of National Western, Regent Care Operations, Limited Partnership (a Nevada limited partnership), leased the nursing home building from Regent Care Building, Limited Partnership. Following that, Regent Care Operations, Limited Partnership, contracted with Regent Management Services, Limited Partnership, for the management and operations of the nursing home. Regent Management Services, Limited Partnership, is owned by general partner RCC Management Services, Inc. (a Nevada corporation), and the following limited partners: Three R Trusts, Jay W. Balentine, and Rex Greebon. (b) Certain Business Relationships None. (c) Indebtedness of Management The Company holds three mortgage loans issued to Gal-Tex Hotel Corporation, which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody Foundation. The first mortgage loan in the amount of $2,071,000 was issued in 1988 and originally matured in May of 1998. It was extended during 1998 to May of 2003 and pays interest of 8%. The loan is secured by property consisting of a hotel located in Kingsport, Tennessee. The second mortgage loan in the amount of $7,642,000 was issued in 1994, will mature in October of 2004, and pays interest of 8.75%. The loan is secured by property consisting of a hotel located in Houston, Texas. The third mortgage loan in the amount of $1,610,000 was issued in 1995, will mature in January of 2006, and pays interest of 9%. The loan is secured by property consisting of a hotel located in Woodstock, Virginia. Each of these loans is current as to principal and interest payments. The Company's wholly owned subsidiary, NWL Services, Inc., is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, in the trust estate of Libbie Shearn Moody. The trustee of this estate is The Moody National Bank of Galveston. The Moody National Bank is ultimately controlled by the Three R Trusts, Galveston, Texas, whose ultimate beneficiaries are the children of Robert L. Moody, who are Robert L. Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody. The Moody Foundation is a private charitable foundation governed by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees. (d) Transactions with Promoters None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Listing of Financial Statements See Attachment A, Index to Financial Statements and Schedules, on page ___ for a list of financial statements included in this report. (a) 2. Listing of Financial Statement Schedules See Attachment A, Index to Financial Statements and Schedules, on page ___ for a list of financial statement schedules included in this report. All other schedules are omitted because they are not applicable, not required, or because the information required by the schedule is included elsewhere in the financial statements or notes. (a) 3. Listing of Exhibits Exhibit 2 - Order Confirming Third Amended Joint Consensual Plan Of Reorganization Proposed By The Debtors And The Official Committee Of Unsecured Creditors (As Modified As Of August 28, 1998) (incorporated by reference to Exhibit 2 to the Company's Form 8-K dated August 28, 1998). Exhibit 3(a) - Restated Articles of Incorporation of National Western Life Insurance Company dated April 10, 1968 (incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 3(b) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated July 29, 1971 (incorporated by reference to Exhibit 3(b) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 3(c) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 10, 1976 (incorporated by reference to Exhibit 3(c) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 3(d) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated April 28, 1978 (incorporated by reference to Exhibit 3(d) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 3(e) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 1, 1979 (incorporated by reference to Exhibit 3(e) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 3(f) - Bylaws of National Western Life Insurance Company as amended through April 24, 1987 (incorporated by reference to Exhibit 3(f) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 10(a) - National Western Life Insurance Company Non-Qualified Defined Benefit Plan dated July 26, 1991 (incorporated by reference to Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 10(b) - National Western Life Insurance Company Officers' Stock Bonus Plan effective December 31, 1992 (incorporated by reference to the Company's Form S-8 registration dated January 27, 1994). Exhibit 10(c) - National Western Life Insurance Company Non-Qualified Deferred Compensation Plan, as amended and restated, dated March 27, 1995 (incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 10(d) - First Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1995 (incorporated by reference to Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1995). Exhibit 10(f) - First Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(f) to the Company's Form 10-K for the year ended December 31, 1996). Exhibit 10(g) - Second Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(g) to the Company's Form 10-K for the year ended December 31, 1996). Exhibit 10(h) - Second Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(h) to the Company's Form 10-K for the year ended December 31, 1996). Exhibit 10(i) - Third Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 17, 1996 (incorporated by reference to Exhibit 10(i) to the Company's Form 10-K for the year ended December 31, 1996). Exhibit 10(j) - Fourth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective June 20, 1997 (incorporated by reference to Exhibit 10(j) to the Company's Form 10-K for the year ended December 31, 1997). Exhibit 10(k) - First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan effective June 19, 1998 (incorporated by reference to Exhibit 10(k) to the Company's Form 10-Q for the quarter ended June 30, 1998). Exhibit 10(l) - Joint Motion For Preliminary Approval Of Settlement Agreement, To Authorize Class Notice, To Enjoin Other Actions And To Schedule Fairness Hearing (incorporated by reference to Exhibit 10(l) to the Company's Form 8-K dated September 8, 1998). Exhibit 10(m) - Fifth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1998 (incorporated by reference to Exhibit 10(l) to the Company's Form 10-Q for the quarter ended September 30, 1998). Exhibit 10(n) - Sixth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(n) to the Company's Form 10-K for the year ended December 31, 1998). Exhibit 10(o) - Third Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective August 7, 1998 (incorporated by reference to Exhibit 10(o) to the Company's Form 10-K for the year ended December 31, 1998). Exhibit 10(p) - Exchange Agreement by and among National Western Life Insurance Company, NWL Services, Inc., Alternative Benefit Management, Inc., and American National Insurance Company effective November 23, 1998 (incorporated by reference to Exhibit 10(p) to the Company's Form 10-K for the year ended December 31, 1998). Exhibit 10(q) - Bonus Agreement by and between National Western Life Insurance Company and Richard M. Edwards effective August 1, 1999 (incorporated by reference to Exhibit 10(q) to the Company's Form 10-K for the year ended December 31, 1999). Exhibit 10(r) - Bonus Agreement by and between National Western Life Insurance Company and Arthur W. Pickering effective August 10, 1999 (incorporated by reference to Exhibit 10(r) to the Company's Form 10-K for the year ended December 31, 1999). Exhibit 10(s) - Seventh Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective August 7, 1998 (filed on page ___ of this report). Exhibit 10(t) - Bonus Agreement by and between National Western Life Insurance Company and Richard M. Edwards effective May 30, 2000 (filed on page ___ of this report). Exhibit 10(u) - Eighth Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective December 1, 2000 (filed on page ___ of this report). Exhibit 10(v) - Fourth Amendment to the National Western Life Insurance Company Non-Qualified Defined Benefit Plan effective December 1, 2000 (filed on page ___ of this report). Exhibit 21 - Subsidiaries of the Registrant (filed on page ____ of this report). (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 3, Legal Proceedings. (c) Exhibits Exhibits required by Regulation S-K are listed as to location in the Listing of Exhibits in Item 14(a)3 above. Exhibits not referred to have been omitted as inapplicable or not required. (d) Financial Statement Schedules The financial statement schedules required by Regulation S-K are listed as to location in Attachment A, Index to Financial Statements and Schedules, on page __ of this report. ATTACHMENT A Index to Financial Statements and Schedules Page Independent Auditors' Report Consolidated Balance Sheets, December 31, 2000 and 1999 Consolidated Statements of Earnings for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Comprehensive Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 Notes to Consolidated Financial Statements Schedule I - Summary of Investments Other Than Investments in Related Parties, December 31, 2000 Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 2000, 1999, and 1998 All other schedules are omitted because they are not applicable, not required, or because the information required by the schedule is included elsewhere in the financial statements or notes. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders National Western Life Insurance Company Austin, Texas We have audited the consolidated financial statements of National Western Life Insurance Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Western Life Insurance Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Austin, Texas March 5, 2001 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (In thousands)
ASSETS 2000 1999 Cash and investments: Securities held to maturity, at amortized cost (fair value: $2,113,286 and $2,084,494) $ 2,116,619 2,151,924 Securities available for sale, at fair value (cost: $777,732 and $741,608) 735,110 717,948 Mortgage loans, net of allowance for possible losses ($4,215 and $4,104) 195,665 183,902 Policy loans 110,956 117,309 Index options 5,402 32,820 Other long-term investments 37,386 32,766 Cash and short-term investments 22,665 14,010 Total cash and investments 3,223,803 3,250,679 Deferred policy acquisition costs 394,198 369,665 Accrued investment income 48,265 47,756 Federal income tax receivable 3,888 237 Deferred Federal income tax asset 3,576 - Other assets 24,226 14,491 $ 3,697,956 3,682,828 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (In thousands except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 159,840 165,020 Universal life and investment annuity contracts 2,979,407 2,983,060 Other policyholder liabilities 33,640 24,103 Federal income taxes payable: Current 222 4,763 Deferred - 4,659 Other liabilities 24,741 25,701 Total liabilities 3,197,850 3,207,306 COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9, and 16) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,304,255 and 3,300,728 shares issued and outstanding in 2000 and 1999 3,304 3,301 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 2000 and 1999 200 200 Additional paid-in capital 25,174 25,028 Accumulated other comprehensive loss (7,671) (3,566) Retained earnings 479,099 450,559 Total stockholders' equity 500,106 475,522 $ 3,697,956 3,682,828 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 2000, 1999, and 1998 (In thousands except per share amounts)
2000 1999 1998 Premiums and other revenue: Life and annuity premiums $ 9,717 11,310 13,165 Universal life and investment annuity contract revenues 90,640 83,768 83,169 Net investment income 210,654 242,980 233,844 Other income 946 8,944 1,052 Realized gains (losses) on investments (19,242) 4,481 2,384 Total premiums and other revenue 292,715 351,483 333,614 Benefits and expenses: Life and other policy benefits 40,506 34,775 35,646 Decrease in liabilities for future policy benefits (5,428) (2,319) (3,205) Amortization of deferred policy acquisition costs 47,948 39,148 40,415 Universal life and investment annuity contract interest 137,711 162,302 158,889 Other operating expenses 29,427 27,764 35,504 Total benefits and expenses 250,164 261,670 267,249 Earnings before Federal income taxes and discontinued operations 42,551 89,813 66,365 Federal income taxes 14,011 30,588 17,347 Earnings from continuing operations 28,540 59,225 49,018 Losses from discontinued operations - - (14,125) Net earnings $ 28,540 59,225 34,893 Basic Earnings Per Share: Earnings from continuing operations $ 8.15 16.92 14.02 Losses from discontinued operations - - (4.04) Net earnings $ 8.15 16.92 9.98 Diluted Earnings Per Share: Earnings from continuing operations $ 8.11 16.78 13.87 Losses from discontinued operations - - (4.00) Net earnings $ 8.11 16.78 9.87 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2000, 1999, and 1998 (In thousands)
2000 1999 1998 Net earnings $ 28,540 59,225 34,893 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 (57) (20,051) 3,315 Reclassification adjustment for net losses (gains) included in net earnings 6,809 (2,111) (581) Amortization of net unrealized gains related to transferred securities (581) (250) (516) Unrealized losses on securities transferred during period from held to maturity to available for sale (11,041) - - Net unrealized gains (losses) on securities (4,870) (22,412) 2,218 Foreign currency translation adjustments 765 212 148 Other comprehensive income (loss) (4,105) (22,200) 2,366 Comprehensive income $ 24,435 37,025 37,259 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 2000, 1999, and 1998 (In thousands)
2000 1999 1998 Common stock: Balance at beginning of year $ 3,501 3,498 3,492 Shares exercised under stock option plan 3 3 6 Balance at end of year 3,504 3,501 3,498 Additional paid-in capital: Balance at beginning of year 25,028 24,899 24,662 Shares exercised under stock option plan 146 129 237 Balance at end of year 25,174 25,028 24,899 Accumulated other comprehensive income (loss): Unrealized gains (losses) on securities: Balance at beginning of year (6,412) 16,000 13,782 Change in unrealized gains (losses) during period (4,870) (22,412) 2,218 Balance at end of year (11,282) (6,412) 16,000 Foreign currency translation adjustments: Balance at beginning of year 2,846 2,634 2,486 Change in translation adjustments during period 765 212 148 Balance at end of year 3,611 2,846 2,634 Accumulated other comprehensive income (loss) at end of year (7,671) (3,566) 18,634 Retained earnings: Balance at beginning of year 450,559 391,334 356,441 Net earnings 28,540 59,225 34,893 Balance at end of year 479,099 450,559 391,334 Total stockholders' equity $ 500,106 475,522 438,365 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999, and 1998 (In thousands)
2000 1999 1998 Cash flows from operating activities: Net earnings $ 28,540 59,225 34,893 Adjustments to reconcile net earnings to net cash provided by operating activities: Universal life and investment annuity contract interest 137,711 162,302 158,889 Surrender charges and other policy revenues (42,485) (37,811) (40,267) Realized (gains) losses on investments 19,242 (4,481) (2,384) Accrual and amortization of investment income (4,873) (4,505) (7,763) Depreciation and amortization 1,188 1,028 997 Decrease (increase) in value of index options 26,349 2,330 (7,682) Increase in deferred policy acquisition costs (11,642) (26,289) (24,438) Increase in accrued investment income (509) (2,979) (3,727) Decrease (increase) in other assets (2,572) 1,357 71 Decrease in liabilities for future policy benefits (5,428) (2,319) (3,205) Increase (decrease) in other policyholder liabilities 9,537 148 (1,046) Increase (decrease) in Federal income taxes payable (14,217) 6,503 (2,189) Increase (decrease) in other liabilities (960) (35,589) 29,396 Other (823) (527) (730) Net cash provided by operating activities 139,058 118,393 130,815 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity - - 2,978 Securities available for sale 42,206 56,126 - Other investments 7,171 2,180 4,640 Proceeds from maturities and redemptions of: Securities held to maturity 47,473 114,448 99,495 Securities available for sale 37,879 56,782 59,035 Index options 27,450 16,201 403 Purchases of: Securities held to maturity (118,069) (231,136) (266,580) Securities available for sale (25,929) (152,595) (124,142) Other investments (35,660) (38,715) (20,071) Principal payments on mortgage loans 26,276 40,145 37,805 Cost of mortgage loans acquired (40,661) (45,348) (29,572) Decrease in policy loans 6,353 7,132 9,385 Decrease in assets of discontinued operations - 48 844 Decrease in liabilities of discontinued operations - (48) (844) Other (6,957) (1,107) (892) Net cash used in investing activities (32,468) (175,887) (227,516) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Years Ended December 31, 2000, 1999, and 1998 (In thousands)
