-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F+qzsexeFcQ2nbqqj2dcr5zyhJrC33IZN0Yrk91un/mm8zmJ1JnNSOiFQcRpqJzO /m2xBEH3q+bJ8Q6v5JUlIQ== 0000070684-95-000012.txt : 19951119 0000070684-95-000012.hdr.sgml : 19951119 ACCESSION NUMBER: 0000070684-95-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-17039 FILM NUMBER: 95592063 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 [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1995 [ ] 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 , 1995, the number of shares of Registrant's common stock outstanding was: Class A - 3,288,204 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, 1995 (Unaudited) and December 31, 1994 Condensed Consolidated Statements of Operations - For the Three Months Ended September 30, 1995 and 1994 (Unaudited) Condensed Consolidated Statements of Operations - For the Nine Months Ended September 30, 1995 and 1994 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Nine Months Ended September 30, 1995 and 1994 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 1995 and 1994 (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, 1995 and 1994 (Unaudited) Exhibit 11 - Computation of Earnings per Common Share - For the Nine Months Ended September 30, 1995 and 1994 (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, 1995 1994 ASSETS Cash and investments: Securities held to maturity, at amortized cost $ 1,722,544 1,605,813 Securities available for sale, at fair value 473,537 354,300 Mortgage loans, net of allowances for possible losses ($5,668 and $5,929) 191,390 189,632 Policy loans 149,739 151,487 Other long-term investments 32,218 24,872 Cash and short-term investments 6,273 17,723 Total cash and investments 2,575,701 2,343,827 Accrued investment income 33,622 31,630 Deferred policy acquisition costs 281,979 291,274 Other assets 22,769 16,266 Assets of discontinued operations 6,177 232,057 $ 2,920,248 2,915,054 Note: The balance sheet at December 31, 1994 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, 1995 1994 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Future policy benefits: Traditional life and annuity products $ 174,940 177,429 Universal life and investment annuity contracts 2,377,095 2,194,264 Other policyholder liabilities 25,014 23,183 Federal income taxes payable: Current 392 - Deferred 7,461 1,996 Other liabilities 33,374 27,718 Liabilities of discontinued operations 6,177 215,330 Total liabilities 2,624,453 2,639,920 STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,288,204 and 3,288,192 shares issued and outstanding in 1995 and 1994 3,288 3,288 Class B - $1 par value; 200,000 shares authorized, issued and outstanding in 1995 and 1994 200 200 Additional paid-in capital 24,475 24,475 Net unrealized gains (losses) on investment securities 7,077 (2,199) Retained earnings 260,755 249,370 Total stockholders' equity 295,795 275,134 $ 2,920,248 2,915,054 Note: The balance sheet at December 31, 1994 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 OPERATIONS For the Three Months Ended September 30, 1995 and 1994 (Unaudited) (In Thousands Except Per Share Amounts)
1995 1994 Premiums and other revenue: Life and annuity premiums $ 4,381 4,834 Universal life and investment annuity contract revenues 17,236 15,603 Net investment income 50,317 49,155 Other income 26 749 Realized gains (losses) on investments (2,030) 382 Total premiums and other revenue 69,930 70,723 Benefits and expenses: Life and other policy benefits 8,813 7,746 Change in liabilities for future policy benefits (621) 28 Amortization of deferred policy acquisition costs 7,429 7,715 Universal life and investment annuity contract interest 37,155 31,245 Other insurance operating expenses 5,993 6,361 Total benefits and expenses 58,769 53,095 Earnings from continuing operations before Federal income taxes 11,161 17,628 Provision (benefit) for Federal income taxes: Current (1,853) 4,951 Deferred 1,230 1,218 Total Federal income taxes (benefit) (623) 6,169 Earnings from continuing operations 11,784 11,459 Discontinued operations: Earnings (losses) from operations of discontinued subsidiary (net of applicable Federal income taxes of $156 in 1994) (6,752) 288 Estimated loss on disposal of discontinued operations (6,381) - Earnings (losses) from discontinued operations (13,133) 288 Net earnings (losses) $ (1,349) 11,747 Earnings (losses) per share of common stock: Earnings from continuing operations $ 3.38 3.29 Earnings (losses) from discontinued operations (3.77) 0.08 Net earnings (losses) $ (0.39) 3.37 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 1995 and 1994 (Unaudited) (In Thousands Except Per Share Amounts)
