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, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ x ] No [ ]
As of November 10, 1994, the number of shares of Registrant's common stock
outstanding was: Class A - 3,284,672 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, 1994 (Unaudited) and December 31, 1993
Condensed Consolidated Statements of Earnings -
For the Three Months Ended September 30, 1994 and 1993 (Unaudited)
Condensed Consolidated Statements of Earnings -
For the Nine Months Ended September 30, 1994 and 1993 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Nine Months Ended September 30, 1994 and 1993 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1994 and 1993 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings per Common Share -
For the Three Months Ended September 30, 1994 and 1993 (Unaudited)
Exhibit 11 - Computation of Earnings per Common Share -
For the Nine Months Ended September 30, 1994 and 1993 (Unaudited)
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1994 1993
<S> <C> <C> <C>
Cash and investments:
Securities held to maturity, at amortized cost $ 1,626,748 1,787,360
Securities available for sale, at fair value in 1994
and aggregate market in 1993 305,456 39,355
Trading securities, at fair value 85,140 116,918
Mortgage loans, net of allowances for possible
losses ($6,290 and $6,849) 195,273 188,920
Policy loans 151,968 153,822
Other long-term investments 28,198 43,921
Securities purchased under agreements to resell 165,491 186,896
Cash and short-term investments 1,899 32,823
Total cash and investments 2,560,173 2,550,015
Brokerage trade receivables, net of allowances for
possible losses ($1,000 and $123) 12,754 55,163
Accrued investment income 29,530 28,901
Deferred policy acquisition costs 282,774 287,711
Other assets 17,280 19,261
$ 2,902,511 2,941,051
<FN>
Note: The balance sheet at December 31, 1993 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
LIABILITIES:
<S> <C> <C>
Future policy benefits:
Traditional life and annuity products $ 176,917 177,157
Universal life and investment annuity contracts 2,140,492 2,115,352
Other policyholder liabilities 21,714 24,211
Short-term borrowings 34,140 82,852
Securities sold not yet purchased 87,627 78,835
Securities sold under agreements to repurchase 122,093 127,971
Brokerage trade payables 11,049 39,422
Federal income tax payable:
Current - 4,823
Deferred 3,115 3,078
Other liabilities 31,907 44,632
Total liabilities 2,629,054 2,698,333
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 7)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares authorized;
3,284,672 shares issued and outstanding in 1994 and 1993 3,285 3,285
Class B - $1 par value; 200,000 shares authorized,
issued and outstanding in 1994 and 1993 200 200
Additional paid-in capital 24,356 24,356
Net unrealized gains (losses) on investment securities 30 (257)
Retained earnings 245,586 215,134
Total stockholders' equity 273,457 242,718
$ 2,902,511 2,941,051
<FN>
Note: The balance sheet at December 31, 1993 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 4,834 4,645
Universal life and investment annuity contract revenues 15,603 16,598
Net investment income 49,155 44,361
Brokerage revenues 7,594 23,148
Other income 749 730
Realized gains on investments 382 964
Total premiums and other revenue 78,317 90,446
Benefits and expenses:
Life and other policy benefits 7,746 8,038
Change in liabilities for future policy benefits 28 121
Amortization of deferred policy acquisition costs 7,715 8,503
Universal life and investment annuity contract interest 31,245 34,074
Other insurance operating expenses 6,361 9,935
Brokerage operating expenses 7,150 15,602
Total benefits and expenses 60,245 76,273
Earnings before Federal income tax 18,072 14,173
Provision for Federal income tax:
Current 5,107 3,346
Deferred 1,218 1,991
Total Federal income tax expense 6,325 5,337
Net earnings $ 11,747 8,836
Earnings per share of common stock:
Net earnings $ 3.37 2.54
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 14,003 14,572
Universal life and investment annuity contract revenues 48,972 50,776
Net investment income 142,255 135,322
Brokerage revenues 35,382 70,189
Other income 957 1,526
Realized gains on investments 2,486 2,277
Total premiums and other revenue 244,055 274,662
Benefits and expenses:
Life and other policy benefits 24,250 27,447
Decrease in liabilities for future policy benefits (240) (385)
Amortization of deferred policy acquisition costs 25,112 27,374
Universal life and investment annuity contract interest 95,880 98,829
