-----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, PNBCT4QvfzRmRfioloIOhoYOJEnID3o/4N3ClLd0bTOThw+iNZ/UMfYdBMQvlI4h 2NjSSldZjs6KfaMKhFar1Q== 0000070684-97-000012.txt : 19971117 0000070684-97-000012.hdr.sgml : 19971117 ACCESSION NUMBER: 0000070684-97-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 002-17039 FILM NUMBER: 97719985 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 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 November 12, 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 - September 30, 1997 (Unaudited) and December 31, 1996 Condensed Consolidated Statements of Earnings - For the Three Months Ended September 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Earnings - For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 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 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 - Computation of Earnings per Share - For the Three Months Ended September 30, 1997 and 1996 (Unaudited) Exhibit 11 - Computation of Earnings per Share - For the Nine Months Ended September 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) September 30, December 31, 1997 1996 ASSETS Cash and investments: Securities held to maturity, at amortized cost $ 1,878,334 1,873,561 Securities available for sale, at fair value 617,225 527,627 Mortgage loans, net of allowance for possible losses ($4,640 and $5,988) 182,312 193,311 Policy loans 136,117 142,077 Other long-term investments 26,787 22,997 Cash and short-term investments 6,224 11,358 Total cash and investments 2,846,999 2,770,931 Accrued investment income 40,147 39,503 Deferred policy acquisition costs 290,480 295,666 Other assets 14,456 13,472 Assets of discontinued operations 892 1,257 $ 3,192,974 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) September 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 170,364 172,565 Universal life and investment annuity contracts 2,567,190 2,529,307 Other policyholder liabilities 25,549 24,403 Federal income taxes payable: Current 1,596 - Deferred 11,685 11,910 Other liabilities 31,430 28,527 Liabilities of discontinued operations 892 1,257 Total liabilities 2,808,706 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 11,915 9,853 Foreign currency translation adjustment 2,267 - Retained earnings 341,948 314,869 Total stockholders' equity 384,268 352,860 $ 3,192,974 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 September 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Amounts)
1997 1996 Premiums and other revenue: Life and annuity premiums $ 3,411 3,206 Universal life and investment annuity contract revenues 19,303 19,155 Net investment income 52,908 54,778 Other income 64 32 Realized gains (losses) on investments 408 (446) Total premiums and other revenue 76,094 76,725 Benefits and expenses: Life and other policy benefits 9,362 8,902 Decrease in liabilities for future policy benefits (96) (1,009) Amortization of deferred policy acquisition costs 9,785 5,945 Universal life and investment annuity contract interest 36,116 37,568 Other insurance operating expenses 6,378 5,997 Total benefits and expenses 61,545 57,403 Earnings before Federal income taxes 14,549 19,322 Provision (benefit) for Federal income taxes: Current 6,741 6,178 Deferred (1,721) 584 Total Federal income taxes 5,020 6,762 Net earnings $ 9,529 12,560 Earnings per share of common stock: Net earnings $ 2.73 3.59 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Amounts)
1997 1996 Premiums and other revenue: Life and annuity premiums $ 11,682 11,799 Universal life and investment annuity contract revenues 59,984 57,998 Net investment income 160,419 159,461 Other income 220 1,171 Realized gains(losses)on investments (2,371) 1,275 Total premiums and other revenue 229,934 231,704 Benefits and expenses: Life and other policy benefits 29,371 26,393 Decrease in liabilities for future policy benefits (2,096) (1,924) Amortization of deferred policy acquisition costs 30,670 21,733 Universal life and investment annuity contract interest 110,180 115,522 Other insurance operating expenses 19,750 18,989 Total benefits and expenses 187,875 180,713 Earnings from continuing operations before Federal income taxes 42,059 50,991 Provision (benefit) for Federal income taxes: Current 16,536 18,085 Deferred (2,556) (238) Total Federal income taxes 13,980 17,847 Earnings from continuing operations 28,079 33,144 Losses from discontinued operations (1,000) - Net earnings $ 27,079 33,144 Earnings (losses) per share of common stock: Earnings from continuing operations $ 8.05 9.49 Losses from discontinued operations (0.29) - Net earnings $ 7.76 9.49 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 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 2,848 (7,856) Amortization of net unrealized gains related to transfers of securities available for sale to securities held to maturity (786) (875) Balance at end of period 11,915 6,464 Foreign currency translation adjustment, net of taxes: Balance at beginning of year - - Change in translation adjustment during period 2,267 - Balance at end of period 2,267 - Retained earnings: Balance at beginning of year 314,869 268,654 Net earnings 27,079 33,144 Balance at end of period 341,948 301,798 Total stockholders' equity $ 384,268 336,400 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) (In Thousands)
