-----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, QR0uxZdCJpk8yRSESPOL8eEFNSsnBbVwmwqm8Y6/lT19S6e2/FZkxKELMfnaopsd MKvzKly4uqN/OnNLRt2vLA== 0000070684-96-000012.txt : 19960816 0000070684-96-000012.hdr.sgml : 19960816 ACCESSION NUMBER: 0000070684-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96613091 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 June 30, 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 Office (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 August 8, 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 - June 30, 1996 (Unaudited) and December 31, 1995 Condensed Consolidated Statements of Operations - For the Three Months Ended June 30, 1996 and 1995 (Unaudited) Condensed Consolidated Statements of Operations - For the Six Months Ended June 30, 1996 and 1995 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Six Months Ended June 30, 1996 and 1995 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share - For the Three Months Ended June 30, 1996 and 1995 (Unaudited) Exhibit 11 - Computation of Earnings per Share - For the Six Months Ended June 30, 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) June 30, December 31, ASSETS 1996 1995 Cash and investments: Securities held to maturity, at amortized cost $ 1,769,759 1,643,211 Securities available for sale, at fair value 534,398 600,794 Mortgage loans, net of allowances for possible losses ($5,668 and $5,668) 200,641 191,674 Policy loans 147,710 147,923 Other long-term investments 25,655 30,970 Cash and short-term investments 7,500 10,024 Total cash and investments 2,685,663 2,624,596 Accrued investment income 38,239 36,127 Deferred policy acquisition costs 291,742 270,167 Other assets 24,548 21,392 Assets of discontinued operations 1,939 6,177 $ 3,042,131 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) June 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 173,880 174,946 Universal life and investment annuity contracts 2,467,412 2,401,098 Other policyholder liabilities 34,629 22,833 Federal income taxes payable: Current 1,676 413 Deferred 6,977 12,287 Other liabilities 31,804 28,718 Liabilities of discontinued operations 1,939 6,177 Total liabilities 2,718,317 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 6,438 15,195 Retained earnings 289,238 268,654 Total stockholders' equity 323,814 311,987 $ 3,042,131 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 June 30, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Amounts)
1996 1995 Premiums and other revenue: Life and annuity premiums $ 4,319 3,827 Universal life and investment annuity contract revenues 20,027 17,088 Net investment income 54,028 50,849 Other income 38 126 Realized gains on investments 1,098 168 Total premiums and other revenue 79,510 72,058 Benefits and expenses: Life and other policy benefits 8,813 8,670 Change in liabilities for future policy benefits (431) (618) Amortization of deferred policy acquisition costs 7,427 7,840 Universal life and investment annuity contract interest 39,119 36,177 Other insurance operating expenses 6,438 7,122 Total benefits and expenses 61,366 59,191 Earnings from continuing operations before Federal income taxes 18,144 12,867 Provision (benefit) for Federal income taxes: Current 6,694 5,109 Deferred (390) (1,136) Total Federal income taxes 6,304 3,973 Earnings from continuing operations 11,840 8,894 Losses from discontinued operations (net of Federal income taxes of $79 in 1995) - (1,484) Net earnings $ 11,840 7,410 Earnings (losses) per share of common stock: Earnings from continuing operations $ 3.40 2.54 Losses from discontinued operations - (0.42) Net earnings $ 3.40 2.12 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Six Months Ended June 30, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Amounts)
1996 1995 Premiums and other revenue: Life and annuity premiums $ 8,593 8,680 Universal life and investment annuity contract revenues 38,843 34,154 Net investment income 104,683 98,844 Other income 1,139 585 Realized gains on investments 1,721 301 Total premiums and other revenue 154,979 142,564 Benefits and expenses: Life and other policy benefits 17,491 20,220 Change in liabilities for future policy benefits (915) (1,868) Amortization of deferred policy acquisition costs 15,788 17,093 Universal life and investment annuity contract interest 77,954 70,448 Other insurance operating expenses 12,992 13,980 Total benefits and expenses 123,310 119,873 Earnings from continuing operations before Federal income taxes 31,669 22,691 Provision (benefit) for Federal income taxes: Current 11,907 7,665 Deferred (822) (925) Total Federal income taxes 11,085 6,740 Earnings from continuing operations 20,584 15,951 Losses from discontinued operations (net of Federal income taxes of $179 in 1995) - (3,217) Net earnings $ 20,584 12,734 Earnings (losses) per share of common stock: Earnings from continuing operations $ 5.90 4.57 Losses from discontinued operations - (0.92) Net earnings $ 5.90 3.65 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Six months Ended June 30, 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 (8,141) 8,738 Amortization of net unrealized gains related to transfers of securities available for sale to securities held to maturity (616) (680) Balance at end of period 6,438 5,859 Retained earnings: Balance at beginning of year 268,654 249,370 Net earnings 20,584 12,734 Balance at end of period 289,238 262,104 Total stockholders' equity $ 323,814 295,926 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1996 and 1995 (Unaudited) (In Thousands)