Other insurance operating expenses 18,410 22,654
Brokerage operating expenses 33,794 48,166
Total benefits and expenses 197,206 224,085
Earnings before Federal income tax 46,849 50,577
Provision (benefit) for Federal income tax:
Current 16,587 19,577
Deferred (190) (1,917)
Total Federal income tax expense 16,397 17,660
Earnings before cumulative effect of change in
accounting principle 30,452 32,917
Cumulative effect of change in accounting for income taxes - 5,520
Net earnings $ 30,452 38,437
Earnings per share of common stock:
Earnings before cumulative effect of change in
accounting principle $ 8.74 9.46
Cumulative effect of change in accounting for income taxes - 1.58
Net earnings $ 8.74 11.04
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year 3,485 3,478
Shares issued for stock bonus plan - 3
Shares outstanding at end of period 3,485 3,481
Common stock:
Balance at beginning of year $ 3,485 3,478
Shares issued for stock bonus plan - 3
Balance at end of period 3,485 3,481
Additional paid-in capital:
Balance at beginning of year 24,356 24,065
Shares issued for stock bonus plan - 141
Balance at end of period 24,356 24,206
Net unrealized gains (losses) on investment securities
Balance at beginning of year (257) 138
Effect of change in accounting for investments
in debt and equity securities 26,610 -
Change in unrealized losses on investment
securities during the period (27,525) (138)
Net unrealized gain related to transfer of securities
available for sale to securities held to maturity 1,380 -
Amortization of net unrealized gain related to
transferred securities (178) -
Balance at end of period 30 0
Retained earnings:
Balance at beginning of year 215,134 158,410
Net earnings 30,452 38,437
Balance at end of period 245,586 196,847
Total stockholders' equity $ 273,457 224,534
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 30,452 38,437
Adjustments to reconcile net earnings to net cash
from operating activities:
Universal life and investment annuity contract interest 95,880 98,829
Surrender charges (25,426) (27,434)
Realized gains on investments (2,486) (2,277)
Accrual and amortization of investment income (10,355) (642)
Depreciation and amortization 768 589
Decrease (increase) in insurance receivables
and other assets 1,926 (2,647)
Decrease (increase) in brokerage receivables, net 14,036 (1,149)
Decrease (increase) in accrued investment income (629) 3,115
Decrease in deferred policy acquisition costs 6,585 11,166
Decrease in liability for future policy benefits (240) (385)
Increase (decrease) in other policyholder liabilities (2,498) 1,802
Decrease in Federal income tax payable (5,175) (14,053)
Decrease in other liabilities (12,724) (20,113)
Net decrease (increase) in repurchase agreements
less related liabilities 24,319 (115,679)
Decrease in trading securities 31,778 81,502
Other - (156)
Net cash provided by operating activities 146,211 50,905
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 7,362 -
Investments in debt securities - 64,876
Other investments 22,427 5,507
Proceeds from maturities and redemptions of:
Securities held to maturity 54,801 -
Securities available for sale 55,723 -
Investments in debt securities - 356,860
Purchases of:
Securities held to maturity (152,323) -
Securities available for sale (59,608) -
Investments in debt securities - (436,978)
Other investments (7,114) (11,164)
Principal payments on mortgage loans 20,933 10,931
Cost of mortgage loans acquired (26,912) (26,434)
Decrease in policy loans 1,854 330
Other (251) (259)
Net cash used in investing activities (83,108) (36,331)
<FN>
(Continued on next page)
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from financing activities:
Increase (decrease) in short-term borrowings $ (48,712) 41,416
Deposits to account balances for universal life
and investment annuity contracts 111,141 95,341
Return of account balances on universal life
and investment annuity contracts (156,456) (168,538)
Net cash used in financing activities (94,027) (31,781)
Net decrease in cash and short-term investments (30,924) (17,207)
Cash and short-term investments at beginning of year 32,823 31,203
Cash and short-term investments at end of period $ 1,899 13,996
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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 and
Commercial Adjusters, Inc. 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, 1994, and the results of its operations for the three
months and nine months ended September 30, 1994 and 1993 and its cash flows
for the nine months ended September 30, 1994 and 1993.
