-----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, IXLVscHECqaYq4IAdkUU3gyeuHcXwb6S4IaRQQ+SkHDQSww8zo3BGEOnM0EzMHWW rcjHNO75PhOt0++pytoaXQ== 0000070684-96-000010.txt : 19960517 0000070684-96-000010.hdr.sgml : 19960517 ACCESSION NUMBER: 0000070684-96-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 96566929 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 March 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512) 836-1010 (Address of Principal Executive Offices) (Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] As of May 10, 1996, the number of shares of Registrant's common stock outstanding was: Class A - 3,291,338 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 - March 31, 1996 (Unaudited) and December 31, 1995 Condensed Consolidated Statements of Operations - For the Three Months Ended March 31, 1996 and 1995 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Three Months Ended March 31, 1996 and 1995 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 1996 and 1995 (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 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share - For the Three Months Ended March 31, 1996 and 1995 (Unaudited) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) March 31, December 31, ASSETS 1996 1995 Cash and investments: Securities held to maturity, at amortized cost $ 1,718,570 1,643,211 Securities available for sale, at fair value 568,423 600,794 Mortgage loans, net of allowances for possible losses ($5,668 and $5,668) 190,780 191,674 Policy loans 149,277 147,923 Other long-term investments 29,832 30,970 Cash and short-term investments 8,649 10,024 Total cash and investments 2,665,531 2,624,596 Accrued investment income 35,060 36,127 Deferred policy acquisition costs 282,861 270,167 Other assets 18,409 21,392 Assets of discontinued operations 4,573 6,177 $ 3,006,434 2,958,459 Note: The balance sheet at December 31, 1995 has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Shares Outstanding)
(Unaudited) March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 174,462 174,946 Universal life and investment annuity contracts 2,430,745 2,401,098 Other policyholder liabilities 23,863 22,833 Federal income taxes payable: Current 5,125 413 Deferred 8,739 12,287 Other liabilities 43,980 28,718 Liabilities of discontinued operations 4,573 6,177 Total liabilities 2,691,487 2,646,472 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,291,338 shares issued and outstanding in 1996 and 1995 3,291 3,291 Class B - $1 par value; 200,000 shares authorized, issued and outstanding in 1996 and 1995 200 200 Additional paid-in capital 24,647 24,647 Net unrealized gains on investment securities 9,411 15,195 Retained earnings 277,398 268,654 Total stockholders' equity 314,947 311,987 $ 3,006,434 2,958,459 Note: The balance sheet at December 31, 1995 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 March 31, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Amounts)
1996 1995 Premiums and other revenue: Life and annuity premiums $ 4,274 4,853 Universal life and investment annuity contract revenues 18,816 17,066 Net investment income 50,655 47,995 Other income 1,101 459 Realized gains on investments 623 133 Total premiums and other revenue 75,469 70,506 Benefits and expenses: Life and other policy benefits 8,678 11,550 Change in liabilities for future policy benefits (484) (1,250) Amortization of deferred policy acquisition costs 8,361 9,253 Universal life and investment annuity contract interest 38,835 34,271 Other insurance operating expenses 6,554 6,858 Total benefits and expenses 61,944 60,682 Earnings from continuing operations before Federal income taxes 13,525 9,824 Provision (benefit) for Federal income taxes: Current 5,213 2,556 Deferred (432) 211 Total Federal income taxes 4,781 2,767 Earnings from continuing operations 8,744 7,057 Losses from discontinued operations (net of Federal income taxes of $100 in 1995) - (1,733) Net earnings $ 8,744 5,324 Earnings (losses) per share of common stock: Earnings from continuing operations $ 2.50 2.03 Losses from discontinued operations - (0.50) Net earnings $ 2.50 1.53 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 1996 and 1995 (Unaudited) (In Thousands)
1996 1995 Common stock shares outstanding: Shares outstanding at beginning of year and end of period 3,491 3,488 Common stock: Balance at beginning of year and end of period $ 3,491 3,488 Additional paid-in capital: Balance at beginning of year and end of period 24,647 24,475 Net unrealized gains (losses) on securities available for sale, net of effects of deferred policy acquisition costs and taxes: Balance at beginning of year 15,195 (2,199) Change in unrealized gains (losses) during period (5,524) 4,060 Amortization of net unrealized gains related to transfers of securities available for sale to securities held to maturity (260) (343) Balance at end of period 9,411 1,518 Retained earnings: Balance at beginning of year 268,654 249,370 Net earnings 8,744 5,324 Balance at end of period 277,398 254,694 Total stockholders' equity $ 314,947 284,175 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1996 and 1995 (Unaudited) (In Thousands)