1995 1994 Premiums and other revenue: Life and annuity premiums $ 13,061 14,003 Universal life and investment annuity contract revenues 51,390 48,972 Net investment income 149,161 142,255 Other income 611 957 Realized gains (losses) on investments (1,729) 2,486 Total premiums and other revenue 212,494 208,673 Benefits and expenses: Life and other policy benefits 29,033 24,250 Change in liabilities for future policy benefits (2,489) (240) Amortization of deferred policy acquisition costs 24,522 25,112 Universal life and investment annuity interest contract 107,603 95,880 Other insurance operating expenses 19,973 18,410 Total benefits and expenses 178,642 163,412 Earnings from continuing operations before Federal income taxes 33,852 45,261 Provision (benefit) for Federal income taxes: Current 5,812 16,031 Deferred 305 (190) Total Federal income taxes 6,117 15,841 Earnings from continuing operations 27,735 29,420 Discontinued operations: Earnings (losses) from operations of discontinued subsidiary (net of applicable Federal income taxes of $556 in 1994) (9,969) 1,032 Estimated loss on disposal of discontinued operations (6,381) - Earnings (losses) from discontinued operations (16,350) 1,032 Net earnings $ 11,385 30,452 Earnings (losses) per share of common stock: Earnings from continuing operations $ 7.95 8.45 Earnings (losses) from discontinued operations (4.69) 0.29 Net earnings $ 3.26 8.74 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, 1995 and 1994 (Unaudited) (In Thousands)
1995 1994 Common stock shares outstanding: Shares outstanding at beginning of year and end of period 3,488 3,485 Common stock: Balance at beginning of year and end of period $ 3,488 3,485 Additional paid-in capital: Balance at beginning of year and end of period 24,475 24,356 Net unrealized gains (losses) on investment securities: Balance at beginning of year (2,199) (257) 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 10,016 (27,525) 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 transfer of securities available for sale to securities held to maturity (740) (178) Balance at end of period 7,077 30 Retained earnings: Balance at beginning of year 249,370 215,134 Net earnings 11,385 30,452 Balance at end of period 260,755 245,586 Total stockholders' equity $ 295,795 273,457 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, 1995 and 1994 (Unaudited) (In Thousands)
1995 1994 Cash flows from operating activities: Net earnings $ 11,385 30,452 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 107,603 95,880 Surrender charges (25,313) (25,426) Realized (gains) losses on investments 1,729 (2,486) Accrual and amortization of investment income (5,543) (10,355) Depreciation and amortization 451 459 Decrease (increase) in insurance receivables and other assets (1,176) 3,228 Increase in accrued investment income (1,992) (265) Decrease (increase) in deferred policy acquisition costs (11,410) 6,585 Decrease in liability for future policy benefits (2,489) (240) Increase (decrease) in other policyholder liabilities 1,831 (2,498) Decrease in Federal income taxes payable (4,016) (4,003) Increase in other liabilities 2,858 6,835 Net cash provided by operating activities 73,918 98,166 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity 7,720 - Securities available for sale 42,374 7,362 Other investments 1,048 22,427 Proceeds from maturities and redemptions of: Securities held to maturity 36,915 54,801 Securities available for sale 5,757 55,723 Purchases of: Securities held to maturity (159,837) (152,323) Securities available for sale (130,066) (59,608) Other investments (5,281) (7,114) Principal payments on mortgage loans 12,207 20,933 Cost of mortgage loans acquired (14,573) (26,912) Decrease in policy loans 1,748 1,854 Decrease in assets of discontinued operations 225,880 102,132 Decrease in liabilities of discontinued operations (209,153) (102,689) Other (651) (289) Net cash used in investing activities (185,912) (83,703) (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, 1995 and 1994 (Unaudited) (In Thousands)