1997 1996 Cash flows from operating activities: Net earnings $ 27,079 33,144 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 110,180 115,522 Surrender charges and other policy revenues (31,716) (30,924) Realized (gains) losses on investments 2,371 (1,275) Accrual and amortization of investment income (3,846) (5,370) Depreciation and amortization 746 525 Decrease (increase) in insurance receivables and other assets 395 (1,210) Increase in accrued investment income (644) (851) Decrease (increase) in deferred policy acquisition costs 2,391 (8,526) Decrease in liability for future policy benefits (2,096) (1,924) Increase (decrease) in other policyholder liabilities 1,146 (1,836) Increase in Federal income taxes payable 976 11,569 Increase in other liabilities 2,903 6,581 Net cash provided by operating activities 109,885 115,425 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity 1,993 - Securities available for sale 48,170 31,060 Other investments 1,615 1,608 Proceeds from maturities and redemptions of: Securities held to maturity 81,177 53,288 Securities available for sale 29,389 23,375 Purchases of: Securities held to maturity (78,914) (220,276) Securities available for sale (167,569) (10,514) Other investments (3,822) (2,724) Principal payments on mortgage loans 27,137 19,535 Cost of mortgage loans acquired (19,395) (14,622) Decrease in policy loans 5,960 2,589 Decrease in assets of discontinued operations 365 4,761 Decrease in liabilities of discontinued operations (365) (4,761) Other (179) (207) Net cash used in investing activities (74,438) (116,888) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) (In Thousands)
1997 1996 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 196,328 227,077 Return of account balances on universal life and investment annuity contracts (236,909) (217,236) Net cash provided by (used in financing activities (40,581) 9,841 Net increase (decrease) in cash and short-term investments (5,134) 8,378 Cash and short-term investments at beginning of year 11,358 10,024 Cash and short-term investments at end of period $ 6,224 18,402 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 September 30, 1997, and the results of its operations for the three months and nine months ended September 30, 1997 and 1996 and its cash flows for the nine months ended September 30, 1997 and 1996. The results of operations for the three months and nine months ended September 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 nine months ended September 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'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. On September 29, 1997, the United States Bankruptcy Court, Southern District of Texas, Houston, Texas, entered an order approving claims in the amount of $56,173,000 against The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. The claims were filed by the Board of Trustees of Community College District No. 508, County of Cook, State of Illinois. The Westcap Corporation and Westcap Enterprises, Inc. have appealed this order. While The Westcap Corporation is a wholly owned brokerage subsidiary of National Western Life Insurance Company, National Western is not a party to the order or the bankruptcy proceeding, and the order of the Bankruptcy Court does not have any direct effect upon National Western. Also as previously reported, National Western has agreed to participate in the Westcap plan of reorganization by the contribution of $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. This reorganization plan is pending and subject to approval by Westcap's creditors and the Bankruptcy Court. The Creditors' Committee, the debtor Westcap, and National Western continue to discuss possible settlement of all claims by the creditors of Westcap and the claims by Westcap against National Western. 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 September 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 September 30, 1997, approximately 24.2% 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 September 30, 1997 and December 31, 1996. The Company emphasizes debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments September 30, December 31, 1997 1996 Debt securities 87.2% 86.0% Mortgage loans 6.4 7.0 Policy loans 4.8 5.1 Real estate 0.6 0.6 Equity securities 0.5 0.6 Other 0.5 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 September 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 $ 1,934,324 1,878,334 55,990 Securities available for sale: Debt securities 604,017 578,092 25,925 Equity securities 13,208 10,111 3,097 Totals $ 2,551,549 2,466,537 85,012