1996 1995 Cash flows from operating activities: Net earnings $ 8,744 5,324 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 38,835 34,271 Surrender charges (9,937) (8,532) Realized gains on investments (623) (133) Accrual and amortization of investment income (1,583) (2,198) Depreciation and amortization 180 160 Increase in insurance receivables and other assets (315) (224) Decrease in accrued investment income 1,067 1,078 Increase in deferred policy acquisition costs (1,222) (3,140) Decrease in liability for future policy benefits (484) (1,250) Increase (decrease) in other policyholder liabilities 1,030 (609) Increase in Federal income taxes payable 7,532 2,867 Increase in other liabilities 15,262 3,897 Net cash provided by operating activities 58,486 31,511 Cash flows from investing activities: Proceeds from sales of: Securities available for sale 11,418 106 Other investments 599 1,004 Proceeds from maturities and redemptions of: Securities held to maturity 21,471 14,099 Securities available for sale 3,478 1,274 Purchases of: Securities held to maturity (96,694) (25,371) Securities available for sale (943) (45,797) Other investments (324) (1,854) Principal payments on mortgage loans 5,653 2,701 Cost of mortgage loans acquired (3,876) (4,678) Decrease (increase) in policy loans (1,354) 772 Decrease in assets of discontinued operations 1,604 9,017 Decrease in liabilities of discontinued operations (1,604) (7,098) Other (38) (64) Net cash used in investing activities (60,610) (55,889) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Three Months Ended March 31, 1996 and 1995 (Unaudited) (In Thousands)
1996 1995 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 72,120 97,627 Return of account balances on universal life and investment annuity contracts (71,371) (59,636) Net cash provided by financing activities 749 37,991 Net increase (decrease) in cash and short-term investments (1,375) 13,613 Cash and short-term investments at beginning of year 10,024 17,723 Cash and short-term investments at end of period $ 8,649 31,336 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, NWL Investments, Inc., NWL Properties, Inc., and NWL 806 Main, Inc. The Westcap Corporation ceased brokerage operations during 1995 and, as a result, is reflected as discontinued operations in the accompanying financial statements . 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 March 31, 1996, and the results of its operations and its cash flows for the three months ended March 31, 1996 and 1995. The results of operations for the three months ended March 31, 1996 and 1995 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 three months ended March 31, 1996 and 1995. (3) DISCONTINUED BROKERAGE OPERATIONS On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. The Westcap Corporation is the successor by merger to Westcap Securities Investment, Inc., and Westcap Securities Management, Inc. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities, L.P. The Westcap Corporation is a wholly owned brokerage subsidiary of National Western Life Insurance Company (National Western). The plan of reorganization filed in the Bankruptcy Court provides for the merger of Westcap Enterprises, Inc. into The Westcap Corporation (Westcap), with the survivor to conduct business as a real estate investment trust under sections 856-58 of the Federal Tax Code. National Western has agreed to participate in the Westcap plan of reorganization by contributing approximately $5,000,000 of cash and $5,000,000 of income producing real properties in exchange for a complete settlement and release of any claims by Westcap against National Western and a continuing equity interest in the reorganized entity. The reorganization plan is subject to approval by Westcap's creditors and the Bankruptcy Court. As previously reported, National Western's investment in Westcap was completely written off during 1995 as losses of the subsidiary were recognized on a consolidated basis until the subsidiary's equity was reduced to zero. Additional losses relating to the above-mentioned contributions will depend primarily on results of Westcap bankruptcy proceedings. (4) STOCK AND INCENTIVE PLAN On April 19, 1996, the Compensation and Stock Option Committee approved the issuance of an additional 33,000 non-qualified stock options to selected officers of the Company. The options were granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan (Plan). The stock options begin to vest following three full years of service to the Company after date of grant, 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. Total outstanding stock options under the Plan totaled 92,500 at March 31, 1996. 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 manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities. Investments in debt and equity securities are classified and reported 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. At March 31, 1996, approximately 24.7% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are held for current resale are classified as trading securities, as the intent is to sell them, producing a trading profit. The Company does not maintain a portfolio of trading securities. Securities that are not classified as either held to maturity or trading securities 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 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. The Company's overall conservative investment philosophy is reflected in the allocation of investments of its insurance operations which is detailed below as of March 31, 1996 and December 31, 1995. The Company emphasizes debt securities, with smaller holdings in mortgage loans and real estate than industry averages.