2. The results of operations for the three months and nine months ended
September 30, 1994 and 1993 are not necessarily indicative of the results
to be expected for the full year.
3. The Company paid no cash dividends on common stock during the nine
months ended September 30, 1994 and 1993.
4. In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt
securities. Those investments are to be classified in three categories and
accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses,
net of taxes and adjustments to deferred policy acquisition costs, excluded
from earnings and reported in a separate component of stockholders' equity.
Previous accounting policy was similar to the requirements of the new
statement. Significant differences were that securities available for sale
were reported at the lower of aggregate cost or market value, whereas SFAS
No. 115 requires reporting of these securities on an individual fair value
basis. Also, SFAS No. 115 provides stricter requirements and guidance on
the classification of securities among the three reporting categories.
Effective January 1, 1994, the Company adopted SFAS No. 115. Upon
adoption, approximately 60% of the Company's insurance operations debt
securities were reported as securities available for sale with the
remainder classified as securities held to maturity. The Company's
relatively small holdings of equity securities were also reported as
securities available for sale. Trading securities were composed entirely
of securities from the Company's brokerage operations. There was no change
in accounting policy for the trading securities as they were already being
recorded at fair value with fair value changes reflected in earnings.
Upon adoption of the new statement, certain related balance sheet accounts,
deferred federal income tax payable and deferred policy acquisition costs,
were adjusted as if the unrealized gains had actually been realized. For
the Company's universal life and investment annuity contracts, deferred
policy acquisition costs are amortized in relation to the present value of
expected gross profits on these policies. Accordingly, under SFAS No. 115,
deferred policy acquisition costs are adjusted for the impact on estimated
gross profits of net unrealized gains and losses on securities. The
implementation of the new statement had no effect on net earnings of the
Company. However, stockholders' equity was adjusted as follows as of
January 1, 1994:
<TABLE>
<CAPTION>
January 1,
1994
(In thousands)
<S> <C>
Fair value adjustment to investments in
debt and equity securities $ 93,788
Less:
Decrease in deferred policy acquisition costs (52,849)
Increase in deferred federal income taxes (14,329)
Effect of change in accounting
in debt and equity securities for investments $ 26,610
</TABLE>
At July 31, 1994, the Company transferred debt securities with market
values totaling $805 million from securities available for sale to
securities held to maturity. There were no changes in classifications of
the Company's equity or trading securities. Securities available for sale
now represent 15% of the Company's insurance operations debt securities as
compared to 60% prior to the transfers. The lower holdings of securities
available for sale will significantly reduce the Company's exposure to
equity volatility while still providing securities for liquidity and
asset/liability management purposes. The transfers of securities were
recorded at market values in accordance with SFAS No. 115. This statement
requires that the unrealized holding gain or loss at the date of the
transfer continue to be reported in a separate component of stockholders'
equity but shall be amortized over the remaining life of the security as an
adjustment of yield in a manner consistent with the amortization of any
premium or discount. The amortization of an unrealized holding gain or
loss reported in equity will offset or mitigate the effect on interest
income of the amortization of the premium or discount for the held-to-
maturity securities. The transfer of securities from available for sale to
held to maturity had no effect on net earnings of the Company. However,
stockholders' equity was adjusted as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Fair value adjustment to securities
transferred at July 31, 1994 $ 3,898
Less:
Decrease in deferred policy acquisition costs (1,775)
Increase in deferred federal income taxes (743)
Net unrealized gain related to securities transferred
to held to maturity at July 31, 1994 1,380
Less:
Amortization of net unrealized gain for the
period August 1 to September 30, 1994 (178)
Net unrealized gain related to securities transferred
to held to maturity at September 30, 1994 $ 1,202
</TABLE>
Net unrealized gains (losses) on investment securities included in
stockholders' equity at September 30, 1994 and December 31, 1993 are
