-----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, O9IPxehWevVjCZz7Fc+tQGiDJ4ngalhli+qZgBJ5oTKK8dcQKa+SVpKzJK/Y3U2V 7YX2Zqhs1Gls6gHaBrPURA== 0000070684-97-000006.txt : 19970815 0000070684-97-000006.hdr.sgml : 19970815 ACCESSION NUMBER: 0000070684-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661225 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, 1997 [ ] 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 August 8, 1997, 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, 1997 (Unaudited) and December 31, 1996 Condensed Consolidated Statements of Earnings - For the Three Months Ended June 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Earnings - For the Six Months Ended June 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Six Months Ended June 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1997 and 1996 (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 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, 1997 and 1996 (Unaudited) Exhibit 11 - Computation of Earnings per Share - For the Six Months Ended June 30, 1997 and 1996 (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 1997 1996 Cash and investments: Securities held to maturity, at amortized cost $ 1,894,787 1,873,561 Securities available for sale, at fair value 547,126 527,627 Mortgage loans, net of allowance for possible losses ($4,640 and $5,988) 190,705 193,311 Policy loans 137,571 142,077 Other long-term investments 27,770 22,997 Cash and short-term investments 13,925 11,358 Total cash and investments 2,811,884 2,770,931 Accrued investment income 40,290 39,503 Deferred policy acquisition costs 294,026 295,666 Other assets 16,510 13,472 Assets of discontinued operations 1,064 1,257 $ 3,163,774 3,120,829 Note: The balance sheet at December 31, 1996 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 1997 1996 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 170,511 172,565 Universal life and investment annuity contracts 2,548,885 2,529,307 Other policyholder liabilities 24,498 24,403 Federal income taxes payable: Current 3,742 - Deferred 11,547 11,910 Other liabilities 32,242 28,527 Liabilities of discontinued operations 1,064 1,257 Total liabilities 2,792,489 2,767,969 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 1997 and 1996 3,291 3,291 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 1997 and 1996 200 200 Additional paid-in capital 24,647 24,647 Net unrealized gains on investment securities 8,792 9,853 Foreign currency translation adjustment 1,936 - Retained earnings 332,419 314,869 Total stockholders' equity 371,285 352,860 $ 3,163,774 3,120,829 Note: The balance sheet at December 31, 1996 has been taken from the audited financial statements at that date. See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Three Months Ended June 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Amounts)
1997 1996 Premiums and other revenue: Life and annuity premiums $ 4,551 4,319 Universal life and investment annuity contract revenues 21,250 20,027 Net investment income 54,958 54,028 Other income 88 38 Realized gains on investments 77 1,098 Total premiums and other revenue 80,924 79,510 Benefits and expenses: Life and other policy benefits 10,310 8,813 Decrease in liabilities for future policy benefits (1,282) (431) Amortization of deferred policy acquisition costs 11,183 7,427 Universal life and investment annuity contract interest 36,344 39,119 Other insurance operating expenses 6,445 6,438 Total benefits and expenses 63,000 61,366 Earnings before Federal income taxes 17,924 18,144 Provision (benefit) for Federal income taxes: Current 7,118 6,694 Deferred (992) (390) Total Federal income taxes 6,126 6,304 Net earnings $ 11,798 11,840 Earnings per share of common stock: Net earnings $ 3.38 3.40 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Six Months Ended June 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Amounts)
1997 1996 Premiums and other revenue: Life and annuity premiums $ 8,271 8,593 Universal life and investment annuity contract revenues 40,681 38,843 Net investment income 107,511 104,683 Other income 156 1,139 Realized gains (losses) on investments (2,779) 1,721 Total premiums and other revenue 153,840 154,979 Benefits and expenses: Life and other policy benefits 20,009 17,491 Decrease in liabilities for future policy benefits (2,000) (915) Amortization of deferred policy acquisition costs 20,885 15,788 Universal life and investment annuity contract interest 74,064 77,954 Other insurance operating expenses 13,372 12,992 Total benefits and expenses 126,330 123,310 Earnings before Federal income taxes and discontinued operations 27,510 31,669 Provision (benefit) for Federal income taxes: Current 9,795 11,907 Deferred (835) (822) Total Federal income taxes 8,960 11,085 Earnings from continuing operations 18,550 20,584 Losses from discontinued operations (1,000) - Net earnings $ 17,550 20,584 Earnings (losses) per share of common stock: Earnings from continuing operations $ 5.32 5.90 Losses from discontinued operations (0.29) - Net earnings $ 5.03 5.90 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, 1997 and 1996 (Unaudited) (In Thousands)
