-----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, Rz92YuAWa4qw3ksIVtdlFwVxy/4Dobhav8bXwfQKI1tqjNy/Z/WmbgeiXSVVe/YD ddUELPjtZ3e+hL2cd6/unQ== 0000070684-94-000017.txt : 19941122 0000070684-94-000017.hdr.sgml : 19941122 ACCESSION NUMBER: 0000070684-94-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NASD 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: 94559957 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 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 November 10, 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: Page Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 1994 (Unaudited) and December 31, 1993 Condensed Consolidated Statements of Earnings - For the Three Months Ended September 30, 1994 and 1993 (Unaudited) Condensed Consolidated Statements of Earnings - For the Nine Months Ended September 30, 1994 and 1993 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Nine Months Ended September 30, 1994 and 1993 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 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 September 30, 1994 and 1993 (Unaudited) Exhibit 11 - Computation of Earnings per Common Share - For the Nine Months Ended September 30, 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) September 30, December 31, ASSETS 1994 1993 Cash and investments: Securities held to maturity, at amortized cost $ 1,626,748 1,787,360 Securities available for sale, at fair value in 1994 and aggregate market in 1993 305,456 39,355 Trading securities, at fair value 85,140 116,918 Mortgage loans, net of allowances for possible losses ($6,290 and $6,849) 195,273 188,920 Policy loans 151,968 153,822 Other long-term investments 28,198 43,921 Securities purchased under agreements to resell 165,491 186,896 Cash and short-term investments 1,899 32,823 Total cash and investments 2,560,173 2,550,015 Brokerage trade receivables, net of allowances for possible losses ($1,000 and $123) 12,754 55,163 Accrued investment income 29,530 28,901 Deferred policy acquisition costs 282,774 287,711 Other assets 17,280 19,261 $ 2,902,511 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) September 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 176,917 177,157 Universal life and investment annuity contracts 2,140,492 2,115,352 Other policyholder liabilities 21,714 24,211 Short-term borrowings 34,140 82,852 Securities sold not yet purchased 87,627 78,835 Securities sold under agreements to repurchase 122,093 127,971 Brokerage trade payables 11,049 39,422 Federal income tax payable: Current - 4,823 Deferred 3,115 3,078 Other liabilities 31,907 44,632 Total liabilities 2,629,054 2,698,333 COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7) 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 30 (257) Retained earnings 245,586 215,134 Total stockholders' equity 273,457 242,718 $ 2,902,511 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 September 30, 1994 and 1993 (Unaudited) (In Thousands Except Per Share Amounts)
1994 1993 Premiums and other revenue: Life and annuity premiums $ 4,834 4,645 Universal life and investment annuity contract revenues 15,603 16,598 Net investment income 49,155 44,361 Brokerage revenues 7,594 23,148 Other income 749 730 Realized gains on investments 382 964 Total premiums and other revenue 78,317 90,446 Benefits and expenses: Life and other policy benefits 7,746 8,038 Change in liabilities for future policy benefits 28 121 Amortization of deferred policy acquisition costs 7,715 8,503 Universal life and investment annuity contract interest 31,245 34,074 Other insurance operating expenses 6,361 9,935 Brokerage operating expenses 7,150 15,602 Total benefits and expenses 60,245 76,273 Earnings before Federal income tax 18,072 14,173 Provision for Federal income tax: Current 5,107 3,346 Deferred 1,218 1,991 Total Federal income tax expense 6,325 5,337 Net earnings $ 11,747 8,836 Earnings per share of common stock: Net earnings $ 3.37 2.54 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Nine Months Ended September 30, 1994 and 1993 (Unaudited) (In Thousands Except Per Share Amounts)
1994 1993 Premiums and other revenue: Life and annuity premiums $ 14,003 14,572 Universal life and investment annuity contract revenues 48,972 50,776 Net investment income 142,255 135,322 Brokerage revenues 35,382 70,189 Other income 957 1,526 Realized gains on investments 2,486 2,277 Total premiums and other revenue 244,055 274,662 Benefits and expenses: Life and other policy benefits 24,250 27,447 Decrease in liabilities for future policy benefits (240) (385) Amortization of deferred policy acquisition costs 25,112 27,374 Universal life and investment annuity contract interest 95,880 98,829 Other insurance operating expenses 18,410 22,654 Brokerage operating expenses 33,794 48,166 Total benefits and expenses 197,206 224,085 Earnings before Federal income tax 46,849 50,577 Provision (benefit) for Federal income tax: Current 16,587 19,577 Deferred (190) (1,917) Total Federal income tax expense 16,397 17,660 Earnings before cumulative effect of change in accounting principle 30,452 32,917 Cumulative effect of change in accounting for income taxes - 