-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, maK7eFNopFCZYTQQHVsmEXOGnR83aj+hDMJ/RuyNw3Va0n/8HbOsL6fcx5lnxeL6 srcHY9Gdfd0n1xvLkaDXhA== 0000070684-94-000010.txt : 19940520 0000070684-94-000010.hdr.sgml : 19940520 ACCESSION NUMBER: 0000070684-94-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940331 FILED AS OF DATE: 19940516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-17039 FILM NUMBER: 94528661 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 10-Q FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1994 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512)836-1010 (Address of Principal Executive Offices) (Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] As of May 11, 1994, the number of shares of Registrant's common stock outstanding was: Class A - 3,284,672 and Class B - 200,000. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES INDEX Part I. Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheets - March 31, 1994 (Unaudited) and December 31, 1993 Condensed Consolidated Statements of Earnings - For the Three Months Ended March 31, 1994 and 1993 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Three Months Ended March 31, 1994 and 1993 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 1994 and 1993 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K Exhibit 11 - Computation of Earnings per Common Share - For the Three Months Ended March 31, 1994 and 1993 (Unaudited) Signatures PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) March 31, December 31, ASSETS 1994 1993 Cash and investments: Securities held to maturity, at amortized cost $ 753,866 1,787,360 Securities available for sale, at fair value in 1994 and aggregate market in 1993 1,145,517 39,355 Mortgage loans, net of allowances for possible losses ($6,824 and $6,849) 194,550 188,920 Policy loans 152,806 153,822 Other long-term investments 35,073 43,921 Securities purchased under agreements to resell 236,249 186,896 Trading securities, at fair value 189,911 116,918 Cash and short-term investments 16,213 32,823 Total cash and investments 2,724,185 2,550,015 Brokerage trade receivables, net of allowances for possible losses ($1,000 and $123) 44,226 55,163 Accrued investment income 29,330 28,901 Deferred policy acquisition costs 258,451 287,711 Other assets 24,840 19,261 $3,081,032 2,941,051 Note: The balance sheet at December 31, 1993 has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Shares Outstanding)
(Unaudited) March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 177,104 177,157 Universal life and investment annuity contracts 2,114,771 2,115,352 Other policyholder liabilities 23,222 24,211 Short-term borrowings 120,323 82,852 Securities sold not yet purchased 53,325 78,835 Securities sold under agreements to repurchase 245,564 127,971 Brokerage trade payables 43,728 39,422 Federal income tax payable: Current 3,469 4,823 Deferred 9,489 3,078 Other liabilities 25,527 44,632 Total liabilities 2,816,522 2,698,333 COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,284,672 shares issued and outstanding in 1994 and 1993 3,285 3,285 Class B - $1 par value; 200,000 shares authorized, issued and outstanding in 1994 and 1993 200 200 Additional paid-in capital 24,356 24,356 Net unrealized gains (losses) on investment securities 13,024 (257) Retained earnings 223,645 215,134 Total stockholders' equity 264,510 242,718 $3,081,032 2,941,051 Note: The balance sheet at December 31, 1993 has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (In Thousands Except Per Share Amounts)
1994 1993 Premiums and other revenue: Life and annuity premiums $ 4,934 4,870 Universal life and investment annuity contract revenues 16,248 16,017 Net investment income 45,764 44,803 Brokerage revenues 15,010 21,562 Other income 155 46 Realized gains on investments 1,714 514 Total premiums and other revenue 83,825 87,812 Benefits and expenses: Life and other policy benefits 7,886 10,063 Decrease in liabilities for future policy benefits (65) (620) Amortization of deferred policy acquisition costs 8,718 9,494 Universal life and investment annuity contract interest 32,462 32,129 Other insurance operating expenses 6,029 5,999 Brokerage operating expenses 15,702 15,137 Total benefits and expenses 70,732 72,202 Earnings before Federal income tax 13,093 15,610 Provision (benefit) for Federal income tax: Current 5,396 7,647 Deferred (814) (2,372) Total Federal income tax expense 4,582 5,275 Earnings before cumulative effect of change in accounting principle 8,511 10,335 Cumulative effect of change in accounting for income taxes - 5,520 Net earnings $ 8,511 15,855 Earnings per share of common stock: Earnings before cumulative effect of change in accounting principle $ 2.44 2.97 Cumulative effect of change in accounting for income taxes - 1.58 Net earnings $ 2.44 4.55 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (In Thousands)