as follows:
<TABLE>
<CAPTION>
September December
1994 1993
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 5,777 1,708
Gross unrealized losses (10,577) (2,176)
Adjustments for:
Deferred policy acquisition costs 2,997 -
Deferred Federal income taxes 631 211
(1,172) (257)
Net unrealized gain related to securities
transferred to held to maturity 1,202 -
Net unrealized gains (losses) on
investment securities $ 30 (257)
</TABLE>
5. The Company's brokerage subsidiary, The Westcap Corporation, incurred
trading losses during March, 1994, totaling $4,394,000, net of taxes and
related expenses. These trading losses have been recorded in the
consolidated financial statements for the three months ended March 31,
1994, and nine months ended September 30, 1994. As a result of these
losses, the Company has purchased an additional $4,400,000 of preferred
stock of The Westcap Corporation in 1994 and has agreed to provide a
$3,000,000 line of credit to Westcap. This infusion of capital was
important in order for Westcap to maintain its normal capital position,
which is well in excess of required financial operating ratios.
6. On March 25, 1994, the Community College District No. 508, County of
Cook and State of Illinois (The City Colleges) filed a complaint in the
United States District Court for the Northern District of Illinois, Eastern
Division, against National Western Life Insurance Company and subsidiaries
of The Westcap Corporation. The suit seeks rescission of securities
purchase transactions by The City Colleges from Westcap between September
9, 1993 and November 3, 1993, alleged compensatory damages, punitive
damages, injunctive relief, declaratory relief, fees and costs. Westcap
and the Company are of the opinions that Westcap has adequate documentation
to validate all such securities purchase transactions by The City Colleges,
and that Westcap and the Company each have adequate defenses to the
litigation. Although the alleged damages would be material to the
Company's financial position, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. A judicial
ruling favorable to Westcap was recently made requiring resolution of
the suit against Westcap through binding arbitration. The lawsuit against
National Western Life was suspended pending determination of the arbitration
proceeding against Westcap.
7. On August 5, 1994, the Sarasota-Manatee Airport Authority filed a
complaint in the United States District Court, Middle District of Florida,
Tampa Division, against National Western Life Insurance Company, The Westcap
Corporation and subsidiaries of Westcap. The suit seeks rescission of
securities purchase transactions by the Sarasota-Manatee Airport Authority
from Westcap, judgment for damages, or such other relief as the court may
deem appropriate. Westcap and the Company are of the opinions that Westcap
has adequate documentation to validate all such securities purchase
transactions by Sarasota-Manatee Airport Authority, and that Westcap and the
Company each have adequate defenses to the litigation. Although the alleged
damages would be material to Westcap's financial position, a reasonable
estimate of any actual losses which may result from this suit cannot be made
at this time.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994, as more fully described in the notes to the
financial statements. This statement addresses the accounting and
reporting for investments in debt and equity securities and required
classification of such securities into the following categories: held to
maturity, available for sale, and trading. The reporting category chosen
for the Company's securities investments depends on various factors
including the type and quality of the particular security and how it will
be incorporated into the Company's overall asset/liability management
strategy.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong
cash flows and matches expected maturities of assets and liabilities, the
Company has the ability to hold the securities as it would be unlikely that
forced sales of securities would be required prior to maturity to cover
payments of liabilities. As a result, fixed maturities 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
p a rticular 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 purchased by the Company's brokerage subsidiary that are held
for current resale are classified as trading securities. These securities
are typically held for short periods of time as the intent is to sell them
producing a trading profit. Trading securities are recorded in the
Company's financial statements at fair value. Any trading profits or losses
and unrealized gains or losses resulting from changes in the fair value of
the securities are reflected as a component of income in the Company's
financial statements.