1996 1995 Cash flows from operating activities: Net earnings $ 20,584 12,734 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 77,954 70,448 Surrender charges (20,928) (16,811) Realized gains on investments (1,721) (301) Accrual and amortization of investment income (3,474) (3,809) Depreciation and amortization 356 327 Decrease (increase) in insurance receivables and other assets (13,684) 534 Increase in accrued investment income (2,112) (2,820) Increase in deferred policy acquisition costs (4,744) (7,385) Decrease in liability for future policy benefits (915) (1,868) Increase (decrease) in other policyholder liabilities 11,796 (679) Increase in Federal income taxes payable 11,007 2,219 Increase in other liabilities 3,086 4,781 Net cash provided by operating activities 77,205 57,370 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity - 4,180 Securities available for sale 29,318 31,200 Other investments 1,243 1,135 Proceeds from maturities and redemptions of: Securities held to maturity 34,159 28,006 Securities available for sale 12,178 3,338 Purchases of: Securities held to maturity (161,532) (83,489) Securities available for sale - (112,692) Other investments (4,201) (3,805) Principal payments on mortgage loans 7,838 8,133 Cost of mortgage loans acquired (8,099) (13,902) Decrease in policy loans 213 1,172 Decrease in assets of discontinued operations 4,238 56,773 Decrease in liabilities of discontinued operations (4,238) (53,224) Other (133) (115) Net cash used in investing activities (89,016) (133,290) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Six Months Ended June 30, 1996 and 1995 (Unaudited) (In Thousands)
1996 1995 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 158,007 196,308 Return of account balances on universal life and investment annuity contracts (148,720) (119,985) Net cash provided by financing activities 9,287 76,323 Net increase (decrease) in cash and short-term investments (2,524) 403 Cash and short-term investments at beginning of year 10,024 17,723 Cash and short-term investments at end of period $ 7,500 18,126 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 June 30, 1996, and the results of its operations and its cash flows for the three months and six months ended June 30, 1996 and 1995. The results of operations for the three months and six months ended June 30, 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 six months ended June 30, 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 estate 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 June 30, 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 p r evailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company continually 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 over all asset/liability management strategy. At June 30, 1996, approximately 23.3% 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 June 30, 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 June 30, December 31, 1996 1995 Debt securities 84.9% 84.5% Mortgage loans 7.5 7.3 Policy loans 5.5 5.6 Equity securities 0.9 1.0 Real estate 0.6 0.7 Other 0.6 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 June 30, 1996, securities held to maturity totaled $1.770 billion or 65.9% of total invested assets. The fair value of these securities was $1.759 billion which reflects gross unrealized losses of $11 million. This reflects a $27 million unrealized loss during the second quarter of 1996, due primarily to increases in market interest rates. Market interest rates rose almost 50 basis points during the quarter ended June 30, 1996. Securities available for sale totaled $534 million at June 30, 1996. 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 $23 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 $3.9 million at June 30, 1996, reflecting a decrease of $2.6 million from March 31, 1996, due to increasing market interest rates as previously 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 June 30, 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) June 30, 1996 $ 22,219 21,974 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 June 30, 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 $200,641,000 and $191,674,000, or 7.5% and 7.3% of total invested assets, at June 30, 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 June 30, 1996 and December 31, 1995, was as follows:
June 30, December 31, 1996 1995 West South Central 56.1% 54.0% Mountain 14.8 12.9 South Atlantic 8.6 9.2 Other 20.5 23.9 Totals 100.0% 100.0% June 30, December 31, 1996 1995 Retail 63.3% 67.0% Office 19.9 15.9 Hotel/Motel 7.7 8.3 Other 9.1 8.8 Totals 100.0% 100.0%
As of June 30, 1996, the allowance for possible losses on mortgage loans was $5,668,000. No additions were made to the allowance in the quarter ended June 30, 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 June 30, 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 $15,972,000 and $19,066,000 at June 30, 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 $253,000 and $129,000 for the three months ended June 30, 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 June 30, 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 June 30, 1996 and 1995 is provided below:
Three Months Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 (In thousands except per share data) Revenues: Insurance revenues excluding realized gains on investments $ 78,412 71,890 153,258 142,263 Realized gains on investments 1,098 168 1,721 301 Total revenues $ 79,510 72,058 154,979 142,564 Earnings: Earnings from insurance operations $ 11,126 8,784 19,465 15,755 Losses from discontinued brokerage operations - (1,484) - (3,217) Net realized gains on investments 714 110 1,119 196 Net earnings $ 11,840 7,410 20,584 12,734 Earnings Per Share: Earnings from insurance operations $ 3.19 2.51 5.58 4.51 Losses from discontinued brokerage operations - (0.42) - (0.92) Net realized gains on investments 0.21 0.03 0.32 0.06 Net earnings $ 3.40 2.12 5.90 3.65
Significant changes and fluctuations in income and expense items between the three months ended June 30, 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 June 30, 1996, were $11,126,000 compared to $8,784,000 for the second quarter of 1995. This represents an increase of $2,342,000, or 26.7%, over 1995 second quarter earnings. This increase in earnings was primarily due to higher revenues from universal life and annuity products and lower insurance operating expenses. Insurance operating expenses declined in 1996 primarily due to lower state guaranty fund assessment expenses. 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 $17,088,000 for the quarter ended June 30, 1995, to $20,027,000 for the same 1996 period. Increases totaling $2,341,000 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 $426,000. Actual universal life and investment annuity deposits collected for the quarters ended June 30, 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 June 30, 1996 1995 1994 (In thousands) Investment annuities $ 77,360 89,412 23,160 Universal life insurance 17,563 17,891 16,581 Totals $ 94,923 107,303 39,741
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 6.3% from the second quarter of 1995 while average total invested assets increased over 8% 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. Realized Gains on Investments: The Company had realized gains of $1,098,000 in 1996 compared to realized gains of $168,000 in 1995. The gains were primarily from sales of real estate and investments in debt securities. No significant write-downs on investments were recorded in 1996. However, writedowns on investments in debt securities totaled $1,300,000 in 1995. Universal Life and Investment Annuity Contract Interest: Interest expense was up $2,942,000 from $36,177,000 in 1995 to $39,119,000 in 1996. Increases in annuity production, resulting in corresponding increases in policy liabilities, are the primary reason for the higher expenses. Other Insurance Operating Expenses: Other insurance operating expenses were down significantly in 1996 primarily due to lower state guaranty fund assessment 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 31%. Federal income taxes for the three months ended June 30, 1995, include a tax benefit of $429,000 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 second 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 $1,484,000, or $0.42 per share, for the quarter ended June 30, 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 estate 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. Significant changes and fluctuations in income and expense items between the six months ended June 30, 1996 and 1995 are described in detail for insurance and brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations increased $3,710,000, or $1.07 per share, compared to the first six months of 1995. The increase in earnings for the six months ended June 30, 1996, results primarily from lower life insurance benefit claims and higher revenues from universal life and annuity products. 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: For the six months ended June 30, 1996, these revenues increased $4,689,000 compared to the 1995 period. Increases totaling $3,542,000 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 $599,000. Actual universal life and investment annuity deposits collected for the six months ended June 30, 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.