1994 1993 Common stock shares outstanding: Shares outstanding at beginning of year 3,485 3,478 Shares issued for stock bonus plan - 3 Shares outstanding at end of period 3,485 3,481 Common stock: Balance at beginning of year $ 3,485 3,478 Shares issued for stock bonus plan - 3 Balance at end of period 3,485 3,481 Additional paid-in capital: Balance at beginning of year 24,356 24,065 Shares issued for stock bonus plan - 140 Balance at end of period 24,356 24,205 Net unrealized gains (losses) on investment securities: Balance at beginning of year (257) 138 Effect of change in accounting for investments in debt and equity securities 26,610 - Change in unrealized gains (losses) on investment securities during the period (13,329) 566 Balance at end of period 13,024 704 Retained earnings: Balance at beginning of year 215,134 158,410 Net earnings 8,511 15,855 Balance at end of period 223,645 174,265 Total stockholders' equity $ 264,510 202,655 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (In Thousands)
1994 1993 Cash flows from operating activities: Net earnings $ 8,511 15,855 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 32,462 32,129 Surrender charges (8,466) (8,307) Realized gains on investments (1,714) (514) Accrual and amortization of investment income (2,655) (228) Depreciation and amortization 242 189 Increase in insurance receivables and other assets (5,602) (1,608) Decrease in brokerage receivables 15,243 5,585 Decrease (increase) in accrued investment income (429) 622 Decrease in deferred policy acquisition costs 3,840 3,814 Decrease in liability for future policy policy benefits (65) (620) Increase (decrease) in other policyholder liabilities (989) 2,960 Decrease in Federal income tax payable (2,168) (5,828) Decrease in other liabilities (18,758) (15,483) Net decrease in repurchase agreements less related liabilities 42,730 22,016 Increase in trading securities (72,993) (15,200) Other (240) (72) Net cash provided by (used in) operating activities (11,051) 35,310 Cash flows from investing activities: Proceeds from sales of: Securities available for sale 757 - Investments in debt securities - 36,649 Other investments 11,652 3,298 Proceeds from maturities and redemptions of: Securities held to maturity 14,223 - Securities available for sale 52,269 - Investments in debt securities - 101,002 Purchases of: Securities held to maturity (79,434) - Securities available for sale (10,294) - Investments in debt securities - (188,197) Other investments (1,968) (3,269) Principal payments on mortgage loans 2,204 2,943 Cost of mortgage loans acquired (8,664) (8,780) Decrease (increase) in policy loans 1,016 (128) Other (112) (102) Net cash used in investing activities (18,351) (56,584)
(Continued on next page) NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (In Thousands)
1994 1993 Cash flows from financing activities: Net increase in short-term borrowings $ 37,471 9,736 Deposits to account balances for universal life and investment annuity contracts 26,785 35,938 Return of account balances on universal life and investment annuity contracts (51,464) (51,954) Net cash provided by (used in) financing activities 12,792 (6,280) Net decrease in cash and short-term investments (16,610) (27,554) Cash and short-term investments at beginning of year 32,823 31,203 Cash and short-term investments at end of period $ 16,213 3,649 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries (the Company), The Westcap Corporation and Commercial Adjusters, Inc. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 1994, and the results of its operations and its cash flows for the three months ended March 31, 1994 and 1993. 2. The results of operations for the three months ended March 31, 1994 and 1993 are not necessarily indicative of the results to be expected for the full year. 3. The Company paid no cash dividends on common stock during the three months ended March 31, 1994 and 1993. 4. In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows: (a) Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. (b) Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. (c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of taxes and adjustments to deferred policy acquisition costs, excluded from earnings and reported in a separate component of stockholders' equity. Previous accounting policy was similar to the requirements of the new statement. Significant differences were that securities available for sale were reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories. Effective January 1, 1994, the Company adopted SFAS No. 115. Approximately 60% of the Company's debt securities are now reported as securities available for sale with the remainder classified as securities held to maturity. The Company's relatively small holdings of equity securities are also reported as securities available for sale. Trading securities are composed entirely of securities from the Company's brokerage operations. There was no change in accounting policy for the trading securities as they were already being recorded at fair value with fair value changes reflected in earnings. Upon adoption of the new statement, certain related balance sheet accounts, deferred federal income tax payable and deferred policy acquisition costs, were adjusted as if the unrealized gains had actually been realized. For the Company's universal life and investment annuity contracts, deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on these policies. Accordingly, under SFAS No. 115, deferred policy acquisition costs are adjusted for the impact on estimated gross profits of net unrealized gains on securities. The implementation of the new statement had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows as of January 1, 1994:
January 1, 1994 (In thousands) Fair value adjustment to investments in debt and equity securities $ 93,788 Less: Decrease in deferred policy acquision costs (52,849) Increase in deferred federal income taxes (14,329) Effect of change in accounting for investments in debt and equity securities $ 26,610
Net unrealized gains on investment securities included in stockholders' equity at March 31, 1994 and December 31, 1993 are as follows:
March 31, December 31, 1994 1993 (In thousands) Gross unrealized gains $ 60,068 1,708 Gross unrealized losses (14,610) (2,176) Adjustments for: Deferred policy acquisition costs (25,420) - Deferred Federal income taxes (7,014) 211 Net unrealized gains (losses) on investment securities $ 13,024 (257)
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at March 31, 1994:
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 $ 21,200 969 - 22,169 States and political subdivisions 6,424 1,008 - 7,432 Foreign governments 17,677 - 1,402 16,275 Public utilities 197,426 2,767 6,016 194,177 Corporate 305,861 3,514 11,954 297,421 Mortgage-backed 205,278 1,169 9,221 197,226 Totals $ 753,866 9,427 28,593 734,700
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 $ 14,873 588 2,156 13,305 States and political subdivisions 2,000 84 - 2,084 Foreign governments 6,743 215 1,006 5,952 Public utilities 89,221 2,202 1,047 90,376 Corporate 204,332 8,443 3,763 209,012 Mortgage-backed 754,908 46,894 5,529 796,273 Equity securities 27,982 1,642 1,109 28,515 Totals $ 1,100,059 60,068 14,610 1,145,517
The amortized cost and fair values of investments in debt securities at March 31, 1994, 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 Held to Maturity Available for Sale Amortized Fair Amortized Fair Cost Value Cost Value (In thousands) Due in 1 year or less $ - - 1,999 2,045 Due after 1 year through 5 years 16,055 16,872 48,227 46,495 Due after 5 years through 10 years 181,310 174,326 100,854 102,258 Due after 10 years 351,223 346,276 166,089 169,931 548,588 537,474 317,169 320,729 Mortgage-backed securities 205,278 197,226 754,908 796,273 Totals $ 753,866 734,700 1,072,077 1,117,002
Proceeds from sales of securities available for sale totaled $757,000 for the quarter ended March 31, 1994. Gross gains of $7,000 were realized on those sales. The Company uses the specific identification method in computing realized gains and losses. Net increases in the fair values of trading securities totaled $228,000 for the quarter ended March 31, 1994, and have been included in earnings. 5. The Company's brokerage subsidiary, The Westcap Corporation, incurred trading losses during March, 1994, totaling $4,394,000, net of taxes and related expenses. These trading losses produced a net loss from brokerage operations of $450,000 or $0.13 per share for the quarter ended March 31, 1994. As a result of these losses, the Company has purchased an additional $4,400,000 of preferred stock of The Westcap Corporation and has agreed to provide a $3,000,000 line of credit to Westcap. This infusion of capital was important in order for Westcap to maintain its normal capital position, which is well in excess of required financial operating ratios. 6. 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 and subsidiaries of The Westcap Corporation. The suit seeks 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. No discovery has occurred, no judicial proceedings or hearings have occurred, and no answers or responses have been prepared or filed. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all of such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994, as more fully described in the notes to the financial statements. This statement addresses the accounting and reporting for investments in debt and equity securities and required classification of such securities into the following categories: held to maturity, available for sale, and trading. Although approximately 60% of the Company's debt securities are now reported as securities available for sale, a significant strategy within the Company's investment philosophy is still the intent to hold investments in debt securities to maturity. However, the significant holdings of securities available for sale 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. 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. 