1997 1996 Common stock shares outstanding: Shares outstanding at beginning of year and end of period 3,491 3,491 Common stock: Balance at beginning of year and end of period $ 3,491 3,491 Additional paid-in capital: Balance at beginning of year and end of period 24,647 24,647 Net unrealized gains (losses) on investment securities, net of effects of deferred policy acquisition costs and taxes: Balance at beginning of year 9,853 15,195 Change in unrealized gains (losses) during period (522) (8,141) Amortization of net unrealized gains related to transfers of securities available for sale to securities held to maturity (539) (616) Balance at end of period 8,792 6,438 Foreign currency translation adjustment, net of taxes: Balance at beginning of year - - Change in translation adjustment during period 1,936 - Balance at end of period 1,936 - Retained earnings: Balance at beginning of year 314,869 268,654 Net earnings 17,550 20,584 Balance at end of period 332,419 289,238 Total stockholders' equity $ 371,285 323,814 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, 1997 and 1996 (Unaudited) (In Thousands)
1997 1996 Cash flows from operating activities: Net earnings $ 17,550 20,584 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 74,064 77,954 Surrender charges and other policy revenues (21,991) (20,928) Realized (gains) losses on investments 2,779 (1,721) Accrual and amortization of investment income (3,551) (3,474) Depreciation and amortization 502 356 Increase in insurance receivables and other assets (325) (13,684) Increase in accrued investment income (787) (2,112) Decrease (increase) in deferred policy acquisition costs 3,145 (4,744) Decrease in liability for future policy benefits (2,000) (915) Increase in other policyholder liabilities 95 11,796 Increase in Federal income taxes payable 3,066 11,007 Increase in other liabilities 3,715 3,086 Net cash provided by operating activities 76,262 77,205 Cash flows from investing activities: Proceeds from sales of: Securities available for sale 33,468 29,318 Other investments 868 1,243 Proceeds from maturities and redemptions of: Securities held to maturity 66,893 34,159 Securities available for sale 18,457 12,178 Purchases of: Securities held to maturity (91,068) (161,532) Securities available for sale (69,800) - Other investments (3,723) (4,201) Principal payments on mortgage loans 13,896 7,838 Cost of mortgage loans acquired (14,580) (8,099) Decrease in policy loans 4,506 213 Decrease in assets of discontinued operations 193 4,238 Decrease in liabilities of discontinued operations (193) (4,238) Other (116) (133) Net cash used in investing activities (41,199) (89,016) (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, 1997 and 1996 (Unaudited) (In Thousands)
1997 1996 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 127,857 158,007 Return of account balances on universal life and investment annuity contracts (160,353) (148,720) Net cash provided by (used in) financing activities (32,496) 9,287 Net increase (decrease) in cash and short-term investments 2,567 (2,524) Cash and short-term investments at beginning of year 11,358 10,024 Cash and short-term investments at end of period $ 13,925 7,500 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 (Westcap), NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., and NWL Services, Inc. The Westcap Corporation ceased brokerage operations during 1995 and filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation is reflected as discontinued operations in the accompanying financial statements. NWL Services, Inc. is a newly incorporated subsidiary formed in June, 1997 primarily for investment related activities. 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, 1997, and the results of its operations for the three months and six months ended June 30, 1997 and 1996 and its cash flows for the six months ended June 30, 1997 and 1996. The results of operations for the three months and six months ended June 30, 1997 and 1996 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, 1997 and 1996. (3) DISCONTINUED BROKERAGE OPERATIONS As previously reported, National Western Life Insurance Company's brokerage subsidiary, The Westcap Corporation, is currently in reorganization bankruptcy. As a result of brokerage losses and the resulting bankruptcy, National Western Life's investment in Westcap was completely written off during 1995. However, a $1,000,000 cash infusion was made to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as a loss from discontinued operations in the first quarter of 1997. No losses from discontinued brokerage operations were recorded in 1996. The Creditors' Committee, the debtor Westcap, and National Western Life are continuing discussions relating to the possible settlement of all claims by the creditors against Westcap and the claims of Westcap against National Western Life. However, no prediction can be made at this time as to the outcome of such settlement discussions. Any additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings and settlement discussions. Any future settlements of the Company with Westcap would be reduced by the $1,000,000 contribution described above. (4) STOCK AND INCENTIVE PLAN On April 11, 1997, the Board of Directors approved the issuance of an additional 21,900 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 114,400 at June 30, 1997. 