Six Months Ended June 30, 1996 1995 1994 (In thousands) Investment annuities $ 142,481 178,626 43,644 Universal life insurance 33,441 35,025 31,025 Totals $ 175,922 213,651 74,669
Net Investment Income: Net investment income increased $5,839,000 from $98,844,000 in 1995 to $104,683,000 in 1996, primarily due to increases in invested assets resulting from increased annuity production. Market interest rates for the first six months of 1996 have been significantly lower than rates for the comparable 1995 period. This has resulted in purchases of lower yielding securities during 1996 which has had a minor impact on investment income. Other Income: Other income increased significantly from $585,000 in 1995 to $1,139,000 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 $1,721,000 in 1996 compared to $301,000 in 1995. The 1996 realized gains, resulting primarily from sales of real estate and investments in debt securities, include no significant write-downs. The 1995 realized gains are primarily from sales of investments in debt securities and include write-downs of $1,300,000 as previously described for the three months ended June 30, 1995. Life and Other Policy Benefits: Expenses in 1996 and 1995 were $17.5 million and $20.2 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 in the first quarter. 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 $7,506,000 from $70,448,000 in 1995 to $77,954,000 in 1996 for the same reasons as previously described for the three months ended June 30, 1996. Other Insurance Operating Expenses: Other insurance operating expenses are down $988,000 in 1996 due primarily to lower state guaranty fund assessment 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 30%. Federal income taxes for the six months ended June 30, 1995, include a tax benefit of $1.1 million 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 Consistent with the results reported for the first and second quarters of 1996, no earnings or losses were reported for discontinued brokerage operations for the six months ended June 30, 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 $3,217,000, or $0.92 per share, for the six months ended June 30, 1995. 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 $77.2 million and $57.4 million for the six months ended June 30, 1996 and 1995, respectively. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $9.3 million and $76.3 million for the six months ended June 30, 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 $46.3 million and $31.3 million for the six months ended June 30, 1996 and 1995, respectively. The Company again expects significant cash flows from these sources throughout the remainder of 1996. 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 $323.8 million at June 30, 1996, reflecting an increase of $11.8 million from December 31, 1995. The increase in capital is primarily from net earnings of $20.6 million, offset by a decline in net unrealized gains on investment securities totaling $8.8 million during the first six months of 1996. The increase in market interest rates during the first half of 1996 resulted in the significant decrease in unrealized gains. Book value per share at June 30, 1996, was $92.75. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 21, 1996, the stockholders voted upon the following matters at the annual stockholders meeting: (a) The election of Class A directors to serve one-year terms. The results of the voting were as follows:
For Against Robert L. Moody 2,704,945 11,172 Arthur O. Dummer 2,702,879 13,238 Harry L. Edwards 2,702,679 13,438 E. J. Pederson 2,706,346 9,771
(b) The election of Class B directors to serve one-year terms. The results of the voting were as follows:
For Against E. Douglas McLeod 200,000 - Charles D. Milos, Jr. 200,000 - Frances A. Moody 200,000 - Ross R. Moody 200,000 - Russell S. Moody 200,000 - Louis E. Pauls, Jr. 200,000 -
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 pages __ and __ 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: August 8, 1996 /S/ Ross R. Moody Ross R. Moody President and Chief Operating Officer Date: August 8, 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 June 30, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Data)
1996 1995 Earnings applicable to common shares: Earnings from continuing operations $ 11,840 8,894 Losses from discontinued operations - (1,484) Net earnings $ 11,840 7,410 Weighted average common shares outstanding 3,491 3,488 Primary and fully diluted earnings per common share: Earnings from continuing operations $ 3.40 2.54 Losses from discontinued operations - (0.42) Net earnings $ 3.40 2.12
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Six Months Ended June 30, 1996 and 1995 (Unaudited) (In Thousands Except Per Share Data)
1996 1995 Earnings applicable to common shares: Earnings from continuing operations $ 20,584 15,951 Losses from discontinued operations - (3,217) Net earnings $ 20,584 12,734 Weighted average common shares outstanding 3,491 3,488 Primary and fully diluted earnings per common share: Earnings from continuing operations $ 5.90 4.57 Losses from discontinued operations - (0.92) Net earnings $ 5.90 3.65
EX-27 3
7 1000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 511,087 1,769,759 1,759,030 23,311 200,641 15,972 2,685,663 7,500 2,378 291,742 3,042,131 2,641,292 0 24,755 9,874 0 0 0 3,491 320,323 3,042,131 47,436 104,683 1,721 1,139 94,530 15,788 12,992 31,669 11,085 20,584 0 0 0 20,584 5.90 5.90 0 0 0 0 0 0 0 Consists of $8,593 revenues from traditional contracts subject to FAS 60 accounting treatment and $38,843 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $17,491 benefits paid to policyholders, $(915) decrease in reserves on traditional contracts and $77,954 interest on universal life and investment annuity contracts.
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