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, fixed maturities 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 purchased by the Company's brokerage subsidiary that are held for current resale are classified as trading securities. These securities are typically held for short periods of time as the intent is to sell them producing a trading profit. Trading securities are recorded in the Company's financial statements at fair value. Any trading profits or losses and unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of income in the Company's financial statements. Securities that are not classified as either held to maturity or trading 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 when factors change 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 individual fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity. As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the entire investment portfolio. Review procedures are 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 credit-related factors. Additional review procedures are performed on those fair value declines which are caused by factors other than market expectations regarding inflation and general interest rates. Specific conditions of the issuer and its ability to comply with all terms of the instrument are considered in the evaluation of the realizable value of the investment. Information reviewed in making this evaluation would include the recent operational results and financial position of the issuer, information about its industry, recent press releases and other available data. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment, such decline in fair value is determined to be other than temporary, and the carrying amount is reduced to its net realizable value. The amount of the reduction is reported as a realized loss. Portfolio Analysis At March 31, 1994, securities held to maturity totaled $754 million or 27.7% of total invested assets. The fair value of these securities was $735 million which reflects gross unrealized losses of $19 million. The unrealized losses within this portfolio result from the recent increases in market interest rates. Securities available for sale totaled $1.146 billion at March 31, 1994, or 42.0% of total invested assets. Equity securities, which are included in securities available for sale, continue to be a small component of the Company's total investment portfolio totaling only $29 million. Securities available for sale are reported in the accompanying financial statements at fair value with changes in values reported as a separate component of stockholders' equity. The fair value of this portfolio declined $13.3 million during the quarter ended March 31, 1994, net of effects of deferred federal income taxes and adjustments to deferred policy acquisition costs. This decline is also reflective of the recent increase in market interest rates. However, the portfolio still maintained net unrealized gains totaling $13 million at March 31, 1994. The Company's insurance operations do not maintain a trading securities portfolio. All trading securities reported in the accompanying financial statements are held by the Company's brokerage subsidiary, The Westcap Corporation. These securities totaled $190 million at March 31, 1994, or 7.0% of total invested assets. Net increases in the fair values of these securities totaled $228,000 for the quarter ended March 31, 1994, and have been included in earnings. The Company's insurance operations maintain a diversified debt securities portfolio which consists of various types of fixed income securities including primarily U.S. government, public utilities, corporate and mortgage-backed securities. Investments in mortgage-backed securities include U.S. government and private issue mortgage-backed pass-through securities as well as collateralized mortgage obligations (CMOs). Mortgage-backed securities are subject to prepayment risk which can affect portfolio yields. However, the Company substantially reduced its prepayment risk in 1993 by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. The Company increased its holdings of planned amortization class I (PAC I) CMOs which are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. This is achieved by redirecting prepayments to other CMO classes. Due to this strategy and the recent increase in market interest rates, the Company has experienced lower principal prepayments in the first quarter of 1994. PAC I tranches continue to account for over 80% of the total CMO portfolio as of March 31, 1994. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis provides information used in selecting securities that fit appropriately within the Company's investment philosophy and asset/liability management parameters. The Company also experienced increased calls in 1993 primarily in public utilities holdings. The Company responded in 1993 with an active approach in managing future call risk by investing the call proceeds in a more diverse group of companies with increased call protection. As a result, the Company's utilities holdings as a percentage of the entire portfolio was reduced significantly. The Company's restructuring of this portion of the portfolio has been a factor in the reduction of calls in the quarter ended March 31, 1994. In addition to managing prepayment and call risk, the Company continues to maintain high quality investments in debt securities. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities, which are summarized as follows, increased slightly from 1993 primarily due to two corporate issuers that were downgraded.