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 closely 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 as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. 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 June 30, 1997, approximately 22.2% 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 not classified as held to maturity 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. Review procedures are also 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. Additionally, the Company closely monitors financial, economic, and interest rate conditions to manage prepayment and extension risks in its mortgage-backed securities portfolio. The Company's overall conservative investment philosophy is reflected in the allocation of its investments which is detailed below as of June 30, 1997 and December 31, 1996. The Company emphasizes debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments June 30, December 31, 1997 1996 Debt securities 86.3% 86.0% Mortgage loans 6.8 7.0 Policy loans 4.9 5.1 Equity securities 0.6 0.6 Real estate 0.6 0.6 Other 0.8 0.7 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 primarily collateralized mortgage obligations (CMOs), but also include some U.S. government and private issue mortgage-backed pass-through securities. At June 30, 1997, the Company s debt and equity securities were classified as follows:
Gross Fair Amortized Unrealized Value Cost Gains (In thousands) Securities held to maturity: Debt securities $ 1,913,814 1,894,787 19,027 Securities available for sale: Debt securities 531,274 514,955 16,319 Equity securities 15,852 12,960 2,892 Totals $ 2,460,940 2,422,702 38,238
As detailed above, debt securities classified as held to maturity comprise the majority of the Company's securities portfolio, while equity securities continue to be a small component of the portfolio. Gross unrealized gains totaling $38,238,000 on the securities portfolio at June 30, 1997, are a reflection of market interest rates at quarter-end. The fair values, or market values, of fixed income debt securities correlate to external market interest rate conditions. Because the interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise. An analysis of gross unrealized gains and losses on the Company's securities portfolio for the quarter ended June 30, 1997 is detailed below:
Change in Unrealized Gross Unrealized Gains Gains (Losses) (Losses) At At During 2nd June 30, March 31, Quarter 1997 1997 1997 (In thousands) Securities held to maturity: Debt securities $ 19,027 (9,901) 28,928 Securities available for sale: Debt securities 16,319 9,527 6,792 Equity securities 2,892 3,013 (121) Totals $ 38,238 2,639 35,599
Market interest rates of the ten year U.S. Treasury bond were approximately 40 basis points lower at June 30, 1997, than at March 31, 1997. As reflected in the table above, such changes in interest rates have a significant impact on the market values of the Company's debt securities. The Company would expect similar results in the future from any significant upward or downward movement in market rates. However, because the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, the changes in market values have relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required which would realize market gains or losses. 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, extensions, and calls, the Company takes steps to manage and minimize such risks. The Company continues to invest primarily in corporate debt securities, many of which are non-callable, which helps reduce prepayment and call risks. At June 30, 1997, corporate and public utility securities represented over 62% of the entire debt securities portfolio. While mortgage-backed securities are still an important component of the Company's debt securities portfolio, holdings of these securities have been reduced significantly over the past several years. This change in the portfolio mix has provided even more stability in the Company's cash flow management. Although holdings of mortgage-backed securities are subject to prepayment and extension risks, both of these risks are addressed by specific portfolio management strategies. The Company substantially reduces both prepayment and extension risks of mortgage-backed securities 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. As of June 30, 1997, CMOs represent over 90% of the Company's mortgage- backed securities, and PAC I CMOs account for approximately 90% of this CMO portfolio. 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 closely manages the credit quality of its investments in debt securities. The Company continues to follow its conservative investment philosophy by minimizing its holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities are summarized below. The increase in below investment grade debt securities from 1995 is primarily due to investment grade issuers that were downgraded to below investment grade status.