1995 1994 Cash flows from financing activities: Increase in short-term borrowings $ - 8,005 Deposits to account balances for universal life and investment annuity contracts 280,533 111,141 Return of account balances on universal life and investment annuity contracts (179,989) (156,456) Net cash provided by (used in) financing activities 100,544 (37,310) Net decrease in cash and short-term investments (11,450) (22,847) Cash and short-term investments at beginning of year 17,723 24,308 Cash and short-term investments at end of period $ 6,273 1,461 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries (the Company), The Westcap Corporation, Commercial Adjusters, Inc., NWL Investments, Inc., NWL Properties, Inc., and NWL 806 Main, Inc. The Westcap Corporation has been reflected as discontinued operations in the accompanying financial statements. Commercial Adjusters, Inc. was dissolved in October, 1994, and all remaining assets and liabilities were assumed by National Western Life Insurance Company. All significant intercorporate transactions and accounts have been eliminated in consolidation. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of September 30, 1995, and the results of its operations for the three months and nine months ended September 30, 1995 and 1994 and its cash flows for the nine months ended September 30, 1995 and 1994. The results of operations for the three months and nine months ended September 30, 1995 and 1994 are not necessarily indicative of the results to be expected for the full year. (2) DIVIDENDS The Company paid no cash dividends on common stock during the nine months ended September 30, 1995 and 1994. (3) CHANGES IN ACCOUNTING PRINCIPLES The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS No. 114. These statements address the accounting by creditors for impairment of certain loans and related financial statement disclosures. The statements are applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions and also apply to all loans that are restructured in a troubled debt restructuring involving a modification of terms. The statements require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Effective January 1, 1995, the Company adopted both SFAS No. 114 and No. 118. As the Company was already providing for impairment of loans through an allowance for possible losses, the implementation of this statement had no effect on the level of this allowance. As a result, there was no net impact on the Company's results of operations or stockholders' equity. However, additional disclosures are required by these statements which are provided below. As of September 30, 1995 and 1994, impaired mortgage loans on real estate were as follows:
1995 1994 (In thousands) Impaired loans: With allowance * $ - 703 Without allowance 338 - Total impaired loans $ 338 703 * Represents gross amounts before allowance for mortgage loan losses of $163,000 at September 30, 1994.
For the quarters ended September 30, 1995 and 1994, average investments in impaired mortgage loans were $169,000 and $634,000, respectively. Interest income recognized on impaired loans during the quarters ended September 30, 1995 and 1994, was not significant. Impaired loans are typically placed on non-accrual status and no interest income is recognized. However, if cash is received on the impaired loan, it is applied to principal and interest on past due payments, beginning with the most delinquent payment. Detailed below are the changes in the allowance for mortgage loan losses for the nine months ended September 30, 1995 and 1994.