2000 1999 1998 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 349,044 410,666 455,709 Return of account balances on universal life and investment annuity contracts (447,128) (363,802) (342,613) Issuance of common stock under stock option plan 149 132 243 Net cash provided by (used in) financing activities (97,935) 46,996 113,339 Net increase (decrease) in cash and short-term investments 8,655 (10,498) 16,638 Cash and short-term investments at beginning of year 14,010 24,508 7,870 Cash and short-term investments at end of year $ 22,665 14,010 24,508 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 388 190 340 Income taxes 28,228 24,084 19,536 Noncash investing activities: Foreclosed mortgage loans $ 3,111 - - Mortgage loans originated to facilitate the sale of real estate - 3,000 1,032 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Principles of Consolidation - The accompanying consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage operations during 1995 and filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation is reflected as discontinued operations in the accompanying financial statements. The bankruptcy reorganization was completed in January, 1999, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. All significant intercorporate transactions and accounts have been eliminated in consolidation. (B) Basis of Presentation - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates included in the accompanying consolidated financial statements include (1) contingent liabilities related to litigation, (2) recoverability of deferred policy acquisition costs, (3) valuation allowances for deferred tax assets, (4) impairment losses on debt securities, and (5) valuation allowances for mortgage loans and real estate. National Western Life Insurance Company also files financial statements with insurance regulatory authorities which are prepared on the basis of statutory accounting practices which are significantly different from consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America. These differences are described in detail in the statutory information section of this note. (C) Investments - Investments in debt securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. 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. Investments in debt and equity securities that are not classified as securities held to maturity are reported as securities available for sale. Securities available for sale are reported in the accompanying consolidated financial statements at individual fair value. Any valuation changes resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity in accumulated other comprehensive income or loss. These unrealized gains or losses in stockholders' equity are reported net of taxes and adjustments to deferred policy acquisition costs. Transfers of securities between categories are recorded at fair value at the date of transfer. The unrealized holding gains or losses for securities transferred from available for sale to held to maturity are included in accumulated other comprehensive income or loss and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. For mortgage-backed and asset-backed securities, the effective interest method is used based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net investment income. Realized gains and losses for securities available for sale and securities held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. A decline in the fair value below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. Mortgage loans and other long-term investments are stated at cost, less unamortized discounts and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Real estate is stated at the lower of cost or fair value less estimated costs to sell. Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans include (1) nonaccrual loans, (2) loans which are 90 days or more past due, unless they are well secured and are in the process of collection, and (3) other loans which management believes are impaired. Impaired loans are measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate, (2) the loan's observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company's impaired loans are measured at the fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent. (D) Cash Equivalents - For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. (E) Derivative Financial Instruments - The Company purchases over-the-counter index options, which are derivative financial instruments, to hedge the equity return component of its equity-indexed annuity products. The index options act as hedges to match closely the returns on the S&P 500 Composite Stock Price Index which may be paid to policyholders. As a result, changes to policyholders' liabilities are substantially offset by changes in the value of the options. Cash is exchanged upon purchase of the index options, and no principal or interest payments are made by either party during the option periods. Upon maturity or expiration of the options, cash is paid to the Company based on the S&P 500 performance and terms of the contract. The index options are reported at fair value in the accompanying consolidated financial statements. The changes in the values of the index options and the changes in the policyholder liabilities are both reflected in the statement of earnings. Any gains or losses from the sale or expiration of the options, as well as period-to-period changes in values, are reflected as net investment income in the statement of earnings. Although there is credit risk in the event of nonperformance by counterparties to the index options, the Company does not expect any counterparties to fail to meet their obligations, given their high credit ratings. In addition, credit support agreements are in place with all counterparties for option holdings in excess of specific limits, which may further reduce the Company's credit exposure. At December 31, 2000 and 1999, the fair values of index options owned by the Company totaled $5,402,000 and $32,820,000, respectively. (F) Insurance Revenues and Expenses - Premiums on traditional life insurance products are recognized as revenues as they become due or, for short duration contracts, over the contract periods. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and investment annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period. Expenses for these policies include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. The related deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on the policies. (G) Federal Income Taxes - Federal income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is provided if all or some portion of the deferred tax asset may not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that affects the realizability of the related deferred tax asset is included in income. (H) Depreciation of Property, Equipment, and Leasehold Improvements - Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. (I) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 2000. (J) Statutory Information - National Western Life Insurance Company, domiciled in Colorado, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Such practices may differ from state to state and may even differ from company to company within a state. However, the NAIC has recently completed a comprehensive process of codifying statutory accounting practices and procedures. Other than specific individual state laws, the codification results will be the only source of prescribed statutory accounting practices. The Company's state of domicile, Colorado, has adopted the new codified statutory accounting practices and procedures. Insurance companies must adopt these new statutory accounting practices in 2001, which will result in significant changes to existing practices used in the preparation of statutory financial statements. The Company is currently in the process of finalizing the implementation of the new accounting practices as the first statutory financial statements filed under the new rules will be for the quarter ended March 31, 2001. National Western currently anticipates the financial effects of implementation will be to increase statutory capital and surplus by approximately $3 million as of January 1, 2001. The Company's statutory capital and surplus as of December 31, 2000, before the effects of the rule changes was $396 million. The following are major differences between accounting principles generally accepted in the United States of America (U.S. generally accepted accounting principles) and current prescribed or permitted statutory accounting practices. 1. The Company accounts for universal life and investment annuity contracts based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The basic effect of the statement with respect to certain long-duration contracts is that deposits for universal life and investment annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses. However, statutory accounting practices do reflect such items as revenues and expenses. A summary of direct premiums and deposits collected is provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Direct premiums and deposits collected: Investment annuity deposits $ 329,002 389,563 431,003 Universal life insurance deposits 70,514 69,906 69,647 Traditional life and other premiums 18,105 19,154 20,237 Totals $ 417,621 478,623 520,887
2. Any gains or losses from the sale or expiration of index options, as well as period-to-period changes in values, are reflected as net investment income in the statement of earnings under U.S. generally accepted accounting principles. For statutory accounting purposes prior to 1999, period-to-period changes in values of index options were recorded directly to capital and surplus, and gains or losses from sales or expirations were reported in income as realized gains or losses on investments. Effective January 1, 1999, the statutory accounting treatment for index options is the same as U.S. generally accepted accounting principles. 3. For statutory accounting purposes, litigation settlements are often recorded as direct reductions of capital and surplus. However, litigation settlements are recorded in the statement of earnings for U.S. generally accepted accounting principles. 4. Under U.S. generally accepted accounting principles, commissions and certain expenses related to policy issuance and underwriting, all of which generally vary with and are related to the production of new business, are deferred. For traditional products, these costs are amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and investment annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies. The Company evaluates the recoverability of deferred policy acquisition costs on an annual basis. In this evaluation, the Company considers estimated future gross profits or future premiums, as applicable for the type of contract. The Company also considers expected mortality, interest earned and credited rates, persistency, and expenses. Statutory accounting practices require commissions and related costs to be expensed as incurred. A summary of information relative to deferred policy acquisition costs is provided in the table below:
Years Ended December 31, 2000 1999 1998 (In thousands) Deferred policy acquisition costs, beginning of year $ 369,665 314,493 291,079 Policy acquisition costs deferred: Agents' commissions 57,426 62,932 62,717 Other 2,164 2,505 2,136 Total costs deferred 59,590 65,437 64,853 Amortization of deferred policy acquisition costs (47,948) (39,148) (40,415) Adjustments for unrealized gains and losses on investment securities 12,891 28,883 (1,024) Deferred policy acquisition costs, end of year $ 394,198 369,665 314,493
5. Under U.S. generally accepted accounting principles, the liability for future policy benefits on traditional products has been calculated by the net level method using assumptions as to future mortality (based on the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to 8%, and withdrawals based on Company experience. For universal life and investment annuity contracts, the liability for future policy benefits represents the account balance. Future policy benefit reserves for equity- indexed annuities are based on policy account balances. An account balance is determined as premiums collected, or previous account balance, plus interest for the equity-indexed component of the policy. The interest is calculated based on the performance of the S&P 500 Index, subject to participation rates and asset fee charges. Account balances are also subject to minimum liability calculations as a result of minimum guaranteed interest rates in the policies. For statutory accounting purposes, liabilities for future policy benefits for life insurance policies are calculated by the net level premium method or the commissioners reserve valuation method. Future policy benefit liabilities for annuities are calculated based on the continuous commissioners annuity reserve valuation method and provisions of Actuarial Guidelines 33 and 35. 6. Deferred Federal income taxes are provided for temporary differences which are recognized in the consolidated financial statements in a different period than for Federal income tax purposes. Deferred taxes are not recognized in statutory accounting practices. Also, for statutory accounting purposes, the Company has recorded Federal income tax receivables as permitted by the Colorado Division of Insurance. The Federal income tax receivables related to subsidiary losses have been recorded directly to surplus and were not recorded in results of operations. 7. For statutory accounting purposes, debt securities are recorded at amortized cost, except for securities in or near default, which are reported at market value. 8. Investments in subsidiaries are recorded at admitted asset value for statutory purposes, whereas the financial statements of the subsidiaries have been consolidated with those of the Company under U.S. generally accepted accounting principles. 9. The asset valuation reserve and interest maintenance reserve, which are investment valuation reserves prescribed by statutory accounting practices, have been eliminated, as they are not required under U.S. generally accepted accounting principles. 10. The recorded value of the life interest in the Libbie Shearn Moody Trust (the Trust) is reported at its initial valuation, net of accumulated amortization, under U.S. generally accepted accounting principles. The initial valuation was based on the assumption that the Trust would provide certain income to the Company at an assumed interest rate and is being amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the date he contributed the life interest to the Company. For statutory accounting purposes, the life interest has been valued at $26,400,000, which was computed as the present value of the estimated future income to be received from the Trust. However, this amount was amortized to a valuation of $12,775,000 over a seven-year period ended December 31, 1999, in accordance with Colorado Division of Insurance permitted accounting requirements. Prescribed statutory accounting practices provide no accounting guidance for such asset. The statutory admitted value of this life interest at December 31, 2000, is $12,775,000 in comparison to a carrying value of $3,761,000 in the accompanying consolidated financial statements. 11. Reconciliations of statutory stockholders' equity, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements prepared under U.S. generally accepted accounting principles are as follows:
Stockholders' Equity as of December 31, 2000 1999 1998 (In thousands) Statutory equity $ 396,277 363,526 310,991 Adjustments: Difference in valuation of investment in the Libbie Shearn Moody Trust (9,014) (8,719) (10,374) Deferral of policy acquisition costs 394,198 369,665 314,493 Adjustment of future policy benefits (265,365) (251,887) (232,919) Deferred Federal income tax asset (liability) 3,576 (4,659) (9,646) Adjustment of securities available for sale to fair value (45,419) (23,580) 38,840 Reversal of asset valuation reserve 11,880 16,870 19,756 Reversal of interest maintenance reserve 10,578 14,314 10,140 Reinstatement of nonadmitted assets 2,140 2,598 3,257 Valuation allowances on investments 2,282 (1,560) (5,458) Adjustment for consolidation (537) (338) 221 Other, net (490) (708) (936) U.S. generally accepted accounting principles equity $ 500,106 475,522 438,365
12. Reconciliations of statutory net earnings, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements prepared under U.S. generally accepted accounting principles are as follows:
Net Earnings for the Years Ended December 31, 2000 1999 1998 (In thousands) Statutory net earnings $ 40,047 24,335 23,973 Adjustments: Subsidiary earnings (losses) before deferred Federal income taxes and intercompany eliminations 2,719 5,836 (11,346) Deferral of policy acquisition costs 11,642 26,289 24,438 Adjustment of future policy benefits (13,478) (18,968) (15,879) Amortization of investment in the Libbie Shearn Moody Trust (295) (291) (289) Benefit (provision) for deferred Federal income taxes 6,025 (6,966) 4,781 Valuation allowances and other than temporary impairment writedowns on investments (13,692) (3,004) 1,253 Unrealized gains on index options recorded in statutory surplus prior to 1999 - - 7,682 Lawsuit settlements recorded in statutory surplus - 5 (4,756) Tax benefit (expense) recorded in statutory surplus (511) 1,342 5,320 Increase (decrease) in interest maintenance reserve (3,736) 4,174 510 Statutory realized loss on The Westcap Corporation preferred stock previously recorded in surplus - 24,775 - Other, net (181) 1,698 (794) U.S. generally accepted accounting principles net earnings $ 28,540 59,225 34,893
(2) DEPOSITS WITH REGULATORY AUTHORITIES The following assets were on deposit with state and other regulatory authorities as required by law at the end of each year:
December 31, 2000 1999 (In thousands) Debt securities $ 17,529 17,847 Short term investments 285 260 Totals $ 17,814 18,107
(3) INVESTMENTS (A) Investment Income The major components of net investment income are as follows:
Years Ended December 31, 2000 1999 1998 (In thousands) Investment income: Debt securities $ 210,194 204,294 195,425 Mortgage loans 18,395 16,262 16,943 Index options (32,268) 10,719 8,057 Policy loans 8,120 8,232 9,252 Other investment income 9,253 7,501 7,783 Total investment income 213,694 247,008 237,460 Investment expenses 3,040 4,028 3,616 Net investment income $ 210,654 242,980 233,844
The Company had real estate investments that were not income producing for the preceding twelve months totaling $677,000 and $946,000 at December 31, 2000 and 1999, respectively. The Company had mortgage loans totaling $2,983,000 and $3,014,000 that were on nonaccrual status as of December 31, 2000 and 1999, respectively. No mortgage loans were on nonaccrual status during 1998. Reductions in interest income associated with nonperforming mortgage loans totaled $252,000 and $192,000 in 2000 and 1999, respectively. The Company had investments in debt securities with carrying values totaling $4,138,000 and $6,500,000 that were on nonaccrual status as of December 31, 2000 and 1999, respectively. No investments in debt securities were on nonaccrual status during 1998. Reductions in interest income associated with nonperforming investments in debt securities totaled $990,000 and $83,000 in 2000 and 1999, respectively. (B) Mortgage Loans and Real Estate Concentrations of credit risk arising from mortgage loans exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant exposure to any individual customer or counterparty. The major concentrations of mortgage loan credit risk for the Company arise by geographic location in the United States and by property type as detailed below.