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) June 30, 1997 $ 35,548 36,407 1.3% December 31, 1996 $ 38,696 38,784 1.4% December 31, 1995 $ 14,244 14,567 0.5%
The Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio in recent years. In fact, at June 30, 1997, no securities 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 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 has resulted in higher quality mortgage loans with fewer 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 also participates 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. Portfolio Analysis The Company held net investments in mortgage loans totaling $190,705,000 and $193,311,000, or 6.8% and 7.0% of total invested assets, at June 30, 1997, and December 31, 1996, 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, 1997 and December 31, 1996, was as follows:
June 30, December 31, 1997 1996 West South Central 50.3 % 51.4 % Mountain 15.6 15.0 South Atlantic 12.2 8.7 Pacific 8.4 11.2 Other 13.5 13.7 Totals 100.0 % 100.0 %
June 30, December 31, 1997 1996 Retail 68.8 % 64.4 % Office 13.5 18.9 Hotel/Motel 7.8 7.8 Apartment 4.0 3.9 Other 5.9 5.0 Totals 100.0 % 100.0 %
During the quarter ended June 30, 1997, the Company added $100,000 to the allowance for possible losses to increase the balance to an adequate level based on management s analysis. This addition was recognized as a realized loss on investments in the accompanying financial statements. There were no charge-offs against the allowance during the quarter and the allowance for possible losses on mortgage loans now totals $4,640,000 at June 30, 1997. Although management believes that the current balance is adequate, 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, 1997 and 1996, the reductions in interest income due to non-accrual and restructured mortgage loans were not significant. The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $17,238,000 and $15,209,000 at June 30, 1997, and December 31, 1996, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating gains on these properties of approximately $76,000 and $253,000 for the three months ended June 30, 1997, and 1996. 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, 1997 and 1996, 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 three months and six months ended June 30, 1997 and 1996 is provided below:
Three Months Ended June 30, Six Months Ended June 30, 1997 1996 1997 1996 (In thousands except per (In thousands except per share data) share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 80,847 78,412 156,619 153,258 Realized gains (losses) on investments 77 1,098 (2,779) 1,721 Total revenues $ 80,924 79,510 153,840 154,979 Earnings: Earnings from insurance operations $ 11,748 11,126 20,356 19,465 Losses from discontinued brokerage operations - - (1,000) - Net realized gains (losses) on investments 50 714 (1,806) 1,119 Net earnings $ 11,798 11,840 17,550 20,584 Earnings Per Share: Earnings from insurance operations $ 3.36 3.19 5.83 5.58 Losses from discontinued brokerage operations - - (0.29) - Net realized gains (losses) on investments 0.02 0.21 (0.51) 0.32 Net earnings $ 3.38 3.40 5.03 5.90
Significant changes and fluctuations in income and expense items between the three months ended June 30, 1997 and 1996 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, 1997, were $11,748,000 compared to $11,126,000 for the second quarter of 1996. This reflects an increase of $622,000, or 5.6%, over 1996 second quarter earnings. Increases in insurance revenues continue to contribute to higher earnings. Insurance revenues, excluding realized gains on investments, were up $2,435,000, totaling $80,847,000 for the quarter ended June 30, 1997. 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, surrender charges, policy administration fees, and other miscellaneous revenues. These revenues increased from $20,027,000 for the quarter ended June 30, 1996, to $21,250,000 for the same 1997 period. Increases in cost of insurance and other revenues resulted in the majority of the increase in these contract revenues. Although total life and annuity surrenders were up 11.5% when comparing the second quarters of 1997 and 1996, surrender charge revenues actually declined slightly in 1997 primarily due to changes in the types of surrenders. Single-tier annuities accounted for the majority of the increase in surrenders and these annuities typically have lower surrender charges than two-tier annuities. Surrenders of two-tier annuities also declined in the second quarter of 1997 compared to the same 1996 period.