Allocation of Investments March 31, December 31, 1996 1995 Debt securities 84.8 % 84.5 % Mortgage loans 7.2 7.3 Policy loans 5.6 5.6 Equity securities 1.0 1.0 Real estate 0.7 0.7 Other 0.7 0.9 Totals 100.0 % 100.0 %
Portfolio Analysis The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily 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). At March 31, 1996, securities held to maturity totaled $1.719 billion or 64.5% of total invested assets. The fair value of these securities was $1.735 billion which reflects gross unrealized gains of $16 million. Unrealized gains on this portfolio declined significantly during the first quarter of 1996, due primarily to increases in market interest rates. Market interest rates rose almost 100 basis points during the quarter ended March 31, 1996. Securities available for sale totaled $568 million at March 31, 1996, or 21.3% 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 $26 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 $6.5 million at March 31, 1996, reflecting a decrease of $5.5 million from December 31, 1995, due to increasing market interest rates as previous described. An important aspect of the Company's investment philosophy is managing the cash flow stability of the portfolio. Because expected maturities of securities may differ from contractual maturities due to prepayments and calls, the Company takes steps to manage and minimize such risks. More specifically, the Company has been increasing its holdings in noncallable corporate securities during 1995 and 1996. Corporate holdings as a percentage of the entire portfolio increased from 32.5% in 1994 to over 40% in 1996. The Company's holdings of mortgage-backed securities are also subject to prepayment risk, as well as extension risk. Both of these risks are addressed by specific portfolio management strategies. The Company substantially reduces both prepayment and extension risks by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I (PAC I) CMOs, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities. PAC I CMOs account for approximately 90% of the total CMO portfolio as of March 31, 1996. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis provides information used in selecting securities that fit appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension, and credit risks. In addition to managing prepayment, extension, and call risks, the Company continues to maintain a high credit quality portfolio. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities, which are summarized as follows, have increased slightly from 1995 primarily due to several corporate issuers that had ratings downgraded.
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (in thousands) March 31, 1996 $ 22,597 22,493 0.8% December 31, 1995 $ 14,244 14,567 0.5% 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 high quality portfolio. At March 31, 1996, and December 31, 1995, securities with principal balances totaling $2,945,000 and $3,575,000 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 seeks to minimize the credit and default risk in its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lessee, in which case the Company approves the loan based on the credit strength of the lessee. This approach, implemented in 1991, has significantly improved the quality of the Company's mortgage loan portfolio and reduced defaults. 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 and limited partnerships. The joint ventures and partnerships invest primarily in income-producing retail properties. While not a significant portion of the Company's investment portfolio, the investments 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 $190,780,000 and $191,674,000, or 7.2% and 7.3% of total invested assets, at March 31, 1996, and December 31, 1995, respectively. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates. The diversification of the mortgage loan portfolio by geographic regions of the United States and by property type as of March 31, 1996 and December 31, 1995, was as follows:
March 31, December 31, 1996 1995 West South Central 56.1 % 54.0 % Mountain 12.8 12.9 South Atlantic 9.1 9.2 Other 22.0 23.9 Totals 100.0 % 100.0 % March 31, December 31, 1996 1995 Retail 64.5 % 67.0 % Office 17.5 15.9 Hotel/Motel 8.2 8.3 Other 9.8 8.8 Totals 100.0 % 100.0 %
As of March 31, 1996, the allowance for possible losses on mortgage loans was $5,668,000. No additions were made to the allowance in the quarter ended March 31, 1996, 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 West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the highest concentrations of the Company's mortgage loans. The Company currently places all loans past due three months or more on 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 March 31, 1996 and 1995, the reductions in interest income due to non-accural and restructured mortgage loans were not significant. The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $18,194,000 and $19,066,000 at March 31, 1996, and December 31, 1995, 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 $114,000 and $122,000 for the three months ended March 31, 1996, and 1995. The Company does not anticipate significant changes in these operating results in the near future. The Company monitors the conditions and market values of these properties on a regular basis. No significant realized losses were recognized due to declines in values of properties for the three months ended March 31, 1996 and 1995, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. RESULTS OF OPERATIONS Summary of Consolidated Operations A summary of operating results for the periods ended March 31, 1996 and 1995 is provided below:
Three Months Ended March 31, 1996 1995 (in thousands except per share data) Revenues: Insurance revenues excluding realized gains on investments $ 74,846 70,373 Realized gains on investments 623 133 Total revenues $ 75,469 70,506 Earnings: Earnings from insurance operations $ 8,339 6,971 Losses from discontinued brokerage operations - (1,733) Net realized gains on investments 405 86 Net earnings $ 8,744 5,324 Earnings Per Share: Earnings from insurance operations $ 2.39 2.00 Losses from discontinued brokerage operations - (0.50) Net realized gains on investments 0.11 0.03 Net earnings $ 2.50 1.53
Significant changes and fluctuations in income and expense items between the three months ended March 31, 1996 and 1995 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 March 31, 1996, were $8,339,000 compared to $6,971,000 for the first quarter of 1995. This represents an increase of $1,368,000, or 19.6%, over 1995 first quarter earnings. The increase is attributable primarily to lower life insurance benefit claims. These expenses were significantly higher in the first quarter of 1995 than the Company's historical averages. The Company also recognized nonrecurring income totaling $552,000, net of taxes, from a lawsuit settlement in the first quarter of 1996. 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 $17,066,000 for the quarter ended March 31, 1995, to $18,816,000 for the same 1996 period. Increases totaling $1,201,000 in surrender charge revenues resulted in the majority of the increase in these contract revenues. Increases in cost of insurance revenues, primarily from increased universal life insurance in force, totaled $173,000. Actual universal life and investment annuity deposits collected for the quarters ended March 31, 1996, 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 March 31, 1996 1995 1994 (In thousands) Investment annuities $ 65,121 89,214 20,484 Universal life insurance 15,878 17,134 14,444 Totals $ 80,999 106,348 34,928
Prior to 1993, most of the Company's investment annuity production was from the sale of two-tier annuity products. However, in the third quarter of 1992, the Company discontinued sales of all two-tier annuities due to declines in sales and certain regulatory issues concerning two-tier products. The vast majority of the two-tier annuities were sold by a single independent marketing organization. Subsequent to discontinuing the two-tier annuity sales, the Company set goals to not only develop new annuity products to replace the lost two-tier production, but to diversify and strengthen distribution channels to avoid dependence on one primary independent marketing organization. The Company achieved this by developing new annuity products in 1994 and by contracting new marketing organizations with extensive experience, financial resources, and success in marketing life and annuity products. The combination of new products, primarily a single premium deferred annuity, and new marketing organizations started to produce results in the latter half of 1994 as annuity production began to increase significantly. This increased production continued throughout 1995. Although annuity deposits have slowed in 1996, production continues to be significantly higher under the more diversified distribution system. The majority of the Company's universal life insurance production is from the international market, primarily Central and South American countries. The Company has seen increased competition in the Central and South American market in recent years causing production growth to slow. However, the Company has been accepting policies from foreign nationals for almost thirty years and has developed strong relationships with carefully selected brokers in the foreign countries. This experience and strong broker relations have enabled the Company to meet the increased competition with new product enhancements and marketing efforts. The Company's strategic plans for the international market include development of additional life insurance products to complement the universal life portfolio and the continued acceptance of new broker/agents from existing agencies in Latin America. Net Investment Income: Net investment income increased 5.5% from the first quarter of 1995 while average total invested assets increased over 10% for the same period. The increase in invested assets was primarily due to the increased annuity production as previously described. The growth in net investment income lagged the growth in invested assets primarily due to declines in market interest rates throughout 1995. Other Income: Other income increased significantly from $459,000 in 1995 to $1,101,000 in 1996. The increase was due to proceeds received in 1996 from a lawsuit settlement totaling $850,000. The lawsuit related to the Company's previous investment in a mortgage loan. Realized Gains on Investments: The Company had realized gains of $623,000 in 1996 compared to realized gains of $133,000 in 1995. The gains were primarily from bonds that were called and from sales of real estate. No significant write-downs on investments were recorded in 1996 or 1995. Life and Other Policy Benefits: Expenses in 1996 and 1995 were $8.7 million and $11.6 million, respectively. The significant decrease in expenses is due to lower life insurance benefit claims. The 1995 expenses were abnormally high due to adverse claims experience. 