December 31, Geographic Region: 2000 1999 West South Central 57.1% 58.8% Mountain 20.0 20.5 Pacific 11.0 11.0 South Atlantic 4.6 5.1 All other 7.3 4.6 Totals 100.0% 100.0%
December 31, Property Type: 2000 1999 Retail 62.0% 56.1% Office 23.0 27.4 Hotel/Motel 6.5 7.2 Land/Lots 3.1 2.5 All other 5.4 6.8 Totals 100.0% 100.0%
As of December 31, 2000 and 1999, mortgage loans with book values totaling $2,983,000 and $3,014,000, respectively, were considered impaired. For the years ended December 31, 2000 and 1999, average investments in impaired mortgage loans were $3,441,000 and $1,616,000, respectively. There were no investments in impaired mortgage loans for the year ended December 31, 1998. Interest income recognized on impaired loans for the year ended December 31, 2000, was $268,000. Interest income recognized on impaired loans for the year ended December 31, 1999, was not significant. Impaired loans are typically placed on nonaccrual status, and no interest income is recognized. However, if cash is received on the impaired loan, it is applied to principal and interest on past due payments, beginning with the most delinquent payment. Detailed below are changes in the allowance for mortgage loan losses for 2000, 1999, and 1998:
Years Ended December 31, 2000 1999 1998 (In thousands) Balance at beginning of year $ 4,104 4,640 4,640 Net changes recorded as realized investment (gains) losses 111 (536) - Balance at end of year $ 4,215 4,104 4,640
At December 31, 2000 and 1999, the Company owned investment real estate totaling $14,683,000 and $11,388,000 which is reflected in other long-term investments in the accompanying consolidated financial statements. The Company records real estate at the lower of cost or fair value less estimated costs to sell. Real estate values are monitored and evaluated at least annually by the use of independent appraisals or internal valuations. Decreases in market values affecting carrying values are recorded in a valuation allowance which is reflected in realized gains or losses on investments. For the year ended December 31, 2000, impairment losses on real estate due to decreases in market values totaled $420,000. For the years ended December 31, 1999 and 1998, there were no impairment losses on real estate due to decreases in market values. (C) Investment Gains and Losses The table below presents realized gains and losses and changes in unrealized gains and losses on investments for 2000, 1999, and 1998:
Changes in Realized Unrealized Investment Investment Gains Gains (Losses) (Losses) From Prior Year (In thousands) Year Ended December 31, 2000: Securities held to maturity $ (8,573) 64,097 Securities available for sale (10,475) (4,870) Other (194) - Totals $ (19,242) 59,227 Year Ended December 31, 1999: Securities held to maturity $ (1,454) (162,417) Securities available for sale 3,248 (22,412) Other 2,687 - Totals $ 4,481 (184,829) Year Ended December 31, 1998: Securities held to maturity $ 797 19,754 Securities available for sale 893 2,218 Other 694 - Totals $ 2,384 21,972
(D) Debt and Equity Securities The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 2000:
Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 4,115 302 - 4,417 States and political subdivisions 6,752 524 39 7,237 Foreign governments 51,515 1,532 - 53,047 Public utilities 345,062 5,932 2,871 348,123 Corporate 1,191,413 17,643 29,788 1,179,268 Mortgage-backed 411,502 9,559 228 420,833 Asset-backed 106,260 320 6,219 100,361 Totals $ 2,116,619 35,812 39,145 2,113,286
Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 3,257 20 - 3,277 States and political subdivisions 15,463 620 346 15,737 Public utilities 46,040 1,161 494 46,707 Corporate 379,915 4,352 52,229 332,038 Mortgage-backed 194,513 5,814 1,433 198,894 Asset-backed 125,875 1,155 4,850 122,180 Equity securities 12,669 3,975 367 16,277 Totals $ 777,732 17,097 59,719 735,110
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1999:
Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 3,612 105 - 3,717 States and political subdivisions 6,741 617 35 7,323 Foreign governments 51,450 136 215 51,371 Public utilities 323,310 989 11,125 313,174 Corporate 1,284,420 4,376 52,112 1,236,684 Mortgage-backed 382,975 3,237 5,510 380,702 Asset-backed 99,416 58 7,951 91,523 Totals $ 2,151,924 9,518 76,948 2,084,494
Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 3,243 69 - 3,312 States and political subdivisions 11,771 - 1,046 10,725 Public utilities 51,013 827 1,517 50,323 Corporate 316,567 2,179 19,482 299,264 Mortgage-backed 219,549 3,410 4,857 218,102 Asset-backed 126,710 - 6,488 120,222 Equity securities 12,755 3,976 731 16,000 Totals $ 741,608 10,461 34,121 717,948
The amortized cost and fair values of investments in debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Securities Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value (In thousands) Due in 1 year or less $ 2,998 3,007 9,135 9,102 Due after 1 year through 5 years 79,200 67,624 745,348 748,455 Due after 5 years through 10 years 305,851 271,299 726,832 716,453 Due after 10 years 56,626 55,829 117,542 118,082 444,675 397,759 1,598,857 1,592,092 Mortgage and asset-backed securities 320,388 321,074 517,762 521,194 Totals $ 765,063 718,833 2,116,619 2,113,286
The Company uses the specific identification method in computing realized gains and losses. Proceeds from sales of securities available for sale during 2000 and 1999 totaled $42,206,000 and $56,126,000, respectively. There were no sales of securities available for sale during 1998. Gross gains and gross losses realized on those sales are detailed below:
Years Ended December 31, 2000 1999 1998 (In thousands) Gross realized gains $ 457 4,055 - Gross realized losses (4,858) - - Net realized gains (losses) $ (4,401) 4,055 -
The Company did not sell any held to maturity securities in 2000 or 1999. In 1998, the Company sold one held to maturity security due to significant credit deterioration of the issuing company. Amortized cost of the security totaled $2,981,000, and a realized loss of $3,000 was recognized on the sale. The Company held in its investment portfolio below investment grade debt securities totaling $82,764,000 and $70,900,000 at December 31, 2000 and 1999, respectively. These amounts represent 2.6% and 2.2% of total invested assets at December 31, 2000 and 1999, respectively. Below investment grade securities generally have greater default risk than higher rated corporate debt. The issuers of these securities are usually more sensitive to adverse industry or economic conditions than are investment grade issuers. For the years ended December 31, 2000 and 1999, the Company recorded realized losses totaling $14,671,000 and $4,403,000, respectively, for other than temporary impairment writedowns for investments in debt securities. The Company had investments totaling $56,799,000 in Citigroup, Inc., or its affiliates at December 31, 2000. Except for U.S. government agency mortgage- backed securities, the Company had no other investments in any entity in excess of 10% of stockholders' equity at December 31, 2000. (E) Transfers of Securities At July 31, 1994, the Company transferred debt securities with fair values totaling $805 million from securities available for sale to securities held to maturity. On December 29, 1995, the Company made additional transfers totaling $156 million to the held to maturity category from securities available for sale. Lower holdings of securities available for sale significantly reduce the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers of securities were recorded at fair values in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires that the unrealized holding gain or loss at the date of the transfer continue to be reported in a separate component of stockholders' equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for the held to maturity securities. The transfer of securities from available for sale to held to maturity had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows:
Net Unrealized Gains (Losses) as of December 31, 2000 1999 1998 (In thousands) Beginning unamortized gains from transfers $ 779 1,029 1,545 Amortization of net unrealized gains related to transferred securities, net of effects of deferred policy acquisition costs and taxes (581) (250) (516) Ending unamortized gains from transfers $ 198 779 1,029
Net unrealized gains and losses on investment securities included in stockholders' equity at December 31, 2000 and 1999, are as follows:
December 31, 2000 1999 (In thousands) Gross unrealized gains $ 17,097 10,461 Gross unrealized losses (59,719) (34,121) Adjustments for: Deferred policy acquisition costs 24,960 12,597 Deferred Federal income tax benefits 6,182 3,872 (11,480) (7,191) Net unrealized gains related to securities transferred to held to maturity 198 779 Net unrealized losses on investment securities $ (11,282) (6,412)
(F) Change in Accounting Principles Derivative Instruments and Hedging Activities 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 Derivatives Implementation Group (DIG) of the FASB addressed this policy liability issue, and only recently in December, 2000, released guidance for the liability calculation. The DIG guidance was approved by FASB at its meeting on March 14, 2001. Because of the lack of guidance and delayed approval by FASB, companies are allowed additional time to implement the new policy liability method for equity-indexed annuities. National Western will implement the new method effective April 1, 2001, as provided by changes to the implementation guidance. The Company is continuing its review of the final guidance and is in the process of making system programming changes to calculate policy liabilities under the new method. This method requires that the option portion of the contract be identified and accounted for as an embedded derivative, while the insurance portion of the contract is recorded independently as an annuity contract. Preliminary calculations indicate that if the new method were to be implemented on January 1, 2001, policy liabilities may be reduced. However, the final impact of the change has yet to be determined. The difference in policy liability calculations is not anticipated to be material to the Company's financial position, although it could be significant to net income for the year ended December 31, 2001. Any finally determined adjustment will be reported in net income as a cumulative effect of a change in accounting principle in the second quarter of 2001. As part of the implementation of SFAS No. 133, companies may reconsider the appropriateness of classifications of debt securities in the following categories: held to maturity, available for sale, and trading. Companies may need to reallocate security holdings in light of the new accounting requirements. Therefore, at the date of adoption of SFAS No. 133, an entity may transfer securities held to maturity into the available for sale category or the trading category. Such transfers from the held to maturity category at the date of initial adoption will not call into question a company's intent to hold other debt securities to maturity in the future. National Western has reviewed its current classification of securities and made the decision to transfer $294 million of debt securities at amortized cost from securities held to maturity to securities available for sale. The net unrealized holding losses on the transferred securities totaled $5.1 million, after effects of deferred taxes and deferred policy acquisition costs. This adjustment will be reflected in the Company's financial statements in other comprehensive income as a cumulative effect of a change in accounting principle as of January 1, 2001. The Company also made the determination to transfer debt securities with fair values totaling $112 million from securities available for sale to securities held to maturity as of January 1, 2001. The transfers were recorded at fair values, and the unrealized holding loss totaling $647,000 at the date of transfer will continue to be reported in accumulated other comprehensive income or loss but will be amortized to interest income over the remaining life of the security. The unrealized loss is net of effects of deferred taxes and deferred policy acquisition costs. The transfer of securities from available for sale to held to maturity will have no effect on the net earnings of the Company. (4) REINSURANCE The Company is party to several reinsurance agreements. The Company's general policy is to reinsure that portion of any risk in excess of $200,000 on the life of any one individual. Total life insurance in force was $9.71 billion and $9.75 billion at December 31, 2000 and 1999, respectively. Of these amounts, life insurance in force totaling $1.82 billion and $1.68 billion was ceded to reinsurance companies, primarily on a yearly renewable term basis, at December 31, 2000 and 1999, respectively. In accordance with the reinsurance contracts, reinsurance receivables including amounts related to claims incurred but not reported and liabilities for future policy benefits totaled $6,486,000 and $2,473,000 at December 31, 2000 and 1999, respectively. Premium revenues were reduced by $8,512,000, $7,904,000, and $7,245,000 for reinsurance premiums incurred during 2000, 1999, and 1998, respectively. Benefit expenses were reduced by $10,942,000, $3,350,000, and $3,013,000 for reinsurance recoveries during 2000, 1999, and 1998, respectively. A liability exists with respect to reinsurance, as the Company remains liable if the reinsurance companies are unable to meet their obligations under the existing agreements. (5) FEDERAL INCOME TAXES Total Federal income taxes for 2000, 1999, and 1998 were allocated as follows:
Years Ended December 31, 2000 1999 1998 (In thousands) Taxes on earnings from continuing operations: Current $ 20,036 23,622 22,128 Deferred (6,025) 6,966 (4,781) Taxes on earnings from continuing operations 14,011 30,588 17,347 Taxes on components of stockholders' equity: Net unrealized gains and losses on securities available for sale (2,622) (12,068) 1,196 Foreign currency translation adjustments 412 115 80 Total Federal income taxes $ 11,801 18,635 18,623
The provisions for Federal income taxes attributable to earnings from continuing operations vary from amounts computed by applying the statutory income tax rate to earnings before Federal income taxes. The reasons for the differences and the corresponding tax effects are as follows:
Years Ended December 31, 2000 1999 1998 (In thousands) Income tax expense at statutory rate $ 14,893 31,435 23,228 Tax-exempt income (1,287) (1,096) (931) Amortization of life interest in the Libbie Shearn Moody Trust 103 102 101 Non-deductible travel and entertainment 103 92 108 Tax benefits from discontinued operations - - (4,944) Other 199 55 (215) Taxes on earnings from continuing operations $ 14,011 30,588 17,347
There were no deferred taxes attributable to enacted tax rate changes for the years ended December 31, 2000, 1999, and 1998. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999, are presented below:
December 31, 2000 1999 (In thousands) Deferred tax assets: Future policy benefits, excess of financial accounting liabilities over tax liabilities $ 110,029 105,802 Debt securities writedowns for financial accounting purposes 6,357 1,541 Mortgage loans, principally due to valuation allowances for financial accounting purposes 1,132 1,247 Real estate, principally due to writedowns for financial accounting purposes 2,049 1,424 Accrued and unearned investment income recognized for tax purposes and deferred for financial accounting purposes 1,233 768 Accrued operating expenses recorded for financial accounting purposes not currently tax deductible 1,920 1,724 Net operating loss carryforward - 153 Net unrealized losses on securities available for sale 6,074 3,452 Other 660 293 Total gross deferred tax assets 129,454 116,404 Less valuation allowance - - Net deferred tax assets 129,454 116,404 Deferred tax liabilities: Deferred policy acquisition costs, principally expensed for tax purposes (115,895) (112,563) Securities, principally due to deferred market discount for tax (7,168) (6,081) Real estate, principally due to differences in tax and financial accounting for depreciation (861) (874) Foreign currency translation adjustment (1,945) (1,533) Other (9) (12) Total gross deferred tax liabilities (125,878) (121,063) Net deferred tax assets (liabilities) $ 3,576 (4,659)
There was no valuation allowance for deferred tax assets at December 31, 2000 and 1999. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance company's income was not subject to tax until it was distributed to stockholders, at which time it was taxed at the regular corporate tax rate. In accordance with the 1984 Act, this income, referred to as policyholders' surplus, would not increase, yet any amounts distributed would be taxable at the regular corporate rate. The balance of this account as of December 31, 2000, is approximately $2,446,000. No provision for income taxes has been made on this untaxed income, as management is of the opinion that no distribution to stockholders will be made from policyholders' surplus in the foreseeable future. Should the balance in the policyholders' surplus account at December 31, 2000, become taxable, the Federal income taxes computed at present rates would be approximately $856,000. The Company files a consolidated Federal income tax return with its subsidiaries. Allocation of the consolidated tax liability is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits. In accordance with this consolidated tax sharing agreement, tax benefits resulting from discontinued brokerage operation losses totaling $4,944,000 in 1998 were included in earnings from continuing operations. (6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES (A) Life Interest in Libbie Shearn Moody Trust The Company's wholly owned subidiary, NWL Services, Inc., is the beneficial owner of a life interest (1/8 share) in the trust estate of Libbie Shearn Moody (the Trust) which was previously owned by Mr. Robert L. Moody, Chairman of the Board of Directors of the Company. The Company has issued term insurance policies on the life of Mr. Robert L. Moody which are reinsured through agreements with unaffiliated insurance companies. NWL Services, Inc., is the beneficiary of these policies for an amount equal to the statutory admitted value of the Trust, which was $12,775,000 at December 31, 2000. The excess of $27,000,000 face amount of the reinsured policies over the statutory admitted value of the Trust has been assigned to Mr. Robert L. Moody. The recorded net asset values in the accompanying consolidated financial statements for the life interest in the Trust are as follows:
December 31, 2000 1999 (In thousands) Original valuation of life interest at February 26, 1960 $ 13,793 13,793 Less accumulated amortization (10,032) (9,737) Carrying basis at year end $ 3,761 4,056
Income from the Trust and related expenses reflected in the accompanying consolidated statements of earnings are summarized as follows:
Years Ended December 31, 2000 1999 1998 (In thousands) Income distributions $ 3,643 3,595 3,451 Deduct: Amortization (295) (291) (289) Reinsurance premiums (389) (340) (300) Net income from life interest in the Trust $ 2,959 2,964 2,862
(B) Common Stock Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding shares of the Company's Class B common stock and 1,160,896 of the Class A common stock. Holders of the Company's Class A common stock elect one-third of the Board of Directors of the Company, and holders of the Class B common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock shall be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. Also, in the event of liquidation of the Company, the Class A stockholders shall first receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B common stock, based on the number of shares held. (7) PENSION PLANS (A) Defined Benefit Plans The Company has a qualified defined benefit pension plan covering substantially all full-time employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. A detail of plan disclosures is provided below: The following summarizes the changes in benefit obligations for the years ended:
December 31, 2000 1999 1998 (In thousands) Benefit obligations at beginning of year $ 9,950 10,291 9,408 Service cost 357 414 363 Interest cost 738 717 647 Actuarial (gain) loss 140 (812) 386 Benefits paid (599) (660) (513) Benefit obligations at end of year $ 10,586 9,950 10,291
The following summarizes the changes in the fair value of plan assets, primarily consisting of equity and fixed income securities, for the years ended:
December 31, 2000 1999 1998 (In thousands) Fair value of plan assets at beginning of year $ 10,839 10,301 9,265 Actual return on plan assets 28 1,198 1,549 Benefits paid (599) (660) (513) Fair value of plan assets at end of year $ 10,268 10,839 10,301
The following sets forth the plan's funded status and the related amounts recognized in the Company's financial statements as of:
December 31, 2000 1999 1998 (In thousands) Funded status $ (318) 889 10 Unrecognized net actuarial (gain) loss 564 (340) 964 Unrecognized transition assets (44) (99) (154) Unrecognized prior service cost (86) (116) (146) Prepaid benefit cost $ 116 334 674
The following are the weighted-average assumptions as of:
December 31, 2000 1999 1998 Discount rate 7.50 % 7.75 % 6.75 % Expected return on plan assets 7.50 7.50 7.50 Rate of compensation increase 4.50 4.50 4.50
Net periodic benefit costs include the following components:
Years Ended December 31, 2000 1999 1998 (In thousands) Service cost $ 357 414 363 Interest cost 738 717 647 Expected return on plan assets (792) (730) (674) Amortization of unrecognized transition assets (55) (55) (55) Amortization of prior service cost (30) (30) (30) Recognized net actuarial loss - 24 50 Net periodic benefit cost $ 218 340 301
The Company also sponsors a nonqualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. During 1998 the Company transferred the pension obligations and administrative responsibilities of the plan to a pension administration firm. Upon transfer, the Company paid $4,880,000 to cover current and future liabilities and administration of the plan. Pension expense for 1998, up to the time of transfer, was $324,000. The financial effects of the transaction resulted in additional pension expense during 1998 totaling $2,543,000, as the amount paid upon transfer exceeded the pension liabilities recorded for financial statement purposes. The obligations under the plan are now the responsibility of the new pension administration firm, which is a subsidiary of American National Insurance Company (ANICO). ANICO has also guaranteed the payment of pension obligations under the plan. However, National Western has a contingent liability with respect to the pension plan should these entities be unable to meet their obligations under the existing agreements. Also, National Western has a contingent liability with respect to the plan in the event that a plan participant continues employment with National Western beyond age seventy, the aggregate average annual participant salary increases exceed 10% per year, or any additional employees become eligible to participate in the plan. If any of these conditions are met, National Western would be responsible for any additional pension obligations resulting from these items. (B) Defined Contribution Plans In addition to the defined benefit plans, the Company has a qualified 401(k) plan for substantially all full-time employees and a nonqualified deferred compensation plan primarily for senior officers. The Company makes annual contributions to the 401(k) plan of two percent of each employee's compensation. Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 2000, 1999, and 1998, Company contributions totaled $307,000, $272,000, and $270,000, respectively. The nonqualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional Company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 2000, 1999, and 1998, Company contributions totaled $74,000, $79,000, and $60,000, respectively. (8) SHORT-TERM BORROWINGS The Company has available a $60 million bank line of credit primarily for cash management purposes relating to investment transactions. The Company is required to maintain a collateral security deposit in trust with the bank equal to 120% of any outstanding liability. The Company had no outstanding liabilities or collateral security deposits with the bank at December 31, 2000 and 1999. The weighted average interest rates on borrowings for the years ended December 31, 2000 and 1999 were 7.57% and 5.88%, respectively. The Company had no borrowings on the line of credit during 1998. Interest expense for 2000 and 1999 totaled $319,000 and $55,000, respectively. (9) COMMITMENTS AND CONTINGENCIES (A) Legal Proceedings The Westcap Corporation Bankruptcy Proceedings The Chapter 11 bankruptcy reorganization of the Company's wholly owned subsidiary, The Westcap Corporation (Westcap), was completed in the first quarter of 1999. Pursuant to the reorganization plan, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. No losses were reported for discontinued brokerage operations in 1999, as the entire $14,125,000 settlement payment was accrued and reported as a loss in the third quarter of 1998. Any additional losses will depend on the results of The City Colleges lawsuit filed against National Western on March 28, 1994, for alleged Federal or state securities law "control person" violations relating to Westcap, and which is pending in the United States District Court, Western District of Texas. This suit is described in more detail below. 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, which judgment was entered by the District Court on February 28, 2001, for Westcap. The City Colleges filed a motion for rehearing en banc with the Fifth Circuit Court of Appeals which was denied. The City Colleges filed an application for writ of certiorari with the United States Supreme Court which was denied in late February, 2001, because it was filed too late. The City Colleges filed with the Supreme Court a motion to extend the time for filing its application for writ of certiorari, which motion was denied March 26, 2001. The above described favorable ruling does not affect the current consolidated financial statements of National Western Life Insurance Company as no liability had been previously accrued by National Western for the Bankruptcy/ District Court judgments against Westcap. However, in view of the Court of Appeals decision and the new judgment entered by the District Court, National Western will be entitled to recover a portion of the settlement of the Westcap bankruptcy, but not to exceed $600,000. The Company anticipates the recovery amount will be determined and paid during 2001 and will be reflected in the Company's consolidated financial statements at such time. While Westcap is a wholly owned subsidiary of the Company, the Company is not a party to the bankruptcy or the initial judgments against Westcap by the bankruptcy court and the United States District Court. The lawsuit of The City Colleges directly against National Western was stayed in September, 1994, pending resolution of The City Colleges' claim against Westcap. Following the initial judgment against Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted by the United States District Court in Illinois, and The City Colleges filed an amended complaint seeking to hold the Company liable for the claim allowed in the bankruptcy court against Westcap under the "control person" provision of the Texas Securities Act. The suit seeks approximately $56 million plus fees and costs. The Company filed jurisdictional and venue motions to have the case transferred to the United States District Court for the Western District of Texas, which motions were agreed to by the Plaintiff, and the case 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 has been awaiting the final outcome of the Westcap bankruptcy discussed above. However, based on the decision of the Fifth Circuit Court of Appeals and the denial of appeal by the United States Supreme Court, the Company has now filed with the United States District Court for the Western District of Texas a motion for summary judgment and dismissal of the lawsuit. Regardless of the outcome of the motion for summary judgment, 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 consolidated 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 relating to this suit has been recognized in National Western's consolidated financial statements. Class Action Litigation National Western Life Insurance Company (the Company or National Western) and National Annuity Programs, Inc. (NAP), were sued in the District Court of Travis County, Texas, by a former agent of the Company, eight plaintiffs, and fourteen intervenors, being present and past annuity policyholders of the Company, and on behalf of an asserted class of annuity policyholders of the Company, and alleged that, in the sale of certain Company annuities to the plaintiffs and intervenors, the Company and NAP (i) had violated the Texas Deceptive