5,520 Net earnings $ 30,452 38,437 Earnings per share of common stock: Earnings before cumulative effect of change in accounting principle $ 8.74 9.46 Cumulative effect of change in accounting for income taxes - 1.58 Net earnings $ 8.74 11.04 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 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 - 141 Balance at end of period 24,356 24,206 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 losses on investment securities during the period (27,525) (138) Net unrealized gain related to transfer of securities available for sale to securities held to maturity 1,380 - Amortization of net unrealized gain related to transferred securities (178) - Balance at end of period 30 0 Retained earnings: Balance at beginning of year 215,134 158,410 Net earnings 30,452 38,437 Balance at end of period 245,586 196,847 Total stockholders' equity $ 273,457 224,534 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1994 and 1993 (Unaudited) (In Thousands)
1994 1993 Cash flows from operating activities: Net earnings $ 30,452 38,437 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 95,880 98,829 Surrender charges (25,426) (27,434) Realized gains on investments (2,486) (2,277) Accrual and amortization of investment income (10,355) (642) Depreciation and amortization 768 589 Decrease (increase) in insurance receivables and other assets 1,926 (2,647) Decrease (increase) in brokerage receivables, net 14,036 (1,149) Decrease (increase) in accrued investment income (629) 3,115 Decrease in deferred policy acquisition costs 6,585 11,166 Decrease in liability for future policy benefits (240) (385) Increase (decrease) in other policyholder liabilities (2,498) 1,802 Decrease in Federal income tax payable (5,175) (14,053) Decrease in other liabilities (12,724) (20,113) Net decrease (increase) in repurchase agreements less related liabilities 24,319 (115,679) Decrease in trading securities 31,778 81,502 Other - (156) Net cash provided by operating activities 146,211 50,905 Cash flows from investing activities: Proceeds from sales of: Securities available for sale 7,362 - Investments in debt securities - 64,876 Other investments 22,427 5,507 Proceeds from maturities and redemptions of: Securities held to maturity 54,801 - Securities available for sale 55,723 - Investments in debt securities - 356,860 Purchases of: Securities held to maturity (152,323) - Securities available for sale (59,608) - Investments in debt securities - (436,978) Other investments (7,114) (11,164) Principal payments on mortgage loans 20,933 10,931 Cost of mortgage loans acquired (26,912) (26,434) Decrease in policy loans 1,854 330 Other (251) (259) Net cash used in investing activities (83,108) (36,331) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Nine Months Ended September 30, 1994 and 1993 (Unaudited) (In Thousands)
1994 1993 Cash flows from financing activities: Increase (decrease) in short-term borrowings $ (48,712) 41,416 Deposits to account balances for universal life and investment annuity contracts 111,141 95,341 Return of account balances on universal life and investment annuity contracts (156,456) (168,538) Net cash used in financing activities (94,027) (31,781) Net decrease in cash and short-term investments (30,924) (17,207) Cash and short-term investments at beginning of year 32,823 31,203 Cash and short-term investments at end of period $ 1,899 13,996 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 September 30, 1994, and the results of its operations for the three months and nine months ended September 30, 1994 and 1993 and its cash flows for the nine months ended September 30, 1994 and 1993. 2. The results of operations for the three months and nine months ended September 30, 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 nine months ended September 30, 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. Upon adoption, approximately 60% of the Company's insurance operations debt securities were reported as securities available for sale with the remainder classified as securities held to maturity. The Company's relatively small holdings of equity securities were also reported as securities available for sale. Trading securities were 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 and losses 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 acquisition costs (52,849) Increase in deferred federal income taxes (14,329) Effect of change in accounting in debt and equity securities for investments $ 26,610
At July 31, 1994, the Company transferred debt securities with market values totaling $805 million from securities available for sale to securities held to maturity. There were no changes in classifications of the Company's equity or trading securities. Securities available for sale now represent 15% of the Company's insurance operations debt securities as compared to 60% prior to the transfers. The lower holdings of securities available for sale will 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 market values in accordance with SFAS No. 115. 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:
(In thousands) Fair value adjustment to securities transferred at July 31, 1994 $ 3,898 Less: Decrease in deferred policy acquisition costs (1,775) Increase in deferred federal income taxes (743) Net unrealized gain related to securities transferred to held to maturity at July 31, 1994 1,380 Less: Amortization of net unrealized gain for the period August 1 to September 30, 1994 (178) Net unrealized gain related to securities transferred to held to maturity at September 30, 1994 $ 1,202
Net unrealized gains (losses) on investment securities included in stockholders' equity at September 30, 1994 and December 31, 1993 are as follows:
September December 1994 1993 (In thousands) Gross unrealized gains $ 5,777 1,708 Gross unrealized losses (10,577) (2,176) Adjustments for: Deferred policy acquisition costs 2,997 - Deferred Federal income taxes 631 211 (1,172) (257) Net unrealized gain related to securities transferred to held to maturity 1,202 - Net unrealized gains (losses) on investment securities $ 30 (257)
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 have been recorded in the consolidated financial statements for the three months ended March 31, 1994, and nine months ended September 30, 1994. As a result of these losses, the Company has purchased an additional $4,400,000 of preferred stock of The Westcap Corporation in 1994 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 25, 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. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all 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. A judicial ruling favorable to Westcap was recently made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against National Western Life was suspended pending determination of the arbitration proceeding against Westcap. 7. On August 5, 1994, the Sarasota-Manatee Airport Authority filed a complaint in the United States District Court, Middle District of Florida, Tampa Division, against National Western Life Insurance Company, The Westcap Corporation and subsidiaries of Westcap. The suit seeks rescission of securities purchase transactions by the Sarasota-Manatee Airport Authority from Westcap, judgment for damages, or such other relief as the court may deem appropriate. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by Sarasota-Manatee Airport Authority, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to Westcap'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. 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 p a rticular 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 September 30, 1994, securities held to maturity totaled $1.627 billion or 63.5% of total invested assets. The fair value of these securities was $1.537 million which reflects gross unrealized losses of $90 million. The unrealized losses within this portfolio result from increases in market interest rates during 1994. These gross unrealized losses are partially offset by $1,202,000 of net unrealized gains at September 30, 1994 recorded as a separate component of stockholders' equity resulting from the transfer of securities from available for sale to held to maturity as described in the notes to the financial statements. Securities available for sale totaled $305 million at September 30, 1994, or 11.9% 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 $27 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. As previously described in the notes to the financial statements, at July 31, 1994, the Company transferred securities with market values totaling $805 million from securities available for sale to securities held to maturity. The lower holdings of securities available for sale will significantly reduce the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfer resulted in locking in a net unrealized gain totaling $1,380,000 as a separate component of stockholders' equity which is subsequently being amortized. The net unrealized loss of the remaining securities available for sale was $1,172,000 at September 30, 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 $85.1 million at September 30, 1994, or 3.3% of total invested assets. Net decreases in the fair values of these securities totaled approximately $1.9 million for the quarter ended September 30, 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 increases in market interest rates, the Company has experienced lower principal prepayments in the first nine months of 1994. PAC I tranches continue to account for over 80% of the total CMO portfolio as of September 30, 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. Based on investment philosophy and current asset/liability analysis, the Company is limiting it holdings in CMOs to its present level of approximately 36% of invested assets of the insurance operations. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension and credit risks. 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 and increases in market interest rates have been the major factors in the reduction of calls in the nine months ended September 30, 1994. The Company continues to minimize credit risk within its portfolio by maintaining high quality investments in debt securities. 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. The issuers of such below investment grade securities usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade securities issuers. The Company's small holdings of below investment grade debt securities are summarized as follows:
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) September 30, 1994 $ 26,138 24,414 1.0% 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 September 30, 1994, and December 31, 1993, securities with principal balances totaling only $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 addition to all mortgage loans being secured by the property, the majority of loans originated since 1991 are amortized over the term of the lease on the property, which is guaranteed by the lessee, and are 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 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 $195,273,000 and $188,920,000, or 7.6% and 7.4% of total invested assets, at September 30, 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 September 30, 1994, the allowance for possible losses on mortgage loans was $6,290,000. Additions of $135,000 were made to the allowance in the quarter ended September 30, 1994. 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 September 30, 1994, and December 31, 1993, the Company had approximately $1,762,000 and $4,191,000, respectively, of mortgage loan principal balances on a non-accrual status. For the three months ended September 30, 1994 and 1993, the approximate reduction in interest income associated with non-accrual loans was as follows:
Three Months Ended September 30, 1994 1993 (In thousands) Interest income at contract rate $ 88 522 Interest income recognized 74 213 Interest income not accrued $ 14 309
In addition to the non-accrual loans, the Company had mortgage loans with restructured terms totaling approximately $17,768,000 and $14,257,000 at September 30, 1994, and December 31, 1993, respectively. For the three months ended September 30, 1994 and 1993, the approximate reduction in interest income associated with restructured loans was as follows:
Three Months Ended September 30, 1994 1993 (In thousands) Interest income under original terms $ 505 414 Interest income recognized 451 363 Reduction in interest income $ 54 51
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $21,024,000 and $22,672,000 at September 30, 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 operating losses on these properties of approximately $264,000 and $94,000 for the three months ended September 30, 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. Realized losses totaling $154,000 were recognized due to declines in values of properties for the three months ended September 30, 1994. 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 have 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 September 30, 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 premium revenues increased slightly in the third quarter of 1994, this move in market 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. The decrease from 1993 is primarily due to lower policy surrenders resulting in reduced surrender charge revenues. In addition to the decrease in surrender charge revenues described above, the Company has experienced a decline in universal life and investment annuity deposits over the past several years. Much of the decline is due to the discontinuance of the Company's two-tier annuity products in 1992 and increased competition due to market interest rate conditions. However, the Company continues to develop new annuity and life products and continues to contract with new independent marketing organizations to further strengthen and diversify distribution channels for the sale of such products. The Company also increased annuity marketing efforts in the second quarter of 1994 through personnel additions and product enhancements. As a result, universal life and investment annuity deposits collected increased in the third quarter of 1994. Deposits collected for the quarters ended September 30, 1994 and 1993 were 60.0 million and $35.1 million, respectively. Net Investment Income: Net investment income increased $4,794,000 from $44,361,000 in 1993 to $49,155,000 in 1994. Net investment income was up primarily due to yield and amortization adjustments on mortgage-backed securities and increases in invested assets. The yield and amortization adjustments were made in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." The adjustments are made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affect average lives, yields and amortization periods of the securities. Brokerage Revenues and Expenses: Third quarter 1994 net earnings from the Company's brokerage subsidiary, The Westcap Corporation, totaled $288,000 or $0.08 per share compared to $4,980,000 or $1.43 per share for the third quarter of 1993. Adverse bond market conditions due to increasing market interest rates is the major factor for the lower earnings for the subsidiary. Realized Gains on Investments: The Company had realized gains of $382,000 in 1994 compared to $964,000 in 1993. The 1994 realized gains consist primarily of gains on real