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 $85,012,000 on the securities portfolio at September 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 on the Company's securities portfolio for the quarter ended September 30, 1997 is detailed below:
Change in Gross Unrealized Gains Unrealized At At Gains During September 30, June 30, 3rd Quarter 1997 1997 1997 (In thousands) Securities held to maturity: Debt securities $ 55,990 19,027 36,963 Securities available for sale: Debt securities 25,925 16,319 9,606 Equity securities 3,097 2,892 205 Totals $ 85,012 38,238 46,774
Market interest rates of the ten year U.S. Treasury bond were approximately 40 basis points lower at September 30, 1997, than at June 30, 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, as the Company's securities portfolio increased in value by over $46 million in the third quarter. 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, most of which are non-callable, which helps reduce prepayment and call risks. At September 30, 1997, corporate and public utility securities represented about 63% 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 September 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 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) September 30, 1997 $ 37,793 38,759 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 September 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 $182,312,000 and $193,311,000, or 6.4% and 7.0% of total invested assets, at September 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 September 30, 1997, and December 31, 1996, was as follows:
September 30, December 31, 1997 1996 West South Central 51.9% 51.4% Mountain 12.9 15.0 South Atlantic 12.4 8.7 Pacific 8.6 11.2 Other 14.2 13.7 Totals 100.0% 100.0%
September 30, December 31, 1997 1996 Retail 68.4% 64.4% Office 12.9 18.9 Hotel/Motel 7.9 7.8 Apartment 4.1 3.9 Other 6.7 5.0 Totals 100.0% 100.0%
As of September 30, 1997, the allowance for possible losses on mortgage loans was $4,640,000. No additions were made to the allowance in the quarter ended September 30, 1997, 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 September 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 $16,343,000 and $15,209,000 at September 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 $124,000 and $114,000 for the three months ended September 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 September 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 nine months ended September 30, 1997 and 1996 is provided below:
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (In thousands except per share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 75,686 77,171 232,305 230,429 Realized gains (losses) on investments 408 (446) (2,371) 1,275 Total revenues $ 76,094 76,725 229,934 231,704 Earnings: Earnings from insurance operations $ 9,264 12,850 29,620 32,315 Losses from discontinued brokerage operations - - (1,000) - Net realized gains (losses) on investments 265 (290) (1,541) 829 Net earnings $ 9,529 12,560 27,079 33,144 Earings Per Share: Earnings from insurance operations $ 2.66 3.68 8.49 9.26 Losses from discontinued brokerage operations - - (0.29) - Net realized gains (losses) on investments 0.07 (0.09) (0.44) 0.23 Net earnings $ 2.73 3.59 7.76 9.49
Significant changes and fluctuations in income and expense items between the three months ended September 30, 1997 and 1996 are described in detail for insurance operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations for the quarter ended September 30, 1997, were $9,264,000 compared to $12,850,000 for the third quarter of 1996. Third quarter 1997 earnings would have been comparable to 1996 earnings except for non-recurring gains in 1996 and other fluctuations described as follows: (1) Net investment income for 1996 was significantly higher than other quarters as it included non-recurring gains totaling $1.5 million, net of taxes, from several of the Company's investments in real estate joint ventures. (2) Net investment income for the third quarter of 1997 was lower due to yield and amortization adjustments on mortgage-backed securities totaling $900,000, net of taxes. (3) Life insurance benefit claims, which can fluctuate significantly from quarter to quarter, were $1,085,000 higher in 1997, net of taxes. 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 slightly from $19,155,000 for the quarter ended September 30, 1996, to $19,303,000 for the same 1997 period. Increases in cost of insurance revenues of $653,000 were offset by decreases in surrender charge revenues of $748,000. Although total life and annuity surrenders were up 4.8% when comparing the third quarters of 1997 and 1996, surrender charge revenues actually declined in 1997 primarily due to changes in the types of surrenders. Single-tier annuities accounted for 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 third quarter of 1997 compared to the same 1996 period.