Trade Practices-Consumer Protection Act, statutes in the Texas Insurance Code, and certain rules and regulations of the Texas Department of Insurance; (ii) committed common law fraud; (iii) were negligent; (iv) had breached a duty of good faith and fair dealing; (v) made negligent misrepresentations; (vi) committed a civil conspiracy to commit fraud; and (vii) breached policy contracts. The plaintiffs sought (i) certification of one or more classes; and (ii) recovery of unspecified actual damages, monies paid by plaintiffs, attorneys' fees, prejudgment and postjudgment interests and costs, increased or treble damages, punitive damages, and general relief as awarded by the Court. NAP was an independent marketing general agency under contract with the Company that hired and supervised the agents marketing the annuity products on behalf of the Company. On September 8, 1998, National Western, NAP, and the policyholder plaintiffs, intervenors, and class-representatives in this class action litigation filed with the Court a joint motion for preliminary approval of a Settlement Agreement among the parties. The parties requested the Court to review the Settlement Agreement and make a preliminary determination that it was fair, adequate, and reasonable to the members of the proposed classes and that the proposed classes were capable of being certified for settlement purposes, to approve the form of the notices of the settlement to the classes, and to set a class certification and fairness hearing on the settlement. In exchange for a final order and judgment dismissing with prejudice the claims asserted against National Western and NAP by all members of the settlement classes, National Western agreed to contribute approximately $5 million to the proposed settlement, and NAP agreed to contribute $750,000. Additionally, National Western agreed to pay the costs of notice to the class and administration of the settlement claims process, to guarantee minimum interest rates of 3% and 5% in the future on certain settlement options under specified annuity policies which are the subject matter of the litigation, and to provide additional incidental settlement benefits, all as detailed in the motion and Settlement Agreement. National Western proceeded with notification of class members and preliminary administration of the claims process during late 1998 and January, 1999. Costs for this process totaling $250,000 were accrued as other operating expenses as of December 31, 1998, in the accompanying consolidated financial statements. On January 20, 1999, the Court held a "fairness hearing" and approved the Settlement Agreement. As a result, National Western also accrued the estimated $5,000,000 settlement as other operating expenses as of December 31, 1998. The actual settlement payments totaling $5,000,000 were made during 1999. Other Litigation On September 30, 1999, National Western Life Insurance Company (the Company), National Annuity Programs, Inc. (NAP), Robert L. Myer (Myer), and certain affiliates of Myer executed a Definitive Compromise Settlement Agreement (Agreement) of the declaratory judgment lawsuit pending between them in the District Court of Travis County, Texas. The declaratory judgment action was filed by the Company and sought court construction of a general agent manager contract and amendments thereto (Contract) between the Company and NAP entered into in 1983 and amended thereafter, a declaration that the contract was enforceable, but had been breached by NAP, and for damages from NAP. The Company alleged tortious interference by Myer with the Contract, conspiracy, and damages. NAP and Myer had counter-claimed for declaratory judgment, breach of contract, indemnity, fraud, statutory violations, damages, and attorneys' fees from the Company. By the settlement each party dismissed with prejudice all claims asserted by them in the pending lawsuit. NAP and Myer released the Company from any claim for any funds and other rights arising under the Contract and from all negligence and other claims arising prior to the Agreement. The Company released NAP, Myer, and Myer affiliates from all negligence and other claims, excluding any claims arising under the reinsurance contract between the Company and NAP Life Insurance Company, a Myer affiliate. The Company acquired NAP, and Myer indemnified and held the Company harmless from all claims of any nature asserted against NAP based on its acts or omissions prior to the Agreement, except for claims by policyholders and agents relating to the sale of the Company's products. The Company indemnified Myer for NAP acts or omissions occurring after September 30, 1999. The Company will pay or cause to be paid or released all valid claims for unpaid commissions to sub- agents of NAP who wrote business for the Company under the Contract. The Company completed such payments to these agents in 1999 in the aggregate amount of $820,000. As a result of the settlement, accrued bonus commissions relating to the NAP contract totaling $8,482,000 were released, as they are no longer considered a liability to NAP and will not be paid. Accordingly, the release of these accrued commissions from liabilities in 1999 resulted in additional income of $8,482,000, before taxes. It is anticipated that any future renewal premiums received by the Company on currently issued and in force annuity policies written by NAP sub-agents under the Contract could generate additional commissions for such sub-agents. The payment of such future commissions is subject to and conditioned upon receipt of such renewal premiums by the Company and compliance by the sub-agents with the terms of the agents' contracts with the Company and NAP. By separate Commutation Agreement dated September 30, 1999, the Company and NAP Life Insurance Company ("NAP Life"), an affiliate of Robert L. Myer, canceled and terminated the Specific Benefit Reinsurance Agreement between them dated March 1, 1988, whereby the Company had ceded fifty percent (50%) of the premiums, reserves, and liabilities on a portion of its policies of insurance. The effect of the Commutation Agreement did not have a significant impact on the financial statements of the Company, as the cost to National Western to terminate the agreement totaled $182,000. National Western Life Insurance Company is also currently a defendant in several other lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may arise from these lawsuits would not have a material adverse effect on the Company's financial position. (B) Financial Instruments In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures. The Company had commitments to extend credit relating to mortgage loans totaling $2,405,000 at December 31, 2000. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis. (C) Guaranty Association Assessments National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Many states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits. The Company estimates its liabilities for guaranty association assessments by using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. The Company monitors and revises its estimates for assessments as additional information becomes available which could result in changes to the estimated liabilities. As of December 31, 2000 and 1999, liabilities for guaranty association assessments totaled $3,100,000 and $3,250,000, respectively. Additionally, guaranty association assessment expenses were significantly lower in 1999 and 1998. The reductions are due to changes in estimated liabilities, changes in estimated recoverable capitalized assessments, and assessment refunds received from states during 1999 and 1998. Other operating expenses related to state guaranty association assessments totaled $612,000 and $104,000 for the years ended December 31, 2000 and 1999, respectively. The previously described changes and refunds resulted in a net credit in other operating expenses for guaranty association assessments totaling $365,000 for 1998. (D) Leases The Company leases its executive office building and various computer and other office related equipment. Rental expenses for these leases for the years ended December 31, 2000, 1999, and 1998 were $1,053,000, $920,000, and $745,000, respectively. Total annual lease obligations as of December 31, 2000, are as follows (in thousands): 2001 $ 1,099 2002 1,121 2003 956 2004 592 2005 612 2006 and thereafter 2,766 Total $ 7,146
(10) STOCKHOLDERS' EQUITY (A) Changes in Common Stock Shares Outstanding Details of changes in shares of common stock outstanding are provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Common stock shares outstanding: Shares outstanding at beginning of year 3,501 3,498 3,492 Shares exercised under stock option plan 3 3 6 Shares outstanding at end of year 3,504 3,501 3,498
(B) Dividend Restrictions The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on statutory earnings and surplus levels of the Company. The maximum dividend payment which may be made without prior approval in 2001 is $41,925,000. The Company has never paid cash dividends on its common stock, as it follows a policy of retaining any earnings in order to finance the development of business and to meet regulatory requirements for capital. (C) Regulatory Capital Requirements The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital (RBC) specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements. (D) Stock and Incentive Plan The Company has a stock and incentive plan which provides for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and nonqualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; (4) incentive awards; and (5) performance awards. The plan began on April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares. All of the employees of the Company and its subsidiaries are eligible to participate in the plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Company directors, including members of the Compensation and Stock Option Committee, are eligible for nondiscretionary stock options. The Committee approved the issuance of nonqualified stock options to selected officers of the Company during 1998 totaling 48,500. Additionally, during 1998 the Committee granted 10,000 nonqualified, nondiscretionary stock options to Company directors. No nonqualified stock options were issued in 2000 and 1999. The directors' stock options vest 20% annually following one full year of service to the Company from the date of grant. The officers' stock options vest 20% annually following three full years of service to the Company from the date of grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant. A summary of shares available for grant and stock option activity is detailed below:
Options Outstanding Shares Weighted- Available Average For Grant Shares Exercise Price Balance at December 31, 1997 185,700 113,900 $ 54.92 Stock Options: Granted (58,500) 58,500 106.47 Exercised - (6,390) 38.13 Forfeited 250 (250) 105.25 Balance at December 31, 1998 127,450 165,760 73.68 Stock Options: Exercised - (2,600) 50.40 Forfeited 1,000 (1,000) 105.25 Balance at December 31, 1999 128,450 162,160 73.86 Stock Options: Exercised - (3,500) 42.73 Forfeited 6,450 (6,450) 82.67 Balance at December 31, 2000 134,900 152,210 $ 74.20
Vested and exercisable options at December 31, 2000, 1999, and 1998 totaled 47,150, 26,170, and 7,910, respectively. The weighted-average exercise price for these options was $55.23, $49.92, and $38.13 at December 31, 2000, 1999, and 1998, respectively. The following table summarizes information about stock options outstanding at December 31, 2000.
Options Outstanding Weighted- Average Number Remaining Options Outstanding Life Exercisable Exercise prices: $ 38.13 47,210 4.4 years 27,210 65.00 30,400 5.3 years 11,920 85.13 20,100 6.3 years 4,020 105.25 44,500 7.3 years - 112.38 10,000 7.5 years 4,000 Totals 152,210 47,150
In October, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions regarding the Company's stock and options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company has elected to continue to apply the accounting methods prescribed by APB Opinion No. 25 for its existing stock and incentive plan. No compensation costs have been recorded for the Company's existing plan using the intrinsic value based method. However, if compensation expense for the stock options had been determined using the fair value based method under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts as follows:
Years Ended December 31, 2000 1999 1998 (In thousands except per share amounts) Net earnings: As reported $ 28,540 59,225 34,893 Pro forma $ 28,060 58,542 34,241 Basic earnings per share: As reported $ 8.15 16.92 9.98 Pro forma $ 8.01 16.73 9.80 Diluted earnings per share: As reported $ 8.11 16.78 9.87 Pro forma $ 7.97 16.59 9.69
The fair value of the options used in estimating the pro forma amounts above were estimated on the date of grant using an option pricing model with the weighted-average assumptions as detailed below for the year ended December 31, 1998. No options were granted for the years ended December 31, 2000 and 1999. Risk-free interest rates 5.1% Dividend yields - Volatility factors 29.0% Weighted-average expected life 7 years Weighted-average fair value per share $44.29
(11) EARNINGS PER SHARE Earnings per share amounts for the Company are presented using two different computations. Basic earnings per share excludes dilutive effects of certain securities or contracts, such as stock options, and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The following table sets forth the computations of basic and diluted earnings per share:
Years Ended December 31, 2000 1999 1998 (In thousands except per share amounts) Numerator for basic and diluted earnings per share: Earnings from continuing operations available to common stockholders before and after assumed conversions $ 28,540 59,225 49,018 Denominator: Basic earnings per share - weighted-average shares 3,502 3,500 3,495 Effect of dilutive stock options 19 29 40 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,521 3,529 3,535 Basic earnings per share $ 8.15 16.92 14.02 Diluted earnings per share $ 8.11 16.78 13.87
(12) COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 affects the Company's reporting presentation of certain items such as foreign currency translation adjustments and unrealized gains and losses on investment securities. These items are reflected as components of other comprehensive income, as reported in the accompanying consolidated financial statements. Components of other comprehensive income and related taxes are provided below for 2000, 1999, and 1998.