1995 1994 (In thousands) Balance at beginning of year $ 5,929 6,849 Net additions charged to realized investment gains and losses - 135 Deductions resulting from foreclosures (261) (694) Balance at end of period $ 5,668 6,290
(4) STOCK AND INCENTIVE PLAN General On April 21, 1995, the Company's Board of Directors adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan), subject to the approval of the Plan by the stockholders. The Plan was subsequently approved by the Company's stockholders on June 17, 1995, at the annual meeting of stockholders. The purpose of the Plan is to align the personal financial incentives of key personnel with the long-term growth of the Company and the interests of the Company's stockholders through the ownership and performance of the Company's Class A, $1.00 par value, common stock, to enhance the Company's ability to retain key personnel, and to attract outstanding prospective employees and directors. The adoption of the Plan is part of the establishment of the Company's initial long-term incentive programs. In structuring the Plan, the Board of Directors sought to provide for a variety of awards that could be flexibly administered. This flexibility will permit the Company to keep pace with changing developments in management compensation and make the Company competitive with those companies that offer creative incentives to attract and keep key management employees. The Plan is designed to allow the Company to respond to changing circumstances such as changes in tax laws, accounting rules, securities regulations, and other rules regarding benefit plans. The Plan grants the Compensation and Stock Option Committee, which administers the Plan, flexibility in creating the terms and restrictions deemed appropriate for particular awards as facts and circumstances warrant. Types of Awards The Plan provides for the grant of any or all of the following types of awards: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; (4) incentive awards; and (5) performance awards. Any stock option granted in the form of an incentive stock option must satisfy the applicable requirements of Section 422 of the Internal Revenue Code. Awards may be made to the same person on more than one occasion and may be granted singly, in combination, or in tandem as determined by the Compensation and Stock Option Committee of the Board of Directors (the Committee). Term The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. Termination of the Plan will not affect awards made prior to termination, but awards will not be made after termination. Administration The Plan is administered by the Committee. None of the members of the Committee are officers or employees of the Company or its subsidiaries. Subject to the terms of the Plan, the Committee, consistent with the terms of the Plan, has authority (i) to select personnel to receive awards, (ii) to determine the timing, form, amount or value, and terms of grants and awards, and the conditions and restrictions, if any, subject to which grants and awards will be made and become payable under the Plan (other than non-discretionary stock options for non-employee Directors), (iii) to construe the Plan and to prescribe rules and regulations with respect to the administration of the Plan, and (iv) to make such other determinations authorized under the Plan as the Committee deems necessary or appropriate. Eligibility All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company (other than Committee members) are eligible for restricted stock awards, incentive awards, and performance awards, and non-employee directors (including members of the Committee) receive non-discretionary stock options. The selection of participants from eligible personnel is within the discretion of the Committee, except with respect to non-discretionary stock options automatically awarded to non-employee directors. Shares Subject to the Plan The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares. Stock Options Granted On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified stock options to selected officers of the Company. The Committee also granted 7,000 non-qualified, non-discretionary stock options to non-employee Company directors. The stock options begin to vest following three full years of service to the Company, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The exercise price of the stock options was set at the fair market value of the common stock on the date of grant, May 19, 1995. (5) DISCONTINUED BROKERAGE OPERATIONS Effective July 17, 1995, The Westcap Corporation, a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas office. At that time, The Westcap Corporation (Westcap) continued its corporate operations and small sales operations in its New Jersey office. However, in September, 1995, Westcap approved a plan to close the remaining sales office in New Jersey and to proceed with the liquidation of the corporation. Declines in both sales revenues and earnings were the principal reasons for ceasing all sales activities and led to the decision to liquidate Westcap. Increasing market interest rates and resulting adverse bond market conditions during 1994 and 1995 compared to previous years has had a negative impact on the entire bond brokerage industry. These conditions, coupled with adverse publicity about litigation related to sales of collateralized mortgage obligation (CMO) products, led to the declines in sales and earnings. The publicity surrounding these claims has made it extremely difficult to keep Westcap's customer base and sales force in place. Additionally, because much publicity characterizes CMOs as derivatives, adverse publicity about derivatives has impacted the market for CMOs and decreased Westcap's prospects for future sales. In connection with the plan of liquidation, Westcap's assets are being carried at their estimated fair value, and estimated future costs to liquidate have been accrued. As a result of the plan and in accordance with generally accepted accounting principles, the assets and liabilities of Westcap have been reclassified in the accompanying consolidated balance sheets to separately identify them as assets and liabilities of the discontinued operations. The assets of the discontinued operations as of September 30, 1995, consist primarily of cash, while the liabilities consist primarily of estimated costs to operate and liquidate the corporation. Revenues of Westcap totaled $5,112,000 for the nine months ended September 30, 1995. Losses from the discontinued brokerage operations totaling $13,133,000, and $16,350,000, for the three months and nine months ended September 30, 1995, have been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. These losses include estimated future operating losses as well as estimated costs to liquidate and close the corporation totaling $6,381,000 and have resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. Although The Westcap Corporation could incur additional losses as it proceeds with litigation and ultimate liquidation, such losses will not be reported on a consolidated basis as National Western Life Insurance Company's loss in the subsidiary is limited to its investment. The liquidation period is currently estimated at two years. However, this estimate could change significantly depending primarily on the results of litigation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company does manage its portfolio, which entails monitoring and reacting to all components which affect changes in the price or value of investments in debt and equity securities. Additionally, the Company's overall conservative investment philosophy is reflected in the allocation of investments of its insurance operations which is detailed below as of September 30, 1995, and December 31, 1994. The Company emphasizes debt securities with smaller holdings in mortgage loans and real estate than industry averages.