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 $4,564,000 from $34,271,000 in 1995 to $38,835,000 in 1996. Increases in annuity production, resulting in corresponding increases in policy liabilities, are the primary reason for the higher expenses. Federal Income Taxes: Federal income taxes for 1996 reflect an effective tax rate of 35% which is the current statutory rate. However, the 1995 taxes reflect a significantly lower effective tax rate of 28%. Federal income taxes for the three months ended March 31, 1995, include a tax benefit of $672,000 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 No earnings or losses were reported for discontinued brokerage operations for the first quarter of 1996 as National Western's investment in The Westcap Corporation was written-off in 1995, and there have been no significant changes in estimated costs to cease operations. Losses from discontinued operations totaled $1,733,000, or $0.50 per share, for the quarter ended March 31, 1995. As described in note 3 to the accompanying financial statements, Westcap and its wholly owned subsidiary separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code on April 12, 1996. National Western has agreed to participate in the Westcap plan of reorganization by contributing approximately $5,000,000 of cash and $5,000,000 of income producing real properties in exchange for a complete settlement and release of any claims by Westcap against National Western and a continuing equity interest in the reorganized entity. Additional losses relating to the contributions will depend primarily on results of Westcap bankruptcy proceedings. LIQUIDITY AND CAPITAL RESOURCES Liquidity The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet cash needs are the Company's securities available for sale portfolio, net cash provided by operations, and bank line of credit. The Company's investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $60 million on its bank line of credit for short-term cash needs. A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds. In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $58.5 million and $31.5 million for the three months ended March 31, 1996 and 1995, respectively. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $749,000 and $38.0 million for the first quarters of 1996 and 1995, respectively. The decrease in cash flows in 1996 was due primarily to lower universal life and annuity deposits and higher policy surrenders. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $24.9 million and $15.4 million for the quarters ended March 31, 1996 and 1995, respectively. The Company again expects significant cash flows from these sources throughout the remainder of 1996 at levels similar to 1995 and 1994. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1996 or recent years. The Company does not anticipate the need for any long-term debt in the near future. There are also no current or anticipated material commitments for capital expenditures in 1996. Stockholders' equity totaled $314.9 million at March 31, 1996, reflecting an increase of $3.0 million from December 31, 1995. The increase in capital is primarily from net earnings of $8.7 million, offset by a decline in net unrealized gains on investment securities totaling $5.7 million during the first quarter of 1996. The increase in market interest rates during the first quarter of 1996 resulted in the significant decrease in unrealized gains. Book value per share at December 31, 1995, was $90.21. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 12, 1996, The Westcap Corporation and it wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division as more fully described in note 3 to the accompanying financial statements. Other than the proceedings described above and those previously described in the Company's 1995 Form 10-K, no other legal proceedings presently pending by or against the Company or its subsidiaries are described, because management believes the outcome of such litigation should not have a material adverse effect on the financial position of the Company or its subsidiaries taken as a whole. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 2 - Debtors' First Proposed Joint Plan of Reorganization (incorporated by reference to the Company's Form 8-K filing dated April 12, 1996). Exhibit 11 - Computation of Earnings Per Share (filed on page ___ of this report). Exhibit 27 - Financial Data Schedule (filed electronically pursuant to Regulation S-K). (b) Reports on Form 8-K A report on Form 8-K dated April 12, 1996, was filed by the Company disclosing The Westcap Corporation and its wholly owned subsidiary's separate filings of voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Western Life Insurance Company (Registrant) Date: May 10, 1996 /S/ Ross R. Moody Ross R. Moody President and Chief Operating Officer Date: May 10, 1996 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer EX-11 2 EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended March 31, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Data)
1996 1995 Earnings applicable to common shares: Earnings from continuing operations $ 8,744 7,057 Losses from discontinued operations - (1,733) Net earnings $ 8,744 5,324 Weighted average common shares outstanding 3,491 3,488 Earnings per common share: Earnings from continuing operations $ 2.50 2.03 Losses from discontinued operations - (0.50) Net earnings $ 2.50 1.53
EX-27 3
7 1000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 542,864 1,718,570 1,735,383 25,559 190,780 18,194 2,665,531 8,649 1,255 282,861 3,006,434 2,605,207 0 13,979 9,884 0 0 0 3,491 311,456 3,006,434 23,090 50,655 623 1,101 47,029 8,361 6,554 13,525 4,781 8,744 0 00 0 8,744 2.50 2.50 0 0 0 0 0 0 0 Consists of $4,274 revenues from traditional contracts subject to FAS 60 accounting treatment and $18,816 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $8,678 benefits paid to policyholders, $(484) decrease in reserves on traditional contracts and $38,835 interest on universal life and investment annuity contracts.
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