Amounts Amounts Before (Taxes) Net of Taxes Benefits Taxes (In thousands) 2000: Unrealized gains (losses) on securities, net of effects of deferred policy acquisition costs of $12,891: Unrealized holding gains (losses) arising during period $ (87) 30 (57) Reclassification adjustment for (gains) losses included in net earnings 10,475 (3,666) 6,809 Amortization of net unrealized gains related to transferred securities (894) 313 (581) Unrealized losses on securities transferred during period from held to maturity to available for sale (16,986) 5,945 (11,041) Net unrealized gains (losses) on securities (7,492) 2,622 (4,870) Foreign currency translation adjustments 1,177 (412) 765 Other comprehensive loss $ (6,315) 2,210 (4,105)
Amounts Amounts Before (Taxes) Net of Taxes Benefits Taxes (In thousands) 1999: Unrealized gains (losses) on securities, net of effects of deferred policy acquisition costs of $28,883: Unrealized holding gains (losses) arising during period $ (30,847) 10,796 (20,051) Reclassification adjustment for (gains) losses included in net earnings (3,248) 1,137 (2,111) Amortization of net unrealized gains related to transferred securities (385) 135 (250) Net unrealized gains (losses) on securities (34,480) 12,068 (22,412) Foreign currency translation adjustments 327 (115) 212 Other comprehensive loss $ (34,153) 11,953 (22,200) 1998: Unrealized gains (losses) on securities, net of effects of deferred policy acquisition costs of $1,024: Unrealized holding gains (losses) arising during period $ 5,100 (1,785) 3,315 Reclassification adjustment for (gains) losses included in net earnings (893) 312 (581) Amortization of net unrealized gains related to transferred securities (793) 277 (516) Net unrealized gains (losses) on securities 3,414 (1,196) 2,218 Foreign currency translation adjustments 228 (80) 148 Other comprehensive income $ 3,642 (1,276) 2,366
(13) UNAUDITED QUARTERLY FINANCIAL DATA Quarterly results of operations for 2000 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands except per share data) 2000: Revenues $ 80,550 71,406 78,594 62,165 Net earnings (loss) $ 12,333 7,593 9,006 (392) Basic earnings per share: Net earnings (loss) $ 3.52 2.17 2.57 (0.11) Diluted earnings per share: Net earnings (loss) $ 3.51 2.16 2.56 (0.11)
Quarterly results of operations for 1999 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands except per share data) 1999: Revenues $ 86,750 89,743 77,026 97,964 Net earnings $ 14,103 12,198 12,586 20,338 Basic earnings per share: Net earnings $ 4.03 3.49 3.60 5.81 Diluted earnings per share: Net earnings $ 3.99 3.46 3.57 5.77
The fourth quarter net earnings for 2000 and 1999 reflect the following significant items: The Company recorded a net loss totaling $392,000 for the quarter ended December 31, 2000, compared to net earnings of $20,338,000 for the fourth quarter of 1999. The significant decrease in comparative earnings is due to realized losses on investments and lower earnings on the Company's equity- indexed annuity business. The Company recorded realized losses on investments, net of taxes, totaling $8,259,000 and $903,000 for the quarters ended December 31, 2000 and 1999, respectively. The majority of the fourth quarter 2000 losses were due to other than temporary impairment writedowns for two debt securities. Additionally, approximately $3.1 million of the fourth quarter 2000 losses were from sales of investments in debt securities. Earnings for the 2000 fourth quarter were also affected by the Company's equity-indexed annuity business. These annuities combine features associated with traditional fixed annuities, such as guaranteed minimum interest rates, with the option to have interest rates linked in part to an equity index, the S&P 500 Index. To offset the potential higher returns required to be paid on these products, the Company purchases index options in addition to traditional debt security investments. Index options, which are recorded at market value each reporting period, act as hedges to match closely the returns based on the S&P 500 Index. The Company's fourth quarter 2000 earnings were significantly impacted due to deteriorating stock market conditions during the quarter. Because of the large decline in the S&P 500 Index during the fourth quarter of 2000, the Company recorded significant decreases in investment income resulting from realized and unrealized losses on index options. The S&P 500 Index decline also resulted in lower interest credited to equity-indexed annuity contracts. However, primarily because of policy liabilities related to minimum guaranteed interest rates, the reduction in annuity contract interest expense was much less than the decline in investment income. The combination of these results produced lower earnings for the fourth quarter of 2000. A very similar scenario occurred with the Company's equity-indexed annuity business during the third quarter of 1999, also resulting in lower earnings. However, during the fourth quarter of 1999, the S&P 500 Index increased significantly, reversing its poor performance of the previous quarter. This resulted in significantly higher earnings for the 1999 fourth quarter, as investment income from index options increased significantly and the policy liabilities related to minimum guaranteed interest rates were less of a factor. As a result, a significant portion of the effects from the minimum guaranteed interest rates in the policy liability reserves were reversed, thereby increasing fourth quarter 1999 earnings substantially. (14) SEGMENT AND OTHER OPERATING INFORMATION (A) Operating Segment Information In years prior to 1998, the Company reported two industry segments, life insurance operations and brokerage operations. For the year ended December 31, 1998, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," and redefined its reportable operating segments as domestic life insurance, international life insurance, and annuities. The Company's segments are organized based on product types and geographic marketing areas. A summary of segment information, prepared in accordance with SFAS No. 131, is provided below:
Selected Segment Information: Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) 2000: Selected Balance Sheet Items: Deferred policy acquisition costs $ 73,933 75,796 244,469 - 394,198 Total segment assets 402,840 387,979 2,834,344 47,684 3,672,847 Future policy benefits 319,631 299,213 2,520,403 - 3,139,247 Other policyholder liabilities 9,508 10,878 13,254 - 33,640 Condensed Income Statements: Premiums and contract revenues $ 23,864 43,665 32,828 - 100,357 Net investment income 26,295 22,864 156,014 5,481 210,654 Other income 30 44 317 555 946 Total revenues 50,189 66,573 189,159 6,036 311,957 Policy benefits 17,299 17,548 231 - 35,078 Amortization of deferred policy acquisition costs 4,305 15,413 28,230 - 47,948 Universal life and investment annuity contract interest 10,183 15,148 112,380 - 137,711 Other operating expenses 9,183 8,349 10,593 1,302 29,427 Federal income taxes 3,095 3,396 12,666 1,588 20,745 Total expenses 44,065 59,854 164,100 2,890 270,909 Segment earnings $ 6,124 6,719 25,059 3,146 41,048 1999: Selected Balance Sheet Items: Deferred policy acquisition costs $ 73,519 74,928 221,218 - 369,665 Total segment assets 404,234 380,154 2,844,465 39,247 3,668,100 Future policy benefits 319,862 295,225 2,532,993 - 3,148,080 Other policyholder liabilities 10,045 5,754 8,304 - 24,103 Condensed Income Statements: Premiums and contract revenues $ 24,668 43,018 27,392 - 95,078 Net investment income 25,054 21,692 191,328 4,906 242,980 Other income 40 41 8,863 - 8,944 Total revenues 49,762 64,751 227,583 4,906 347,002 Policy benefits 15,547 16,451 458 - 32,456 Amortization of deferred policy acquisition costs 3,387 14,647 21,114 - 39,148 Universal life and investment annuity contract interest 9,826 13,923 138,553 - 162,302 Other operating expenses 8,563 9,429 9,772 - 27,764 Federal income taxes 4,230 3,503 19,618 1,668 29,019 Total expenses 41,553 57,953 189,515 1,668 290,689 Segment earnings $ 8,209 6,798 38,068 3,238 56,313
Domestic International Life Life All Insurance Insurance Annuities Others Totals (In thousands) 1998: Selected Balance Sheet Items: Deferred policy acquisition costs $ 68,034 70,710 175,749 - 314,493 Total segment assets 412,538 373,201 2,692,330 19,285 3,497,354 Future policy benefits 323,975 284,428 2,371,075 - 2,979,478 Other policyholder liabilities 10,404 6,219 7,332 - 23,955 Condensed Income Statements: Premiums and contract revenues $ 24,296 40,606 31,432 - 96,334 Net investment income 26,211 21,940 182,347 3,346 233,844 Other income 750 32 270 - 1,052 Total revenues 51,257 62,578 214,049 3,346 331,230 Policy benefits 17,932 14,112 397 - 32,441 Amortization of deferred policy acquisition costs 2,954 15,836 21,625 - 40,415 Universal life and investment annuity contract interest 9,963 13,432 135,494 - 158,889 Other operating expenses 10,786 9,573 15,145 - 35,504 Federal income taxes 3,227 3,228 13,880 1,122 21,457 Total expenses 44,862 56,181 186,541 1,122 288,706 Segment earnings $ 6,395 6,397 27,508 2,224 42,524
Reconciliations of segment information to the Company's consolidated financial statements are provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) Premiums and Other Revenue: Premiums and contract revenues $ 100,357 95,078 96,334 Net investment income 210,654 242,980 233,844 Other income 946 8,944 1,052 Realized gains (losses) on investments (19,242) 4,481 2,384 Total consolidated premiums and other revenue $ 292,715 351,483 333,614
Years Ended December 31, 2000 1999 1998 (In thousands) Federal Income Taxes: Total segment Federal income taxes $ 20,745 29,019 21,457 Taxes on realized gains (losses) on investments (6,734) 1,569 834 Tax benefits from discontinued operations - - (4,944) Total taxes on earnings from continuing operations $ 14,011 30,588 17,347
Years Ended December 31, 2000 1999 1998 (In thousands) Net Earnings: Total segment earnings $ 41,048 56,313 42,524 Realized gains (losses) on investments, net of taxes (12,508) 2,912 1,550 Losses from discontinued operations - - (14,125) Tax benefits from discontinued operations - - 4,944 Total consolidated net earnings $ 28,540 59,225 34,893
December 31, 2000 1999 1998 (In thousands) Assets: Total segment assets $ 3,672,847 3,668,100 3,497,354 Assets of discontinued operations - - 48 Other unallocated assets 25,109 14,728 20,601 Total consolidated assets $ 3,697,956 3,682,828 3,518,003
(B) Geographic Information A significant portion of the Company's premiums and contract revenues are from countries other than the United States. Premiums and contract revenues detailed by country are provided below:
Years Ended December 31, 2000 1999 1998 (In thousands) United States $ 57,649 52,732 56,341 Argentina 8,460 8,761 9,052 Peru 7,891 8,201 8,293 Chile 7,142 6,892 6,227 Haiti 6,151 5,543 4,941 Columbia 3,932 3,888 3,612 Other foreign countries 17,644 16,965 15,113 Revenues, excluding reinsurance premiums 108,869 102,982 103,579 Reinsurance premiums (8,512) (7,904) (7,245) Total premiums and contract revenues $ 100,357 95,078 96,334
Premiums and contract revenues are attributed to countries based on the location of the policyholder. The Company has no significant assets, other than financial instruments, located in countries other than the United States. (C) Major Agency Relationships A significant portion of the Company's premiums and deposits were sold through three marketing agencies in recent years. Combined business from these agencies accounted for approximately 30% of total direct premium revenues and universal life and investment annuity contract deposits for 2000. These same three marketing agencies accounted for 28% of total direct premiums and deposits for 1999 and 1998. (15) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Investment securities: Fair values for investments in debt and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services. In the cases where prices are unavailable from these sources, prices are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Mortgage and other loans: The fair values of performing mortgage and other loans are estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair values for significant nonperforming loans are based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Policy loans: The fair values for policy loans are calculated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 2000 and 1999. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts. Index options: Fair values for index options are based on quoted market prices. Life interest in Libbie Shearn Moody Trust: The fair value of the life interest is estimated based on assumptions as to future dividends from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions. However, the Company has limited the fair value to the statutory admitted value of the Trust, as this is the maximum amount to be received by the Company in the event of Mr. Moody's premature death. Investment annuity and supplemental contracts: Fair values of the Company's liabilities for deferred investment annuity contracts are estimated to be the cash surrender values of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair values of liabilities for immediate investment annuity contracts and supplemental contracts with and without life contingencies are estimated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 2000 and 1999. Fair values for the Company's insurance contracts other than investment contracts are not required to be disclosed. This includes the Company's traditional and universal life products. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and investment contracts. The carrying amounts and fair values of the Company's financial instruments are as follows:
December 31, 2000 December 31, 1999 Carrying Fair Carrying Fair Values Values Values Values (In thousands) ASSETS Investments in debt and equity securities: Securities held to maturity $ 2,116,619 2,113,286 2,151,924 2,084,494 Securities available for sale 735,110 735,110 717,948 717,948 Cash and short-term investments 22,665 22,665 14,010 14,010 Mortgage loans 195,665 198,331 183,902 185,841 Policy loans 110,956 127,382 117,309 125,679 Other loans 17,143 16,903 15,422 15,125 Index options 5,402 5,402 32,820 32,820 Life interest in Libbie Shearn Moody Trust 3,761 12,775 4,056 12,775 LIABILITIES Deferred investment annuity contracts $ 2,253,160 1,952,058 2,269,445 1,973,403 Immediate investment annuity and supplemental contracts 245,359 243,713 240,136 234,739