Percent of Insurance Operations Investments 1995 1994 Debt securities 84.2 % 82.5 % Mortgage loans 7.4 8.1 Policy loans 5.8 6.5 Equity securities 1.1 1.1 Real estate 0.8 0.8 Other 0.7 1.0 Totals 100.0 % 100.0 %
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company classifies its investments in debt and equity 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, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are 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. The Company currently does not maintain a trading securities portfolio. Securities that are not classified as either held to maturity or trading securities are reported as securities available for sale. At September 30, 1995, approximately 22% of the Company's total carrying value of debt and equity securities were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. 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 investment portfolio. In addition, 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 other 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, 1995, securities held to maturity totaled $1.723 billion or 66.9% of total invested assets. The fair value of these securities was $1.771 billion which reflects gross unrealized gains of $48 million. This represents an unrealized gain of $166 million since December 31, 1994, due primarily to decreases in market interest rates. The Company sold several held to maturity securities during the nine months ended September 30, 1995, due to significant credit deterioration of the issuing companies. Amortization cost for the securities sold totaled $7,631,000 and realized gains of $89,000 were recognized on the sales. Securities available for sale totaled $474 million at September 30, 1995, or 18.4% 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, net of taxes and adjustments to deferred policy acquisition costs. Net unrealized gains on these securities totaled $7.1 million at September 30, 1995, reflecting an increase of $9.3 million from December 31, 1994. Again, the positive results for the nine months are due primarily to decreases in market interest rates during that period. 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). The Company substantially reduces prepayment and extension risks in its mortgage-backed securities portfolio by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. The Company invests primarily in planned amortization class I (PAC I) CMOs which are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Due to this strategy, the Company continues to manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities. In addition to managing prepayment and extension risks, 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 are summarized as follows:
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) September 30, 1995 $ 15,814 15,470 0.6% December 31, 1994 $ 31,861 28,670 1.4%
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, 1995, and December 31, 1994, securities with principal balances totaling $3,781,000 and $2,415,000 were in default and on non-accrual status. MORTGAGE LOANS AND REAL ESTATE Investment Philosophy In general, the Company seeks loans on high quality, income producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company 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 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. The Company's direct investments in real estate are not a significant portion of its total investment portfolio, and the majority of real estate owned was acquired through mortgage loan foreclosures. However, the Company is also currently participating in several real estate joint ventures. The joint ventures invest primarily in income-producing retail properties. While not a significant portion of the Company's investment portfolio, the joint ventures have produced favorable returns to date. 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 $191,390,000 and $189,632,000, or 7.4% and 8.1% of total invested assets, at September 30, 1995, and December 31, 1994, 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, 1995, the allowance for possible losses on mortgage loans was $5,668,000. No additions were made to the allowance in the quarter ended September 30, 1995, 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 where the majority of the loans and underlying properties are located. This region includes Texas, Louisiana, Oklahoma, and Arkansas. The Company typically places impaired loans on non-accrual status and no interest income is recognized during this period. Also, the Company will at times restructure mortgage loans under certain conditions which may involve changes in interest rates, payment terms or other modifications. For the three months ended September 30, 1995 and 1994, the reductions in interest income due to impaired and restructured mortgage loans were not significant. The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $20,480,000 and $17,766,000 at September 30, 1995, and December 31, 1994, 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 gains on these properties of approximately $45,000 for the three months ended September 30, 1995, and losses of $264,000 for the three months ended September 30, 1994. 