estate sales. The 1994 and 1993 gains are net of write-downs totaling $289,000 and $1,471,000, respectively, relating to real estate, mortgage loans and investments in debt securities. Other Insurance Operating Expenses: Other insurance operating expenses were down over 35% as third quarter 1993 expenses included a charge of $3,700,000 for state guaranty fund assessments relating to insolvent companies. The significant changes and fluctuations between the nine months ended September 30, 1994 and 1993 are described in detail as follows: Universal Life and Investment Annuity Contract Revenues: Consistent with the third quarter 1994 results described above, universal life and investment annuity contract revenues have declined approximately 3.6% from 1993 due primarily to lower policy surrenders resulting in reduced surrender charge revenues. Net Investment Income: Net investment income increased from the 1993 amount for the same reasons as previously described for the three month period. Rising market interest rates during the nine month period ended September 30, 1994, has had a minimal effect on investment income. Brokerage Revenues and Expenses: Net earnings from The Westcap Corporation for the nine month period ended September 30, 1994, totaled $1,032,000 or $0.29 per share compared to $14,523,000 or $4.17 per share for the same period of 1993. The significant decrease in brokerage earnings is due to trading losses incurred during March, 1994, totaling $4,394,000, net of taxes and related expenses, and adverse bond market conditions due to increasing market interest rates as previously described. Other Income: Other income was higher in 1993 as it includes non-recurring proceeds from two lawsuit settlements totaling $1,420,000. Realized Gains on Investments: Realized gains on investments of $2.5 million were recorded in 1994 as compared to $2.3 million for the same period of 1993. The 1993 gains are net of write-downs relating to real estate, mortgage loans and investments in debt securities totaling $5,853,000. The 1994 gains, resulting primarily from debt securities redemptions, include no significant writedowns. Life and Other Policy Benefits: Benefit expenses decreased 11.6% due primarily to lower life insurance benefit claims. 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. Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business which consists primarily of agents commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization for 1994 was $25,112,000 compared to $27,374,000 for 1993. The decrease in amortization in 1994 directly correlates to the decrease in policy surrenders and surrender charge revenues. Other Insurance Operating Expenses: These expenses were down in 1994 as the 1993 amount includes charges for state guaranty fund assessments as previously described for the three month period. 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 subject to the accounting and disclosure requirements of SFAS No. 115. 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) Part 1 - Exhibit 27: Financial Data Schedule: This schedule was included only in the electronic filing for the purposes of the Securities and Exchange Commission. (c) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended September 30, 1994. EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE For the Three Months Ended September 30, 1994 and 1993 (Unaudited) (In Thousands Except Per Share Data)
1994 1993 Earnings applicable to common shares: Net earnings $ 11,747 8,836 Weighted average common shares outstanding 3,485 3,481 Earnings per common share: Net earnings $ 3.37 2.54
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE For the Nine Months Ended September 30, 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 $ 30,452 32,917 Cumulative effect of change in accounting for income taxes - 5,520 Net earnings $ 30,452 38,437 Weighted average common shares outstanding 3,485 3,481 Earnings per common share: Earnings before cumulative effect of change in accounting principle $ 8.74 9.46 Cumulative effect of change in income taxes - 1.58 Net earnings $ 8.74 11.04
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Western Life Insurance Company (Registrant) Date: November 10, 1994 /S/ Ross R. Moody Ross R. Moody President and Chief Operating Officer Date: November 10, 1994 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer EX-27 2
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER 30, 1994 FINANCIAL STATEMENTS OF NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 390,596 1,626,748 1,536,908 27,327 195,273 21,024 2,560,173 1,899 1,125 282,774 2,902,511 2,317,409 0 11,892 9,822 34,140 3,485 0 0 269,972 2,902,511 62,975 142,255 2,486 957 119,890 25,112 18,410 46,849 16,397 30,452 0 0 0 30,452 8.74 8.74 0 0 0 0 0 0 0 Consists of $14,003 revenues from traditional contracts subject to FAS 60 accounting treatment and $48,972 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $24,250 benefits paid to policyholders, $<240> decrease in reserves on traditional contracts and $95,880 interest on univeral life and investment annuity contracts.
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