Securities that are not classified as either held to maturity or trading
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 individual fair value. Any unrealized gains or losses
resulting from changes in the fair value of the securities are reflected as
a component of stockholders' equity.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
entire investment portfolio. Review procedures are performed on securities
that have had significant declines in fair value. The Company's objective
in these circumstances is to determine if the decline in fair value is due
to changing market expectations regarding inflation and general interest
rates or credit-related factors.
Additional review procedures are performed on those fair value declines
which are caused by factors other than market expectations regarding
inflation and general interest rates. Specific conditions of the issuer and
its ability to comply with all terms of the instrument are considered in
the evaluation of the realizable value of the investment. Information
reviewed in making this evaluation would include the recent operational
results and financial position of the issuer, information about its
industry, recent press releases and other available data. If evidence does
not exist to support a realizable value equal to or greater than the
carrying value of the investment, such decline in fair value is determined
to be other than temporary, and the carrying amount is reduced to its net
realizable value. The amount of the reduction is reported as a realized
loss.
Portfolio Analysis
At September 30, 1994, securities held to maturity totaled $1.627 billion
or 63.5% of total invested assets. The fair value of these securities was
$1.537 million which reflects gross unrealized losses of $90 million. The
unrealized losses within this portfolio result from increases in market
interest rates during 1994. These gross unrealized losses are partially
offset by $1,202,000 of net unrealized gains at September 30, 1994 recorded
as a separate component of stockholders' equity resulting from the transfer
of securities from available for sale to held to maturity as described in
the notes to the financial statements.
Securities available for sale totaled $305 million at September 30, 1994,
or 11.9% of total invested assets. Equity securities, which are included
in securities available for sale, continue to be a small component of the
Company's total investment portfolio totaling only $27 million. Securities
available for sale are reported in the accompanying financial statements at
fair value with changes in values reported as a separate component of
stockholders' equity. As previously described in the notes to the
financial statements, at July 31, 1994, the Company transferred securities
with market values totaling $805 million from securities available for sale
to securities held to maturity. The lower holdings of securities available
for sale will significantly reduce the Company's exposure to equity
volatility while still providing securities for liquidity and
asset/liability management purposes. The transfer resulted in locking in a
net unrealized gain totaling $1,380,000 as a separate component of
stockholders' equity which is subsequently being amortized. The net
unrealized loss of the remaining securities available for sale was
$1,172,000 at September 30, 1994.
The Company's insurance operations do not maintain a trading securities
portfolio. All trading securities reported in the accompanying financial
statements are held by the Company's brokerage subsidiary, The Westcap
Corporation. These securities totaled $85.1 million at September 30, 1994,
or 3.3% of total invested assets. Net decreases in the fair values of
these securities totaled approximately $1.9 million for the quarter ended
September 30, 1994, and have been included in earnings.
The Company's insurance operations maintain a diversified debt securities
portfolio which consists of various types of fixed income securities
including primarily U.S. government, public utilities, corporate and
mortgage-backed securities. Investments in mortgage-backed securities
include U.S. government and private issue mortgage-backed pass-through
securities as well as collateralized mortgage obligations (CMOs).
Mortgage-backed securities are subject to prepayment risk which can affect
portfolio yields. However, the Company substantially reduced its
prepayment risk in 1993 by investing primarily in collateralized mortgage
obligations which have more predictable cash flow patterns than
pass-through securities. The Company increased its holdings of planned
amortization class I (PAC I) CMOs which are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. This is
achieved by redirecting prepayments to other CMO classes. Due to this
strategy and increases in market interest rates, the Company has
experienced lower principal prepayments in the first nine months of 1994.
PAC I tranches continue to account for over 80% of the total CMO portfolio
as of September 30, 1994. 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. Based on investment philosophy and
current asset/liability analysis, the Company is limiting it holdings in
CMOs to its present level of approximately 36% of invested assets of the
insurance operations. The Company's investment mix between mortgage-backed
securities and other fixed income securities helps effectively balance
prepayment, extension and credit risks.