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 September 30, 1995 and 1994, 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 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. REULTS OF OPERATIONS Summary of Consolidated Operations A summary of operating results, net of taxes, for the periods ended September 30, 1995 and 1994 is provided below:
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 (In thousands except per share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 71,960 70,341 214,223 206,187 Realized gains (losses) on investments (2,030) 382 (1,729) 2,486 Total revenues $ 69,930 70,723 212,494 208,673 Earnings: Earnings from insurance operations $ 13,103 11,210 28,858 27,804 Earnings (losses) from discontinued brokerage operations (13,133) 288 (16,350) 1,032 Net realized gains (losses) on investments (1,319) 249 (1,123) 1,616 Net earnings (losses) $ (1,349) 11,747 11,385 30,452 Earnings Per Share: Earnings from insurance operations $ 3.76 3.22 8.27 7.98 Earnings (losses) from discontinued brokerage operations (3.77) 0.08 (4.69) 0.29 Net realized gains (losses) on investments (0.38) 0.07 (0.32) 0.47 Net earnings (losses) $ (0.39) 3.37 3.26 8.74
Significant changes and fluctuations in income and expense items between the three months ended September 30, 1995 and 1994 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations for the quarter ended September 30, 1995, totaled $13,103,000 compared to $11,210,000 for the third quarter of 1994. The 1995 earnings include a $4.5 million tax benefit resulting from the Company's subsidiary brokerage operations losses. This benefit was recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Also, as previously reported, comparative earnings from insurance operations for the quarter ended September 30, 1994, were higher than other quarters due to yield and amortization adjustments on mortgage-backed securities. 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. These revenues increased from $15,603,000 for the quarter ended September 30, 1994, to $17,236,000 for the same 1995 period. Increases totaling $820,000 in cost of insurance revenues and $629,000 in surrender charge revenues resulted in the majority of the increase in these contract revenues. Increases in cost of insurance revenues are primarily from increased universal life insurance in force. Actual universal life and investment annuity deposits collected for the quarters ended September 30, 1995 and 1994, are detailed below. Deposits collected on these non-traditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Three Months Ended September 30, 1995 1994 (In thousands) Investment annuities $ 76,211 43,102 Universal life insurance 16,748 16,915 Totals $ 92,959 60,017
As detailed above, deposits increased significantly from 1994 due primarily to investment annuities. The Company's increased marketing efforts through agency additions and new product developments, beginning in latter 1994, continue to produce positive sales results. Net Investment Income: Net investment income increased $1,162,000 from $49,155,000 in 1994 to $50,317,000 in 1995. The majority of the increase resulted from increases in invested assets. The increases in invested assets are attributable primarily to increases in annuity production as previously described. Net investment income for the quarter ended September 30, 1994 was higher than other quarters due to yield and amortization adjustments on mortgage-backed securities totaling approximately $3.7 million. 