Three Months Ended September 30, 1997 1996 (In thousands) Cost of insurance revenues $ 8,759 8,106 Surrender charges 7,952 8,700 Policy fees and other revenues 2,592 2,349 Totals $ 19,303 19,155
Actual universal life and investment annuity deposits collected for the quarters ended September 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 September 30, 1997 1996 (In thousands) Investment annuities: First year and single premiums $ 56,071 55,532 Renewal premiums 4,981 6,283 Total annuities 61,052 61,815 Universal life insurance: First year and single premiums 5,001 3,576 Renewal premiums 12,863 12,838 Total universal life insurance 17,864 16,414 Totals $ 78,916 78,229
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. 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 1997, but sales still continue to be higher under this more diversified distribution system. In efforts to increase annuity production again, the Company has further diversified its annuity products offered to customers by introducing an equity indexed annuity in the third quarter of 1997. This product is a flexible premium deferred annuity which combines the features associated with traditional fixed annuities with the option to have interest rates that are linked in part to an equity index, the S&P 500 Composite Stock Price Index*. This new annuity is a long-term contract designed as a planning vehicle for retirement security. The Company anticipates that this product will be attractive to customers as it has guaranteed minimum interest rates, coupled with the potential for significantly higher returns based on an equity index component. The Company has implemented an investment hedging program to provide the potential higher returns required to be paid on these products. Specifically, the Company purchases index options from high rated banks and brokerage firms. These index options act as hedges to match closely the returns based on the S&P 500 Composite Stock Price Index* which may be paid to policyholders. As the equity indexed annuity was just recently introduced, no significant sales of the new product have been made as of September 30, 1997. (* "Standard & Poor's" "S&P", "S&P 550", "Standard & Poor's 500", and "500" are trade marks of The McGraw-Hill Companies, Inc. and have been licensed for use by National Western Life Insurance Company. National Western's equity indexed annuity is not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's, makes no represenations regarding the advisability of purchasing this product.) 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. 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 been slow in the U.S. domestic market. In response, 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 have included recent personnel additions and increased marketing efforts. Net Investment Income: Net investment income decreased 3.4% from the third quarter of 1996. There were two primary reasons for the lower income. Third quarter 1996 net investment income was higher than other quarters as it included non-recurring gains totaling $2.3 million from sales of several real estate joint venture interests. Additionally, the increase in net investment income from debt securities was lower in the third quarter of 1997 due to yield and amortization adjustments on mortgage-backed securities totaling $1.4 million. The yield and amortization adjustments were made in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." The adjustments are made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affect average lives, yields and amortization periods of the securities. A detail of net investment income is provided below:
Three Months Ended September 30, 1997 1996 (In thousands) Investment income: Debt securities $ 45,627 44,575 Mortgage loans 4,633 5,062 Policy loans 2,458 2,503 Other 598 3,452 Total investment income 53,316 55,592 Investment expenses 408 814 Net investment income $ 52,908 54,778
Realized Gains and Losses on Investments: The Company recorded realized gains of $408,000 in 1997 compared to realized losses of $446,000 in 1996. The gains in 1997 were primarily from sales of debt securities and mortgage loan prepayment penalties. The losses in 1996 were primarily from sales of debt securities and preferred stock for tax planning purposes. No significant write-downs on investments were recorded in 1997 or 1996. Life and Other Policy Benefits: Expenses in 1997 and 1996 were $9.4 million and $8.9 million, respectively. The increase in expenses is due to higher life insurance benefit claims offset partially by a decrease in surrenders of traditional life insurance products. Mortality claims were $1.7 million higher in the third quarter of 1997 than in 1996. Conversely, traditional life insurance surrenders decreased $1.2 million in 1997 over the comparable 1996 period. However, much of this decrease in surrender expense is offset by corresponding changes 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 $9,785,000 compared to $5,945,000 for 1996. Increases in anticipated future gross profits resulted in retrospective adjustments to deferred policy acquisition costs which lowered the amortization in the third quarter of 1996. Also, policy surrenders were higher in 1997 which increased amortization of deferred policy acquisition costs. Significant changes and fluctuations in income and expense items between the nine months ended September 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 first nine months of 1997 were lower by $2,695,000, or $0.77 per share, compared to the same period of 1996. Earnings for the nine months ended September 30, 1997, were lower for the same reasons as previously described for the third quarter of 1997. 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 $57,998,000 for the nine months ended September 30, 1996, to $59,984,000 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.
Nine Months Ended September 30, 1997 1996 (In thousands) Cost of insurance revenues $ 25,757 23,995 Surrender charges 25,605 27,028 Policy fees and other revenues 8,622 6,975 Totals $ 59,984 57,998
Actual universal life and investment annuity deposits collected for the nine months ended September 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.