Three Months Ended June 30, 1997 1996 (In thousands) Surrender charges $ 9,727 9,774 Cost of insurance revenues 8,567 8,005 Policy fees and other revenues 2,956 2,248 Totals $ 21,250 20,027
Actual universal life and investment annuity deposits collected for the quarters ended June 30, 1997 and 1996, 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, 1997 1996 (In thousands) Investment annuities: First year and single premiums $ 51,351 69,038 Renewal premiums 6,516 8,322 Total annuities 57,867 77,360 Universal life insurance: First year and single premiums 4,075 5,545 Renewal premiums 12,798 12,018 Total universal life insurance 16,873 17,563 Totals $ 74,740 94,923
Subsequent to discontinuing two-tier annuity sales, the Company developed new annuity products in 1994 and diversified its distribution system by contracting new marketing organizations with extensive experience, financial resources, and success in marketing life and annuity products. The new products and new marketing organizations resulted in significant increases in annuity production in 1994 and 1995. However, annuity production slowed in 1996 and has continued to decrease in the first half of 1997, but sales still continue to be higher under this more diversified distribution system. Annuities sold include flexible premium deferred annuities, single premium deferred annuities, and single premium immediate annuities. These products can be tax-qualified or non-qualified annuities. In recent years the majority of annuities sold have been non-qualified single premium deferred annuities. The Company also continues to collect additional premiums on existing two-tier annuities, as a large portion of the two-tier block of business were flexible premium annuities on which renewal premiums continue to be collected. The majority of the Company's universal life insurance production is from the international market, primarily Central and South American countries. The Company continues to see increased competition in the Central and South American market which has reduced sales. However, the Company has been accepting policies from foreign nationals for over 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 challenges of the increased competition. The Company's strategic plans for the international market include the continued development of additional life insurance products to complement the universal life portfolio and acceptance of new broker/agents from existing agencies in Latin America. Sales of life insurance have also declined in the U.S. domestic market. In response to this decline, the Company is committed to allocating additional resources to increase domestic life insurance sales and to enhancing and developing new life insurance products. Additional resources include both personnel additions and increased marketing efforts. Net Investment Income: Net investment income increased 1.7% from the second quarter of 1996, due primarily to increases in invested assets for the same period. The increase in invested assets and related investment income was primarily from debt securities. A detail of net investment income is provided below:
Three Months Ended June 30, 1997 1996 (In thousands) Investment income: Debt securities $ 46,180 44,206 Mortgage loans 4,845 4,931 Policy loans 2,506 2,668 Other 2,354 2,752 Total investment income 55,885 54,557 Investment expenses 927 529 Net investment income $ 54,958 54,028
Realized Gains on Investments: The Company recorded realized gains of $77,000 in 1997 compared to realized gains of $1,098,000 in 1996. The gains in 1996 were primarily from sales of real estate and debt securities. The 1997 gains are net of an increase in the mortgage loan allowance for losses totaling $100,000. No significant write-downs on investments were recorded in 1996. Life and Other Policy Benefits: Expenses in 1997 and 1996 were $10.3 million and $8.8 million, respectively. The significant increase in expenses is due to an increase in surrenders of traditional life insurance products and higher life insurance benefit claims. Mortality claims were $317,000 higher in the second quarter of 1997 than in 1996. Traditional life insurance surrenders also increased $1.1 million in 1997 over the comparable 1996 period. However, much of this increase in surrender expense is offset by corresponding decreases in liabilities for future policy benefits. Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level and types of policy surrenders. Amortization for 1997 was $11,183,000 compared to $7,427,000 for 1996. The higher amortization in 1997 was impacted by changes in timing and levels of anticipated future gross profits for certain blocks of business and increased policy surrenders. Significant changes and fluctuations in income and expense items between the six months ended June 30, 1997 and 1996 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations increased $891,000 or $0.25 per share, compared to the first six months of 1996. Earnings for the six months ended June 30, 1997, benefited from increases in insurance revenues. Also, first quarter 1996 earnings included nonrecurring income totaling $552,000, net of taxes, from a lawsuit settlement. Universal Life and Investment Annuity Contract Revenues: These revenues increased from $38,843,000 for the six months ended June 30, 1996, to $40,681,000 for the same 1997 period. Increases in cost of insurance and other revenues resulted in the majority of the increase in these contract revenues. Increases in other revenues are primarily from recognition of deferred revenues relating to immediate annuities. Surrender charge revenues declined in 1997 primarily due to lower two-tier annuity surrenders. The Company s two-tier annuities typically have higher surrender charges compared to other Company annuity and life insurance products.
Six Months Ended June 30, 1997 1996 (In thousands) Surrender charges $ 17,653 18,328 Cost of insurance revenues 16,998 15,889 Policy fees and other revenues 6,030 4,626 Totals $ 40,681 38,843
Actual universal life and investment annuity deposits collected for the six months ended June 30, 1997 and 1996, 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, 1997 1996 (In thousands) Investment annuities: First year and single premiums $ 103,346 126,035 Renewal premiums 12,621 16,446 Total annuities 115,967 142,481 Universal life insurance: First year and single premiums 7,039 9,926 Renewal premiums 23,541 23,515 Total universal life insurance 30,580 33,441 Totals $ 146,547 175,922
Net Investment Income: Net investment income increased $2,828,000 from $104,683,000 in 1996 to $107,511,000 in 1997, primarily due to increases in invested assets, as investment yields have remained relatively stable. The increase in invested assets and related investment income was primarily from debt securities. A detail of net investment income is provided below:
Six Months Ended June 30, 1997 1996 (In thousands) Investment income: Debt securities $ 91,846 87,066 Mortgage loans 9,511 9,829 Policy loans 4,848 5,439 Other 2,863 3,686 Total investment income 109,068 106,020 Investment expenses 1,557 1,337 Net investment income $ 107,511 104,683
Other Income: Other income totaled only $156,000 in 1997 compared to $1,139,000 in 1996. The higher income in 1996 was due to proceeds received from a lawsuit settlement totaling $850,000. The lawsuit related to the Company's previous investment in a mortgage loan. Realized Gains and Losses on Investments: The Company recorded realized losses of $2,779,000 in 1997 compared to realized gains of $1,721,000 in 1996. The losses in 1997 were primarily from net losses on debt securities totaling $2.0 million. The Company also incurred net losses totaling $849,000 on mortgage loans primarily relating to a foreclosure during the first quarter of 1997. The gains in 1996 were primarily from debt securities that were called and from sales of real estate. Life and Other Policy Benefits: Expenses in 1997 and 1996 were $20.0 million and $17.5 million, respectively. The significant increase in expenses is due to higher life insurance benefit claims and higher traditional life insurance surrenders as previously described for the three months ended June 30, 1997. Mortality claims experience fluctuates from period to period and such deviations are not uncommon in the life insurance industry. Over extended periods of time, higher claims experience tends to be offset by periods of lower claims experience. Also, the Company utilizes reinsurance to help minimize its exposure to adverse mortality experience. The Company's general policy is to reinsure amounts in excess of $200,000 on the life of any one individual. Amortization of Deferred Policy Acquisition Costs: Amortization was up $5,097,000 from $15,788,000 in 1996 to $20,885,000 in 1997 for the same reasons as previously described for the three months ended June 30, 1997. Federal Income Taxes: Federal income taxes for 1996 reflect an effective tax rate of 35% which is