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. Realized Gains (Losses) on Investments: The Company had realized losses of $2,030,000 in 1995 compared to realized gains of $382,000 in 1994. The 1995 realized losses result primarily from sales of investments in debt securities while the 1994 realized gains result primarily from real estate sales. The Company made the decision to realize losses in 1995 in order to obtain tax benefits related to the losses which are scheduled to expire on December 31, 1995. The losses were primarily from sales of the Company's remaining investments in principal exchange rate linked securities. Life and Other Policy Benefits: Expenses totaled $8,813,000 for the three months ended September 30, 1995, compared to $7,746,000 for the same period in 1994. The increase in these expenses is due to both higher life insurance benefit claims and higher policy surrenders on traditional life insurance products. Universal Life and Investment Annuity Contract Interest: Interest expense was up $5,910,000 from $31,245,000 in 1994 to $37,155,000 in 1995. Increases in annuity production, resulting in corresponding increases in policy liabilities, are the primary reason for the higher expenses. Also, some of the Company's new annuity products credit higher interest rates in the first policy year resulting in higher interest costs. Federal Income Taxes: Federal income taxes for the three months ended September 30, 1995 reflect a tax benefit of $623,000 although earnings from continuing operations before taxes totaled $11,161,000 for the same period. This result is due to a $4.5 million tax benefit resulting from the Company's subsidiary brokerage operations losses. This tax benefit was reflected in earnings from continuing operations in accordance with the Company's tax allocation agreement with its subsidiaries. Discontinued Brokerage Operations As more fully described in note 5 to the financial statements, during September, 1995, The Westcap Corporation approved a plan to close its remaining sales office in New Jersey and to proceed with the liquidation of the corporation. Declines in both sales revenues and earnings were the principal reasons for ceasing all sales activities and led to the decision to liquidate The Westcap Corporation. Volatile bond market conditions, coupled with adverse publicity about litigation related to sales of collateralized mortgage obligation (CMO) products, led to the declines in sales and earnings. Third quarter losses from brokerage operations totaling $13,133,000, or $3.77 per share, include estimated future operating losses as well as estimated costs to liquidate and close the corporation and have resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. Although The Westcap Corporation could incur additional losses as it proceeds with litigation and ultimate liquidation, such losses will not be reported on a consolidated basis as National Western Life Insurance Company's loss in the subsidiary is limited to its investment. Significant changes and fluctuations in income and expense items between the nine months ended September 30, 1995 and 1994 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations increased $1,054,000, or $0.29 per share, compared to the first nine months of 1994. The increase in earnings for the nine months ended September 30, 1995, is due primarily to the $4.5 million tax benefit resulting from the Company's subsidiary brokerage operations losses as previously described. However, life and other policy benefit expenses were up significantly during the first nine months of 1995, thereby reducing earnings. These expenses, consisting primarily of life insurance benefit claims, were up over $3 million, net of taxes, compared to 1994. Universal Life and Investment Annuity Contract Revenues: For the nine months ended September 30, 1995, these revenues increased $2,418,000 compared to the 1994 period. This increase is due to increases in cost of insurance revenues offset somewhat by decreases in surrender charge revenues. Actual universal life and investment annuity deposits collected for the nine months ended September 30, 1995 and 1994, are detailed below. Deposits collected on these non-traditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Nine Months Ended September 30, 1995 1994 (In thousands) Investment annuities $ 254,837 86,746 Universal life insurance 51,773 47,941 Totals $ 306,610 134,687
Net Investment Income: Net investment income increased $6,906,000 from $142,255,000 in 1994 to $149,161,000 in 1995, primarily due to increases in invested assets resulting from increased annuity production. Also, included in 1994 net investment income are yield and amortization adjustments on mortgage-backed securities totaling approximately $3.7 million as previously described. Realized Gains (Losses) on Investments: The Company recognized realized losses of $1,729,000 in 1995 compared to realized gains of $2,486,000 in 1994. The 1995 realized losses are primarily from write-downs and sales of investments in debt securities. The losses were realized for the tax purposes as previously described for the three months ended September 30, 1995. The 1994 realized gains resulted primarily from debt securities redemptions and included no significant write-downs. Life and Other Policy Benefits: Expenses for 1995 and 1994 were $29.0 million and $24.3 million, respectively. The significant increase in expenses is due to higher life insurance benefit claims. The 1995 expenses are abnormally high due to adverse claims experience incurred primarily in the first quarter of 1995. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims in comparison to Company averages. The first quarter of 1995 reflects such a period as benefit claims were significantly higher. Such deviations are not uncommon in the life insurance industry and, over extended periods of time, tend to be offset by periods of lower claims experience. Universal Life and Investment Annuity Contract Interest: Interest expense was up $11,723,000 from $95,880,000 in 1994 to $107,603,000 in 1995 for the same reasons as previously described for the three months ended September 30, 1995. Other Insurance Operating Expenses: Other insurance operating expenses are up $1,563,000 in 1995 due primarily to state guaranty fund assessments. Federal Income Taxes: Federal income taxes for the nine months ended September 30, 1995, include a $4.5 million tax benefit resulting from the Company's subsidiary brokerage operations as previously described. This benefit resulted in the low effective tax rate for the period for earnings from continuing operations. Discontinued Brokerage Operations Losses for the nine months ended September 30, 1995, from the Company's discontinued brokerage subsidiary, The Westcap Corporation, totaled $16,350,000, or $4.69 per share, compared to earnings of $1,032,000, or $0.29 per share, for the nine months ended September 30, 1994. The losses from the subsidiary are due to both adverse bond market conditions and adverse publicity about litigation involving sales of CMO products. The losses also include estimated costs accrued for discontinuation of the operations as previously described for the three months ended September 30, 1995, and in note 5 to the financial statements. LIQUIDITY AND CAPITAL RESOURCES The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet unexpected cash needs are the Company's securities available for sale portfolio, net cash provided by operations and a $60 million bank line of credit. A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds. The Company had no long-term debt during 1995 or 1994. There are no present material commitments for capital expenditures in 1995, and the Company does not anticipate incurring any such commitments in the remainder of 1995. 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 September 30, 1995. EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE For the Three Months Ended September 30, 1995 and 1994 (Unaudited) (In Thousands Except Per Share Data)
1995 1994 Earnings (losses) applicable to common shares: Earnings from continuing operations $ 11,784 11,459 Earnings (losses) from discontinued operations (13,133) 288 Net earnings (losses) $ (1,349) 11,747 Weighted average common shares outstanding 3,488 3,485 Earnings (losses) per common share: Earnings from continuing operations $ 3.38 3.29 Earnings (losses) from discontinued operations (3.77) 0.08 Net earnings (losses) $ (0.39) 3.37
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE For the Nine Months Ended September 30, 1995 and 1994 (Unaudited) (In Thousands Except Per Share Data)
1995 1994 Earnings (losses) applicable to common shares: Earnings from continuing operations $ 27,735 29,420 Earnings (losses) from discontinued operations (16,350) 1,032 Net earnings $ 11,385 30,452 Weighted average common shares outstanding 3,488 3,485 Earnings (losses) per common share: Earnings from continuing operations $ 7.95 8.45 Earnings (losses) from discontinued operations (4.69) 0.29 Net earnings $ 3.26 8.74
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, 1995 /S/ Ross R. Moody Ross R. Moody President and Chief Operating Officer Date: November 10, 1995 /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, 1995 FINANCIAL STATEMENTS OF NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 444,162 1,722,544 2,214,804 29,375 191,390 20,480 2,575,701 6,273 1,121 281,979 2,920,248 2,552,035 0 14,997 10,017 0 3,488 0 0 292,307 2,920,248 64,451 149,161 (1,729) 611 134,147 24,522 19,973 33,852 6,117 27,735 (16,350) 0 0 11,385 3.26 3.26 0 0 0 0 0 0 0 Consists of $13,061 revenues from traditional contracts subject to FAS 60 accounting treatment and $51,390 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $29,033 benefits paid to policyholders, $(2,489) decrease in reserves on traditional contracts and $107,603 interest on universal life and investment annuity contracts.
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