The Company also experienced increased calls in 1993 primarily in public
utilities holdings. The Company responded in 1993 with an active approach
in managing future call risk by investing the call proceeds in a more
diverse group of companies with increased call protection. As a result,
the Company's utilities holdings as a percentage of the entire portfolio
was reduced significantly. The Company's restructuring of this portion of
the portfolio and increases in market interest rates have been the major
factors in the reduction of calls in the nine months ended September 30,
1994.
The Company continues to minimize credit risk within its portfolio by
maintaining high quality investments in debt securities. Attention is
often placed on a company's holdings of below investment grade debt
securities, as these securities generally have greater default risk than
higher rated corporate debt. The issuers of such below investment grade
securities usually have high levels of indebtedness and are more sensitive
to adverse industry or economic conditions than are investment grade
securities issuers. The Company's small holdings of below investment grade
debt securities are summarized as follows:
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C> <C>
September 30, 1994 $ 26,138 24,414 1.0%
December 31, 1993 $ 24,261 24,223 1.0%
</TABLE>
The level of investments in debt securities which are in default as to
principal or interest payments is indicative of the Company's minimal
holdings of below investment grade debt securities. At September 30, 1994,
and December 31, 1993, securities with principal balances totaling only
$3,151,000 were in default and on non-accrual status.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
The Company continues to improve the quality of its mortgage loan portfolio
through strict underwriting guidelines and diversification of underlying
property types and geographic locations. In addition to all mortgage
loans being secured by the property, the majority of loans originated since
1991 are amortized over the term of the lease on the property, which is
guaranteed by the lessee, and are approved based on the credit strength of
the lessee. This approach also enables the Company to choose the locale in
which the property securing the loan is located. In addition, the
Company's underwriting guidelines require a loan-to-value ratio of 75% or
less.
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans
is typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities. The Company
currently seeks loans ranging from $500,000 to $11,000,000, with terms
ranging from three to twenty-five years, at interest rates dictated by the
marketplace.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio. The majority of real estate
owned was acquired through mortgage loan foreclosures. The Company has no
current plans to significantly increase its investments in real estate in
the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $195,273,000
and $188,920,000, or 7.6% and 7.4% of total invested assets, at September
30, 1994, and December 31, 1993, respectively. The loans are real estate
mortgages substantially all of which are related to commercial properties
and developments and have fixed interest rates.
As of September 30, 1994, the allowance for possible losses on mortgage
loans was $6,290,000. Additions of $135,000 were made to the allowance in
the quarter ended September 30, 1994. While management uses available
information to recognize losses, future additions to the allowance may be
necessary based on changes in economic conditions, particularly in the
region which includes Texas, Louisiana, Oklahoma, and Arkansas.
The Company currently places all loans past due three months or more on a
non-accrual status, thus recognizing no interest income on the loans. At
September 30, 1994, and December 31, 1993, the Company had approximately
$1,762,000 and $4,191,000, respectively, of mortgage loan principal
balances on a non-accrual status. For the three months ended September 30,
1994 and 1993, the approximate reduction in interest income associated with
non-accrual loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1994 1993
(In thousands)
<S> <C> <C> <C>
Interest income at contract rate $ 88 522
Interest income recognized 74 213
Interest income not accrued $ 14 309
</TABLE>
In addition to the non-accrual loans, the Company had mortgage loans with
restructured terms totaling approximately $17,768,000 and $14,257,000 at
September 30, 1994, and December 31, 1993, respectively. For the three
months ended September 30, 1994 and 1993, the approximate reduction in
interest income associated with restructured loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1994 1993
(In thousands)
<S> <C> <C> <C>
Interest income under original terms $ 505 414
Interest income recognized 451 363
Reduction in interest income $ 54 51
</TABLE>
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $21,024,000 and
$22,672,000 at September 30, 1994, and December 31, 1993, 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 losses on these
properties of approximately $264,000 and $94,000 for the three months ended
September 30, 1994 and 1993, respectively. 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. Realized losses totaling $154,000 were recognized due
to declines in values of properties for the three months ended September
30, 1994. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed.