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (16) DISCONTINUED BROKERAGE OPERATIONS Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas, office. In September, 1995, Westcap approved a plan to close its remaining sales office in New Jersey and to cease all brokerage operations. Subsequently, on April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. The assets and liabilities of Westcap have been reclassified in the accompanying consolidated financial statements to separately identify them as assets and liabilities of discontinued operations. Losses from discontinued brokerage operations have also been reflected separately from continuing operations of the Company. The 1995 losses from discontinued operations resulted in the complete write-off of National Western Life Insurance Company's investment in Westcap on a consolidated basis. However, a $1,000,000 cash infusion was made to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as a loss from discontinued operations in 1997. By order dated August 28, 1998, the United States Bankruptcy Court, Southern District of Texas, Houston Division, confirmed and approved the Third Amended Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation and Westcap Enterprises, Inc. Pursuant to the Plan, National Western received credit for the $1,000,000 previously contributed to Westcap in bankruptcy in March, 1997, and paid an additional $14,125,000 to compromise and settle various claims and litigation. The $14,125,000 was paid by National Western on January 13, 1999. However, the settlement payment was accrued in other liabilities as of December 31, 1998, and reflected as a 1998 loss from discontinued operations in the accompanying financial statements. As part of the bankruptcy reorganization, National Western retained 100% continuing ownership of the reorganized Westcap, and the subsidiary is now operating as a real estate management company. (17) RELATED PARTY TRANSACTIONS The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of National Western Life Insurance Company, was paid $84,332 in 2000 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. Moody Insurance Group, Inc., was paid $426,057 in commissions in 2000 pursuant to an agency contract with National Western Life Insurance Company. Moody Insurance Group, Inc. is wholly owned by Mr. Robert L. Moody, Jr. Mr. Robert L. Moody, Jr., is an employee of the Company and the son of Mr. Robert L. Moody, who serves as a director and chief executive officer of the Company, the brother of Mr. Ross R. Moody, who serves as a director and president of the Company, and the brother of Mr. Russell S. Moody and Ms. Frances A. Moody, who serve as directors of the Company. The commissions paid were based on premiums and deposits totaling approximately $19,218,000 from sales of National Western life insurance and annuity products by Moody Insurance Group, Inc., and Mr. Robert L. Moody Jr., in 2000. In addition, Mr. Robert L. Moody, Jr., personally received $593 in commissions in 2000 pursuant to an agency contract between himself and the Company. Jay W. Balentine is the son-in-law of Robert L. Moody. Jay W. Balentine has a 100% ownership interest in JWB Development Corporation. Jay W. Balentine also has a 19.8% limited partner interest in Regent Management Services, Limited Partnership (a Nevada limited partnership); a 20.0% interest in RCC Management Services, Inc. (the general partner of Regent Management Services, Limited Partnership); and is also president of RCC Management Services, Inc. On or about March 29, 2000, National Western Life Insurance Company purchased Nevada Health Development II, Limited Partnership from its partners, JWB Development Corporation (1% general partner interest), Three R Trusts (50% limited partner interest) and Jay W. Balentine (49% limited partner interest). The Three R Trusts are four Texas trusts for the benefit of the children of Robert L. Moody (Robert L. Moody, Jr., Ross R. Moody and Russell S. Moody are the sons of Robert L. Moody and Frances A. Moody is the daughter of Robert L. Moody). This transaction involved the purchase of a nursing home in Reno, Nevada, owned by Nevada Health Development II, Limited Partnership, and a merger into a partnership owned by corporations that are wholly owned subsidiaries of National Western. The result was that the nursing home became the sole property of a subsidiary of National Western Life Insurance Company. Further, the financing for that purchase was ultimately by a mortgage loan totaling $7,000,000 from National Western to a subsidiary, Regent Care Building, Limited Partnership (a Nevada limited partnership). Further, as a result of that purchase, and the following merger of Nevada Health Development II, Limited Partnership, into Regent Care Building, Limited Partnership, another subsidiary of National Western, Regent Care Operations, Limited Partnership (a Nevada limited partnership), leased the nursing home building from Regent Care Building, Limited Partnership. Following that, Regent Care Operations, Limited Partnership, contracted with Regent Management Services, Limited Partnership, for the management and operations of the nursing home. Regent Management Services, Limited Partnerhsip, is owned by general partner RCC Management Services, Inc. (a Nevada corporation) and the following limited partners: Three R Trusts, Jay W. Balentine, and Rex Greebon. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2000 (In thousands)
Balance (1) Market Sheet Type of Investment Cost Value Amount Fixed maturity bonds: Securities held to maturity: United States government and government agencies and authorities $ 4,115 4,417 4,115 States, municipalities, and political subdivisions 6,752 7,237 6,752 Foreign governments 51,515 53,047 51,515 Public utilities 345,062 348,123 345,062 Corporate 1,191,413 1,179,268 1,191,413 Mortgage-backed 411,502 420,833 411,502 Asset-backed 106,260 100,361 106,260 Total securities held to maturity 2,116,619 2,113,286 2,116,619 Securities available for sale: United States government and government agencies and authorities 3,257 3,277 3,277 States, municipalities, and political subdivisions 15,463 15,737 15,737 Public utilities 46,040 46,707 46,707 Corporate 379,915 332,038 332,038 Mortgage-backed 194,513 198,894 198,894 Asset-backed 125,875 122,180 122,180 Total securities available for sale 765,063 718,833 718,833 Total fixed maturity bonds 2,881,682 2,832,119 2,835,452 Equity securities: Securities available for sale: Common stocks: Public utilities 192 367 367 Banks, trust and insurance companies 195 3,901 3,901 Preferred stocks 12,282 12,009 12,009 Total equity securities 12,669 16,277 16,277 Index options 26,382 5,402 Mortgage loans (2) 188,557 184,342 Policy loans 110,956 110,956 Other long-term investments (3) 39,874 37,386 Cash and short-term investments 22,665 22,665 Total investments other than investments in related parties $ 3,282,785 3,212,480 Notes: (1) Bonds are shown at amortized cost, mortgage loans are shown at unpaid principal balances before allowances for possible losses of $4,215,000, and real estate is stated at cost before allowances for possible losses of $2,488,000. (2) Mortgage loans with related parties totaling $11,323,000 have been excluded. (3) Real estate acquired by foreclosure included in other long-term investments is as follows: cost $9,991,000; balance sheet amount $7,746,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2000, 1999, and 1998 (In thousands)
(1) Balance at Charged to Balance at Beginning Costs and (2) (3) End of Description of Period Expenses Reductions Transfers Period Valuation accounts deducted from applicable assets: Allowance for possible losses on mortgage loans: December 31, 2000 $ 4,104 111 - - 4,215 December 31, 1999 $ 4,640 (536) - - 4,104 December 31, 1998 $ 4,640 - - - 4,640 Allowance for possible losses on real estate: December 31, 2000 $ 2,068 420 - - 2,488 December 31, 1999 $ 2,068 - - - 2,068 December 31, 1998 $ 2,222 - (154) - 2,068 Notes: (1) These amounts were recorded to realized (gains) losses on investments. (2) These amounts were related to charge-off of assets against the allowances. (3) These amounts were transferred to real estate.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2001 /S/ Robert L. Moody By: Robert L. Moody, Chairman of the Board, Chief Executive Officer, and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title (Capacity) Date /S/ Robert L. Moody Chairman of the Board, March 29, 2001 Robert L. Moody Chief Executive Officer, and Director (Principal Executive Officer) /S/ Ross R. Moody President, Chief Operating March 29, 2001 Ross R. Moody Officer, and Director /S/ Robert L. Busby, III Senior Vice President - Chief March 29, 2001 Robert L. Busby, III Administrative Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) /S/ Vincent L. Kasch Vice President - Controller March 29, 2001 Vincent L. Kasch and Assistant Treasurer (Principal Accounting Officer) /S/ Arthur O. Dummer Director March 29, 2001 Arthur O. Dummer Director March 29, 2001 Harry L. Edwards /S/ E. Douglas McLeod Director March 29, 2001 E. Douglas McLeod /S/ Charles D. Milos Director March 29, 2001 Charles D. Milos Director March 29, 2001 Frances A. Moody Director March 29, 2001 Russell S. Moody /S/ Louis E. Pauls, Jr. Director March 29, 2001 Louis E. Pauls, Jr. /S/ E.J. Pederson Director March 29, 2001 E.J. Pederson EX-10 2 exh10s.txt EXHIBIT 10S EXHIBIT 10(s) - MATERIAL CONTRACTS SEVENTH AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFERRED COMPENSATION PLAN This Seventh Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan (the "Plan") is hereby made effective as of August 7, 1998, the effective date of the Sixth Amendment to the Plan. WITNESSETH WHEREAS, the Plan was originally established effective January 1, 1991; WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at any time; WHEREAS, Section 5.4 of the Plan was previously amended by the Sixth Amendment to the Plan; WHEREAS, the Company desires to clarify the application of Section 5.4 of the Plan; and WHEREAS, the Committee (as such term is defined by the Plan) has determined that the clarification of Section 5.4 of the Plan as set forth below is consistent with the originally intended amendments to such Section by the Sixth Amendment to the Plan; NOW, THEREFORE, the provisions to the Plan are hereby clarified as follows: 1. Section 5.4 of the Plan, Form of Payment, is hereby clarified and restated to read as follows: "A Participant may elect to receive the Participant's benefit in the form of a single lump sum payment. Alternatively, a Participant may elect to receive the Participant"s benefit in the form of annual installments. In either case, for such election to be effective, such election must be made at least thirteen (13) months prior to the date the Participant first becomes entitled to receive the Participant's benefit hereunder. If a Participant does not choose a method of payment, or fails to elect the payment option prior to the beginning of the thirteen (13) month period described above, payment shall be made on the annual installment basis over an installment period of five (5) years. Under the annual installment payment option, the installment payment period shall not exceed ten (10) years. Each annual installment payment shall equal the Participant's Account Balance divided by the number of annual installment payments remaining to be paid in the annual installment payment period chosen by the Participant (or the default installment period, if applicable). Except as provided in Section 5.3, a Beneficiary entitled to payment shall receive his or her benefit in the form of a single lump payment." Approved by the Board of Directors 10/20/00 EX-10 3 exh10t.txt EXHIBIT 10T EXHIBIT 10(t) - MATERIAL CONTRACTS BONUS AGREEMENT This Bonus Agreement is entered into this 30th day of May, 2000, by and between National Western Life Insurance Company of 850 East Anderson Lane, Austin, TX 78752-1602 ("NWL" or "we") and Richard M. Edwards 6528 Heron Drive, Austin, TX 78759 ("you" or "your"). WHEREAS, Richard M. Edwards is employed by NWL as Senior Vice President- International Marketing and has supervision over all international marketing efforts of NWL; and WHEREAS, the parties desire to establish a bonus compensation arrangement as an incentive for Richard M. Edwards to meet certain production and production- related standards. NOW THEREFORE, the parties agree as follows: I. NWL will pay you four different and independent bonuses, as set forth below, under the following terms and conditions: A. Bonus 1- First Year Life Persistency Rate Bonus 1. NWL will pay you a bonus based on the 12/31/00 Persistency Percentage of the 13th month persistency calculations for international life insurance policies. The data source for determining the company Persistency Percentage rate shall be the report entitled "Company Persistency Report- International- Without Annuities", which is provided by the NWL Information Services Department, using "Premiums- 13 Month Persistency." 2. The Persistency Percentage will then determine the amount of the bonus as follows (only one section shall apply): a) No bonus shall be paid if the Persistency Percentage is below 93%. b) If the Persistency Percentage is equal to 93%, then the bonus shall be $9,000. c) If the Persistency Percentage is greater than 93% but less than 96%, then the bonus shall be $9,000, plus $750 for each 1% over 93%, or a pro-rata amount thereof for percentages stated as other than whole percentages. d) If the Persistency Percentage is equal to 96%, then the bonus shall be $11,250. e) If the Persistency Percentage is greater than 96% but less than 99%, then the bonus shall be $11,250 plus $2,250 for each 1% over 96%, or a pro-rata amount thereof for percentages stated as other than whole percentages. f) If the Persistency Percentage is equal to 99%, then the bonus shall be $18,000. g) If the Persistency Percentage is greater than 99%, then the bonus shall be $18,000 plus $4,220 for each additional 1% that the Persistency Percentage exceeds 99%, or a pro-rata share thereof for percentages stated as other than whole percentages. 3. The assumptions that will be used in the calculation of the First-Year Life Persistency Rate Bonus is as follows: a) That the "Company Persistency Report- International- Without Annuities" is the same report used for agency convention qualification purposes; b) That the above mentioned report does not reflect true one- year persistency, but reflects the persistency of policies written in the most recent 13 months; and c) That the 13 Month Persistency Percentage will be calculated as of 12/31/00, based on premiums. B. Bonus 2- Second-Year Life Persistency Rate Bonus 1. NWL will pay you a bonus based on the 12/31/00 Persistency Percentage of the 24th month persistency calculations for international life insurance policies. The data source for determining the company Persistency Percentage rate shall be the report entitled "Company Persistency Report- International- Without Annuities", which is provided by the NWL Information Services Department, using "Premiums- 24 Month Persistency". 