Nine Months Ended September 30, 1997 1996 (In thousands) Investment annuities: First year and single premiums $ 159,417 181,567 Renewal premiums 17,602 22,729 Total annuities 177,019 204,296 Universal life insurance: First year and single premiums 12,040 13,502 Renewal premiums 36,404 36,353 Total universal life insurance 48,444 49,855 Totals $ 225,463 254,151
Net Investment Income: Net investment income increased $958,000 from $159,461,000 in 1996 to $160,419,000 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. The increase in 1997 was lower than anticipated due to yield and amortization adjustments on mortgage-backed securities totaling $1.4 million. A detail of net investment income is provided below:
Nine Months Ended September 30, 1997 1996 (In thousands) Investment income: Debt securities $ 137,473 131,641 Mortgage loans 14,144 14,891 Policy loans 7,306 7,942 Other 3,461 7,138 Total investment income 162,384 161,612 Investment expenses 1,965 2,151 Net investment income $ 160,419 159,461
Other Income: Other income totaled only $220,000 in 1997 compared to $1,171,000 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 $2,371,000 in 1997 compared to realized gains of $1,275,000 in 1996. The losses in 1997 were primarily from net losses on debt securities totaling $1.7 million. The Company also incurred net losses totaling $485,000 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 $29.4 million and $26.4 million, respectively. The significant increase in expenses is due to higher life insurance benefit claims as previously described for the three months ended September 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 $8,937,000 from $21,733,000 in 1996 to $30,670,000 in 1997 for the same reasons as previously described for the three months ended September 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 33.2%. Federal income taxes for the nine months ended September 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 $109.9 million and $115.4 million for the nine months ended September 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 $9.8 million for the first nine months of 1996, but reflected a net cash outflow totaling $40.6 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 $110.6 million and $76.7 million for the nine months ended September 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 $384.3 million at September 30, 1997, reflecting an increase of $31.4 million from December 31, 1996. The increase in capital is primarily from net earnings of $27.1 million. A foreign currency translation adjustment of $2.3 million and an increase in net unrealized gains on investment securities totaling $2.0 million also contributed to the rise in stockholder's equity. Book value per share at September 30, 1997, was $110.06. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As more fully described in note 3 to the accompanying financial statements, on September 29, 1997, the United States Bankruptcy Court, Southern District of Texas, Houston, Texas, entered an order approving claims in the amount of $56,173,000 against The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc. The claims were filed by the Board of Trustees of Community College District No. 508, County of Cook, State of Illinois. The Westcap Corporation and Westcap Enterprises, Inc. have appealed this order. While The Westcap Corporation is a wholly owned brokerage subsidiary of National Western Life Insurance Company, National Western is not a party to the order or the bankruptcy proceeding, and the order of the Bankruptcy Court does not have any direct effect upon National Western. 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 A report on Form 8-K dated September 29, 1997, was filed by the Company disclosing an order entered by the United States Bankruptcy Court approving claims against The Westcap Corporation and its wholly owned subsidiary Westcap Enterprises, Inc., as previously described in note 3 to the accompanying financial statements and Item 1 above. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Western Life Insurance Company (Registrant) Date: November 12, 1997 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director Date: November 12, 1997 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer Date: November 12, 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 September 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Data)
1997 1996 Earnings applicable to common stock shares: Net earnings $ 9,529 12,560 Weighted average common stock shares outstanding 3,491 3,491 Primary and fully diluted earnings per common stock share: Net earnings $ 2.73 3.59
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Nine Months Ended September 30, 1997 and 1996 (Unaudited) (In Thousands Except Per Share Data)
1997 1996 Earnings (losses) applicable to common stock shares: Earnings from continuing operations $ 28,079 33,144 Losses from discontinued operations (1,000) - Net earnings $ 27,079 33,144 Weighted average common stock shares outstanding 3,491 3,491 Primary and fully diluted earnings (losses) per common stock share: Earnings from continuing operations $ 8.05 9.49 Losses from discontinued operations (0.29) - Net earnings $ 7.76 9.49
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 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 604,017 1,878,334 1,934,324 13,208 182,312 16,343 2,846,999 6,224 2,121 290,480 3,192,974 2,737,554 0 16,193 9,356 2,664 0 0 3,491 380,777 3,192,974 71,666 160,419 (2,371) 220 137,455 30,670 19,750 42,059 13,980 28,079 (1,000) 0 0 27,079 7.76 7.76 0 0 0 0 0 0 0 Consists of $11,682 revenues from traditional contracts subject to FAS 60 accounting treatment and $59,984 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $29,371 benefits paid to policyholders, $(2,096) decrease in reserves on traditional contracts and $110,180 interest on universal life and investment annuity contracts.
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