the current federal rate. However, the 1997 taxes reflect a lower effective tax rate of 32.6%. Federal income taxes for the six months ended June 30, 1997, include a tax benefit of $350,000 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 As more fully described in note 3 to the accompanying financial statements, National Western Life Insurance Company's brokerage subsidiary, The Westcap Corporation, is currently in reorganization bankruptcy. A $1,000,000 cash infusion was made by the Company to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as losses from discontinued operations in the first quarter of 1997. No losses from discontinued brokerage operations were recorded in 1996. Additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings and settlement discussions. Any future settlements of the Company with Westcap would be reduced by the $1,000,000 contribution described above. 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 $76.3 million and $77.2 million for the six months ended June 30, 1997 and 1996, respectively. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $9.3 million for the first six months of 1996, but reflected a net cash outflow totaling $32.5 million for the same period of 1997. The decrease in cash flows from the deposit product operations was due to lower universal life insurance and annuity deposits and higher surrenders. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $85.4 million and $46.3 million for the six months ended June 30, 1997 and 1996, respectively. The Company expects significant cash flows to continue from these sources throughout the remainder of 1997. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1997 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 1997. Stockholders' equity totaled $371.3 million at June 30, 1997, reflecting an increase of $18.4 million from December 31, 1996. The increase in capital is primarily from net earnings of $17.6 million and a foreign currency translation adjustment of $1.9 million, offset by a decline in net unrealized gains on investment securities totaling $1.1 million during the first six months of 1997. Book value per share at June 30, 1997, was $106.34. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 20, 1997, 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 2,864,940 15,470 Arthur O. Dummer 2,861,589 18,821 Harry L. Edwards 2,861,373 19,037 E. J. Pederson 2,865,456 14,954
(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 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 No reports on Form 8-K were filed during the quarter ended June 30, 1997. 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, 1997 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director Date: August 8, 1997 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer Date: August 8, 1997 /S/ Vincent L. Kasch Vincent L. Kasch Vice President - Controller and Assistant 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, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Data)
1997 1996 Earnings applicable to common stock shares: Net earnings $ 11,798 11,840 Weighted average common stock shares outstanding 3,491 3,491 Primary and fully diluted earnings per common stock share: Net earnings $ 3.38 3.40
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Six Months Ended June 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Data)
1997 1996 Earnings (losses) applicable to common stock shares: Earnings from continuing operations $ 18,550 20,584 Losses from discontinued operations (1,000) - Net earnings $ 17,550 20,584 Weighted average common stock shares outstanding 3,491 3,491 Primary and fully diluted earnings (losses) per common stock share: Earnings from continuing operations $ 5.32 5.90 Losses from discontinued operations (0.29) - Net earnings $ 5.03 5.90
EX-27 3
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 531,274 1,894,787 1,913,814 15,852 190,705 17,238 2,811,884 13,925 2,719 294,026 3,163,774 2,719,396 0 14,966 9,532 2,682 0 0 3,491 367,794 3,163,774 48,952 107,511 (2,779) 156 92,073 20,885 13,372 27,510 8,960 18,550 (1,000) 0 0 17,550 5.03 5.03 0 0 0 0 0 0 0 Consists of $8,271 revenues from traditional contracts subject to FAS 60 accounting treatment and $40,681 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $20,009 benefits paid to policyholders, $(2,000) decrease in reserves on traditional contracts and $74,064 interest on universal life and investment annuity contracts.
-----END PRIVACY-ENHANCED MESSAGE-----