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) March 31, 1994 $ 32,262 34,233 1.2% December 31, 1993 $ 24,261 24,223 1.0%
The level of investments in debt securities which are in default as to principal or interest payments is indicative of the Company's minimal holdings of below investment grade debt securities. At March 31, 1994, and December 31, 1993, securities with principal balances totaling $3,151,000 were in default and on non-accrual status. MORTGAGE LOANS AND REAL ESTATE Investment Philosophy The Company continues to improve the quality of its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In most cases, mortgage loans are now guaranteed by the borrower and secured by the property, amortized over the term of the lease on the property which is guaranteed by the lessee, and approved based on the credit strength of the lessee. This approach also enables the Company to choose the locale in which the property securing the loan is located. In addition, the Company's underwriting guidelines still require a loan-to-value ratio of 75% or less. 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 currently seeks loans ranging from $500,000 to $11,000,000, with terms ranging from three to twenty-five years, at interest rates dictated by the marketplace. The Company's direct investments in real estate are not a significant portion of its total investment portfolio. The majority of real estate owned was acquired through mortgage loan foreclosures. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future. Portfolio Analysis The Company held net investments in mortgage loans totaling $194,550,000 and $188,920,000, or 7.1% and 7.4% of total invested assets, at March 31, 1994, and December 31, 1993, respectively. The loans are real estate mortgages substantially all of which are related to commercial properties and developments and have fixed interest rates. As of March 31, 1994, the allowance for possible losses on mortgage loans was $6,824,000. No additions were made to the allowance in the quarter ended March 31, 1994, as management believes that the current balance 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 region which includes Texas, Louisiana, Oklahoma, and Arkansas. The Company currently places all loans past due three months or more on a non-accrual status, thus recognizing no interest income on the loans. At March 31, 1994, and December 31, 1993, the Company had approximately $3,242,000 and $4,191,000, respectively, of mortgage loan principal balances on a non-accrual status. For the three months ended March 31, 1994 and 1993, the approximate reduction in interest income associated with non-accrual loans was as follows:
Three Months Ended March 31, 1994 1993 (In thousands) Interest income at contract rate $ 87 224 Interest income recognized 15 33 Interest income not accrued $ 72 191
In addition to the non-accrual loans, the Company had mortgage loans with restructured terms totaling approximately $17,231,000 and $14,257,000 at March 31, 1994, and December 31, 1993, respectively. For the three months ended March 31, 1994 and 1993, the approximate reduction in interest income associated with restructured loans was as follows:
Three Months Ended March 31, 1994 1993 (In thousands) Interest income under original terms $ 465 432 Interest income recognized 413 370 Reduction in interest income $ 52 62
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $22,303,000 and $22,672,000 at March 31, 1994, and December 31, 1993, 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 small operating losses on these properties of approximately $60,000 and $81,000 for the three months ended March 31, 1994 and 1993, respectively. The Company does not anticipate significant changes in these operating results in the near future. The Company monitors the conditions and market values of these properties on a regular basis. No significant realized losses were recognized due to declines in values of properties for the three months ended March 31, 1994 and 1993, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. However, the amounts expended for this maintenance has not had a significant impact on the Company's liquidity and capital resources, and such maintenance is not foreseen to have a significant impact in the near future. RESULTS OF OPERATIONS The significant changes and fluctuations between the three months ended March 31, 1994 and 1993 are described in detail as follows: Premium Revenues: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets have moved toward non-traditional types such as universal life and investment annuities. Although these revenues were up slightly in 1994 as compared to 1993, the change in marketing direction has resulted in a decrease in revenues in this category over the past several years. Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, policy administration fees and surrender charges assessed during the period. There were no significant changes in the level or mix of these revenues for the quarter ended March 31, 1994, as compared to the same 1993 period. However, these revenues have been increasing steadily over the past two years. The majority of the increase is due to surrender charge revenues from increased policy surrenders. Lowering of credited interest rates and increased competition over the past two years has had a significant impact on the level of policy surrenders. Also, although these revenues have been trending upward, the actual universal life and investment annuity deposits collected have decreased over the past several years. Deposits collected for the quarters ended March 31, 1994 and 1993 were $34.6 million and $43.6 million, respectively. The decline in universal life and investment annuity deposits is related to the discontinuance of the Company's two-tier annuity products in 1992 and increased competition due to market interest rate conditions. The discontinued products have been replaced with single-tier annuities, and the Company anticipates somewhat lower deposit collections than in previous years during this transition period. However, the Company anticipates that this decline will be reversed as efforts have continued to develop new annuity and life products for sale and distribution through independent marketing organizations. In addition to new product developments, the Company has contracted with additional independent marketing organizations to further strengthen and diversify distribution channels. Also, many products are developed specifically for these organizations to meet the needs for a particular customer base. Net Investment Income: Net investment income increased $961,000 from $44,803,000 in 1993 to $45,764,000 in 1994. The majority of the increase resulted from additional amortization of discounts on investments in debt securities. Brokerage Revenues and Expenses: The Company's brokerage subsidiary, The Westcap Corporation, incurred trading losses during March, 1994, totaling $4,394,000, net of taxes and related expenses. These trading losses produced a net loss from brokerage operations of $450,000 or $0.13 per share for the quarter ended March 31, 1994. Realized Gains on Investments: The Company had realized gains of $1,714,000 in 1994 as compared to $514,000 in 1993. The 1994 realized gains consist primarily of gains on investments in debt securities called for redemption. The 1993 gains are net of write-downs totaling $2,000,000 relating to real estate, mortgage loans and investments in debt securities. No write-downs were recorded in 1994. Life and Other Policy Benefits: Expenses for 1994 and 1993 were $7.9 million and $10.1 million, respectively. The significant decrease in expenses is due to lower life insurance benefit claims and surrenders. These expenses declined in 1994 to a level which is more consistent with prior Company experience. Comparative 1993 expenses were abnormally high due to adverse claims experience. Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the Financial Accounting Standards Board issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, 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. Under SFAS No. 109, 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. The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the statement of earnings for the three months ended March 31, 1993. LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of the Company are met primarily by funds provided from the life insurance operations. Policy 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. The Company's brokerage subsidiary uses revolving lines of credit to complement any funds generated from operations. These lines of credit are used primarily for clearing functions for all securities transactions with its customers. National Western also has a $60 million bank line of credit. The line of credit is primarily used for cash management purposes relating to investment transactions. Most of the Company's assets, other than policy loans and deferred policy acquisition costs, are invested in bonds and other securities, substantially all of which are readily marketable. Although there is no present need or intent to dispose of such investments, the Company could liquidate portions of the investments should the need arise. Additionally, the Company has use of the line of credit for short-term liquidity needs for periods not exceeding 30 days. The Company expects future cash flows to be adequate to meet the demands for funds. The Company had no long-term debt during 1994 or 1993. There are no present material commitments for capital expenditures in 1994, and the Company does not anticipate incurring any such commitments through the remainder of 1994. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Part 1 - Exhibit 11: Computation of Earnings Per Common Share (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended March 31, 1994. EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE For the Three Months Ended March 31, 1994 and 1993 (Unaudited) (In Thousands Except Per Share Data) 1994 1993 Earnings applicable to common shares: Earnings before cumulative effect of change in accounting principle $ 8,511 10,335 Cumulative effect of change in accounting for income taxes - 5,520 Net earnings $ 8,511 15,855 Weighted average common shares outstanding 3,485 3,481 Earnings per common share: Earnings before cumulative effect of change in accounting principle $ 2.44 2.97 Cumulative effect of change in accounting for income taxes - 1.58 Net earnings $ 2.44 4.55
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Western Life Insurance Company (Registrant) Date: May 11, 1994 /S/ Ross R. Moody Ross R. Moody President and Chief Operating Officer Date: May 11, 1994 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----