2. The Persistency Percentage will then determine the amount of the bonus as follows (only one section shall apply): a) No bonus shall be paid if the Persistency Percentage is below 89%. b) If the Persistency Percentage is equal to 89%, then the bonus shall be $9,000. c) If the Persistency Percentage is greater than 89% but less than 92%, then the bonus shall be $9,000 plus $750 for each 1% over 89%, or a pro-rata amount thereof for percentages stated as other than whole percentages. d) If the Persistency Percentage is equal to 92%, then the bonus shall be $11,250. e) If the Persistency Percentage is greater than 92% but less than 95%, then the bonus shall be $11,250 plus $2,250 for each 1% over 92%, or a pro-rata amount thereof for percentages stated as other than whole percentages. f) If the Persistency Percentage is equal to 95%, then the bonus shall be $18,000. g) If the Persistency Percentage is greater than 95%, then the bonus shall be $18,000 plus $4,220 for each additional 1% that the Persistency Percentage exceeds 95%, or a pro-rata share thereof for percentages stated as other than whole percentages. 3. The assumptions that will be used in the calculation of the Second-Year Life Persistency Rate Bonus is as follows: a) That the "Company Persistency Report- International- Without Annuities" is the same report used for agency convention qualification purposes; b) That the above mentioned report does not reflect true two- year persistency, but reflects the persistency of policies written in the most recent 24 months; and c) That the 24 Month Persistency Percentage will be calculated as of 12/31/00, based on premiums. C. Bonus 3-Collected International Life First-Year Premiums Bonus 1. NWL will pay you a bonus based on Collected International Life First-Year Premiums. The data source used for determining the Total Collected Premiums will be the Report No. UT69-3BON, International Bonus, using the fields "First Year Premium" and "Single Premium". 2. The Total Collected Premiums shall be calculated as follows: There are two components of the Total Collected Premiums: the International First Year Premiums and the International Single Premiums. a) International First Year Premiums shall be determined from Report No. UT69-3BON, "International Bonus", "First Year Premium" as of 12/31/00. b) International Single Premiums shall be determined from Report No. UT69-3BON, "International Bonus", "Single Premium" as of 12/31/00. The International Single Premiums will then be multiplied by 5% to determine the amount of International Single Premiums to be included in the bonus calculation. This amount will then be added to the International First-Year Premiums to determine the Total Collected Premiums. 3. The Total Collected Premium will then determine the amount of the bonus as follows (only one section shall apply): a) No bonus will be paid if the Total Collected Premium is less than $13,000,000. b) If the Total Collected Premium equals $13,000,000, then the bonus shall be $42,000. c) If the Total Collected Premium is greater than $13,000,000, but less than $16,250,000, then the bonus shall be $42,000 plus $323 for each additional $100,000 over $13,000,000, or a pro- rata share thereof. d) If the Total Collected Premium equals $16,250,000, then the bonus shall be $52,500. e) If the Total Collected Premium is greater than $16,250,000, but less than $19,500,000, then the bonus shall be $52,500 plus $969 for each additional $100,000 over $16,250,000, or a pro- rata share thereof. f) If the Total Collected Premium is equal to $19,500,000, then the bonus shall be $84,000. g) If the Total Collected Premium is greater than $19,500,000, then the bonus shall be $84,000 plus $1,425 for each additional $100,000 over $19,500,000, or a pro-rata amount thereof. 4. The assumptions made in calculation of this bonus are as follows: a) That 100% of the International First-Year Life Insurance Premium is included; b) That 5% of the International Single Premium Life Insurance is included; c) That the Total Collected Premium includes no renewal life insurance premiums; d) That this bonus is based on international life insurance premiums only and excludes all domestic premiums; and e) That this bonus is calculated for the calendar year 2000, as of 12/31/00. D. Bonus 4 - Collected International Investment Contract First-Year and Single Deposit Bonus 1. NWL will pay you a bonus based on collected International Investment Contract and annuity first-year and single deposits and premiums. The data source for determining the Total Collected Deposits will be the report New Business Market Summary - International, Report #5, using the field "Annuity, YTD Paid Premium. 2. The Total Collected Deposits shall then be multiplied by .0005 which result will be the amount of the bonus. 3. The assumptions made in calculation of this bonus are as follows: a) That the bonus is based on first-year and single deposits only. b) That this bonus is based on International Investment Contract and annuity first-year and single deposits and premiums only and excludes all domestic premiums or deposits. c) That this bonus includes no renewal premiums or deposits or any premiums or deposits after first year. d) That this bonus is determined as of 12/31/00 and is based on Year 2000 premiums and deposits only. II. All bonus performance is based on production produced between January 1, 2000 and December 31, 2000. III. All bonuses will be calculated after December 31, 2000 based on reports as of December 31, 2000. IV. All bonuses will be calculated and paid, if amounts are due, as soon as reasonably possible after January 1, 2001 but no later than February 1, 2001 V. The term of this contract is from January 1, 2000 to December 31, 2000. Under no circumstances will this bonus agreement automatically renew for the following year. Both you and NWL must sign a separate agreement if renewal of this agreement is desired. VI. In order to qualify for the bonus and be paid the bonus, you must be employed by NWL on the date that the bonus is actually paid by NWL. During the year 2000 if your employment with NWL is terminated for any reason other than your voluntary termination or "termination for cause" by NWL, NWL will, following year-end, determine whether or not any bonus would have been due for 2000. If NWL decides that such a bonus would have been due, considering all off-sets and deductions that might be imposed under this agreement, NWL will pay a pro-rata portion of the bonus to you, or if you are not living at that time then to your spouse, of if you and your spouse are not living at that time, then to your children. The pro-rata portion will be determined by dividing the total number of days of 2000 up to your date of termination, by the total number of days in 2000 and multiplying that result times the bonus as described above in the preceding paragraph. "Termination for cause" means termination for inappropriate or unsatisfactory work performance, work habits, conduct, behavior or demeanor including, but not limited to, the examples listed in the Code of Conduct that is incorporated in NWL's Employee Handbook. VII. Nothing in this agreement limits NWL's authority to make ALL decisions concerning products, including, but not limited to, profitability issues, commission and overwrite amounts, publications, advertising, compliance, market conduct, underwriting, and availability. VIII. This agreement shall not be amended, modified, or altered in any manner except in a writing signed by both parties. This agreement shall be governed, interpreted and construed according to the laws of the State of Texas. IX. This agreement constitutes the complete and exclusive agreement of the parties with respect to your Bonus Compensation and supersedes any prior understandings or written or oral agreements between the parties respecting this subject matter. X. This Bonus Agreement is binding upon signing. There are no conditions precedent or subsequent, other than the conditions specifically mentioned in this contract, that must occur before this contract becomes binding upon both parties. There are no representations other than those expressly included in this agreement relating to bonus compensation of Richard M. Edwards. EXECUTED at Austin, Texas, on May 30, 2000. NATIONAL WESTERN LIFE INSURANCE COMPANY By: /S/ Ross R. Moody Ross R. Moody, President /S/ Richard M. Edwards Richard M. Edwards Senior Vice President- International Marketing EX-10 4 exh10u.txt EXHIBIT 10U EXHIBIT 10(u) - MATERIAL CONTRACTS EIGHTH AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFERRED COMPENSATION PLAN This Eighth Amendment to the National Western Life Insurance Company Non- qualified Deferred Compensation Plan (the "Plan") is hereby adopted by National Western Life Insurance Company (the "Company"). WITNESSETH WHEREAS, the Plan was originally established effective January 1, 1991; WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at any time; and WHEREAS, the Company desires to amend the Plan to provide for an in- service distribution to the Chairman of the Company; NOW, THEREFORE, the Plan is hereby amended as follows effective as of December 1, 2000: 1. Section 5.3 of the Plan, Timing of Payment, is hereby amended by adding a new paragraph at the end of such Section to read as follows: "A Participant who is the Chairman of the Employer may elect to receive payment of his Vested Account balance on or after his Normal Retirement Date even if such Participant has not retired from active service with the Employer. Payment shall be made in accordance with the foregoing provisions of this Section. Once such an election is made by such Participant, contributions allocable to such Participant (as adjusted for earnings and losses) after the date the Participant receives a lump sum distribution or the final installment of an installment distribution (as applicable), shall be paid to the Participant in a single lump sum as soon as practicable after the end of the Plan Year to which such contributions relate." 2. Except as herein amended, the terms of the Plan as in effect immediately preceding the date hereof shall continue in full force and effect. IN WITNESS WHEREOF, the Company has adopted and executed this Eighth Amendment to the Plan this _____ day of _______, 2000. National Western Life Insurance Company ___________________________________ By: _______________________________ Its:_______________________________ Approved by the Board of Directors 12/5/00 EX-10 5 exh10v.txt EXHIBIT 10V EXHIBIT 10(v) - MATERIAL CONTRACTS FOURTH AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFINED BENEFIT PLAN This Fourth Amendment to the National Western Life Insurance Company Non- Qualified Defined Benefit Plan (the "Plan") is hereby adopted by National Western Life Insurance Company (the "Company"). WITNESSETH WHEREAS, the Plan was originally established effective January 1, 1991; WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at any time; and WHEREAS, the Company desires to amend the Plan to clarify the death benefit payable upon the death of a participant and to provide for in-service distributions to eligible participants; NOW, THEREFORE, the Plan is hereby amended as follows effective as of December 1, 2000: 1. The first paragraph of Section 4.6 of the Plan is hereby amended in its entirety to read as follows: "If a Participant dies while in the active service of the Employer, his Beneficiary shall be entitled to receive the Actuarial Equivalent of his Accrued Benefit that would have been payable at his Normal Retirement Date (if the Participant dies on or before his Normal Retirement Date) or at his Late Retirement Date (if the Participant dies after his Normal Retirement Date). Such benefit shall be payable as of the first day of the month coinciding with or next following the date of the Participant's death, in accordance with Article V hereof as to form and duration of payment." 2. Article IV of the Plan is hereby amended to add a new Section 4.7 at the end of such Article to read as follows: "4.7 In-Service Distribution (a) (i) If a Participant is the Chairman of the Employer and elects to receive an in-service pension under Section 7.7 (a) of the Qualified Plan, such Participant shall receive a benefit pursuant to this Plan equal to the benefit the Participant would have received under Section 4.1 or Section 4.2 (as applicable) had the Participant retired as of the date provided in Qualified Plan Section 7.7(a) for purposes of determining the amount of the Participant's in-service pension under the Qualified Plan. Such in-service benefit shall not be increased by subsequent benefit accruals hereunder (which accruals shall be payable, if at all, only in accordance with subsection (ii) and (iii) below). (ii) If a Participant is the Chairman of the Employer and receives an additional in-service pension under Section 7.7 (b) of the Qualified Plan, such Participant shall receive an additional benefit pursuant to this Plan equal to the benefit accrued by the Participant under this Plan over the period for which such additional in-service pension is determined under Section 7.7(b) of the Qualified Plan. Such additional in-service benefit shall not be increased by subsequent benefit accruals hereunder (which accruals shall be payable, if at all, only in accordance with this subsection (ii) and another in-service pension payable under Section 7.7(b) of the Qualified Plan or in accordance with subsection (iii) below). (iii) At the time such a Participant subsequently separates from the active service of the Employer, such Participant (or his Beneficiary as applicable) shall receive a benefit pursuant to this Plan equal to the benefit accrued by the Participant under this Plan over the period for which the Participant's final pension is determined under Section 7.7(c) of the Qualified Plan. Such final benefit shall not affect the amount of any in-service benefits payable under subsections (i) and (ii) above. (b) If a Participant other than the Chairman of the Employer elects to receive an in-service Pension under Section 7.7 of the Qualified Plan, such Participant shall not be eligible to receive a benefit under this Plan until the Participant retires or dies and becomes eligible to receive a benefit hereunder pursuant to Section 4.1, 4.2, or 4.6." IN WITNESS WHEREOF, the Company has adopted and executed this Fourth Amendment this ___ day of ______, 2000. National Western Life Insurance Company ___________________________________ By: ________________________________ Its:_________________________________ Approved by the Board of Directors 12/5/00 EX-21 6 exh21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State of % Name of Subsidiary Incorporation Owner Ownership The Westcap Corporation Delaware National Western Life 100% Insurance Company NWL Investments, Inc. Texas National Western Life 100% Insurance Company NWL Properties, Inc. Texas National Western Life 100% Insurance Company NWL 806 Main, Inc. Texas National Western Life 100% Insurance Company NWL Services, Inc. Nevada National Western Life 100% Insurance Company NWL Financial, Inc. Nevada National Western Life 100% Insurance Company National Annuity Texas NWL Properties, Inc. 100% Programs, Inc. Regent Care Limited Nevada NWL Services, Inc. 100% Partner, Inc. Regent Care General Nevada NWL Financial, Inc. 100% Partner, Inc. Regent Care Operations General Partner, Inc. Nevada NWL Financial, Inc. 100% Regent Care Operations Limited Partner, Inc. Nevada NWL Financial, Inc. 100%
The subsidiaries conduct business under the same corporate names as detailed above. -----END PRIVACY-ENHANCED MESSAGE-----