However, the amounts expended for this maintenance have not had a
significant impact on the Company's liquidity and capital resources, and
such maintenance is not foreseen to have a significant impact in the near
future.
RESULTS OF OPERATIONS
The significant changes and fluctuations between the three months ended
September 30, 1994 and 1993 are described in detail as follows:
Premium Revenues: This revenue category represents the premiums on
traditional type products. However, sales in most of the Company's markets
have moved toward non-traditional types such as universal life and
investment annuities. Although premium revenues increased slightly in the
third quarter of 1994, this move in market direction has resulted in a
decrease in revenues in this category over the past several years.
Universal Life and Investment Annuity Contract Revenues: These revenues are
from the Company's non-traditional products which are universal life and
investment annuities. Revenues from these types of products consist of
policy charges for the cost of insurance, policy administration fees and
surrender charges assessed during the period. The decrease from 1993 is
primarily due to lower policy surrenders resulting in reduced surrender
charge revenues.
In addition to the decrease in surrender charge revenues described above,
the Company has experienced a decline in universal life and investment
annuity deposits over the past several years. Much of the decline is due
to the discontinuance of the Company's two-tier annuity products in 1992
and increased competition due to market interest rate conditions. However,
the Company continues to develop new annuity and life products and
continues to contract with new independent marketing organizations to
further strengthen and diversify distribution channels for the sale of such
products. The Company also increased annuity marketing efforts in the
second quarter of 1994 through personnel additions and product
enhancements. As a result, universal life and investment annuity deposits
collected increased in the third quarter of 1994. Deposits collected for
the quarters ended September 30, 1994 and 1993 were 60.0 million and $35.1
million, respectively.
Net Investment Income: Net investment income increased $4,794,000 from
$44,361,000 in 1993 to $49,155,000 in 1994. Net investment income was up
primarily due to yield and amortization adjustments on mortgage-backed
securities and increases in invested assets. 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.
Brokerage Revenues and Expenses: Third quarter 1994 net earnings from the
Company's brokerage subsidiary, The Westcap Corporation, totaled $288,000
or $0.08 per share compared to $4,980,000 or $1.43 per share for the third
quarter of 1993. Adverse bond market conditions due to increasing market
interest rates is the major factor for the lower earnings for the
subsidiary.
Realized Gains on Investments: The Company had realized gains of $382,000
in 1994 compared to $964,000 in 1993. The 1994 realized gains consist
primarily of gains on real estate sales. The 1994 and 1993 gains are net
of write-downs totaling $289,000 and $1,471,000, respectively, relating to
real estate, mortgage loans and investments in debt securities.
Other Insurance Operating Expenses: Other insurance operating expenses
were down over 35% as third quarter 1993 expenses included a charge of
$3,700,000 for state guaranty fund assessments relating to insolvent
companies.
The significant changes and fluctuations between the nine months ended
September 30, 1994 and 1993 are described in detail as follows:
Universal Life and Investment Annuity Contract Revenues: Consistent with
the third quarter 1994 results described above, universal life and
investment annuity contract revenues have declined approximately 3.6% from
1993 due primarily to lower policy surrenders resulting in reduced
surrender charge revenues.
Net Investment Income: Net investment income increased from the 1993
amount for the same reasons as previously described for the three month
period. Rising market interest rates during the nine month period ended
September 30, 1994, has had a minimal effect on investment income.
Brokerage Revenues and Expenses: Net earnings from The Westcap Corporation
for the nine month period ended September 30, 1994, totaled $1,032,000 or
$0.29 per share compared to $14,523,000 or $4.17 per share for the same
period of 1993. The significant decrease in brokerage earnings is due to
trading losses incurred during March, 1994, totaling $4,394,000, net of
taxes and related expenses, and adverse bond market conditions due to
increasing market interest rates as previously described.
Other Income: Other income was higher in 1993 as it includes non-recurring
proceeds from two lawsuit settlements totaling $1,420,000.
Realized Gains on Investments: Realized gains on investments of $2.5
million were recorded in 1994 as compared to $2.3 million for the same
period of 1993. The 1993 gains are net of write-downs relating to real
estate, mortgage loans and investments in debt securities totaling
$5,853,000. The 1994 gains, resulting primarily from debt securities
redemptions, include no significant writedowns.
Life and Other Policy Benefits: Benefit expenses decreased 11.6% due
primarily to lower life insurance benefit claims. These expenses declined
in 1994 to a level which is more consistent with prior Company experience.
Comparative 1993 expenses were abnormally high due to adverse claims
experience.
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 for 1994
was $25,112,000 compared to $27,374,000 for 1993. The decrease in
amortization in 1994 directly correlates to the decrease in policy
surrenders and surrender charge revenues.
Other Insurance Operating Expenses: These expenses were down in 1994 as
the 1993 amount includes charges for state guaranty fund assessments as
previously described for the three month period.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by funds
provided from the life insurance operations. Policy 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. The Company's brokerage subsidiary uses revolving lines of credit
to complement any funds generated from operations. These lines of credit
are used primarily for clearing functions for all securities transactions
with its customers. National Western also has a $60 million bank line of
credit. The line of credit is primarily used for cash management purposes
relating to investment transactions.
Most of the Company's assets, other than policy loans and deferred policy
acquisition costs, are invested in bonds and other securities,
substantially all of which are readily marketable. Although there is no
present need or intent to dispose of such investments, the Company could
liquidate portions of the investments should the need arise subject to the
accounting and disclosure requirements of SFAS No. 115. Additionally, the
Company has use of the line of credit for short-term liquidity needs for
periods not exceeding 30 days. The Company expects future cash flows to be
adequate to meet the demands for funds.
The Company had no long-term debt during 1994 or 1993. There are no present
material commitments for capital expenditures in 1994, and the Company does
not anticipate incurring any such commitments through the remainder of
1994.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Part 1 - Exhibit 11: Computation of Earnings Per Common Share
(b) Part 1 - Exhibit 27: Financial Data Schedule: This schedule was
included only in the electronic filing for the purposes of the Securities
and Exchange Commission.
(c) Reports on Form 8-K: There were no reports on Form 8-K filed
during the quarter ended September 30, 1994.
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Three Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C> <C>
Earnings applicable to common shares:
Net earnings $ 11,747 8,836
Weighted average common shares outstanding 3,485 3,481
Earnings per common share:
Net earnings $ 3.37 2.54
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Nine Months Ended September 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C> <C>
Earnings applicable to common shares:
Earnings before cumulative effect of
change in accounting principle $ 30,452 32,917
Cumulative effect of change in
accounting for income taxes - 5,520
Net earnings $ 30,452 38,437
Weighted average common shares outstanding 3,485 3,481
Earnings per common share:
Earnings before cumulative effect of
change in accounting principle $ 8.74 9.46
Cumulative effect of change in income taxes - 1.58
Net earnings $ 8.74 11.04
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Western Life Insurance Company
(Registrant)
Date: November 10, 1994 /S/ Ross R. Moody
Ross R. Moody
President and Chief Operating Officer
Date: November 10, 1994 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1994 FINANCIAL STATEMENTS OF NATIONAL WESTERN LIFE INSURANCE COMPANY AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 390,596
<DEBT-CARRYING-VALUE> 1,626,748
<DEBT-MARKET-VALUE> 1,536,908
<EQUITIES> 27,327
<MORTGAGE> 195,273
<REAL-ESTATE> 21,024
<TOTAL-INVEST> 2,560,173
<CASH> 1,899
<RECOVER-REINSURE> 1,125
<DEFERRED-ACQUISITION> 282,774
<TOTAL-ASSETS> 2,902,511
<POLICY-LOSSES> 2,317,409
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,892
<POLICY-HOLDER-FUNDS> 9,822
<NOTES-PAYABLE> 34,140
<COMMON> 3,485
0
0
<OTHER-SE> 269,972
<TOTAL-LIABILITY-AND-EQUITY> 2,902,511
62,975<F1>
<INVESTMENT-INCOME> 142,255
<INVESTMENT-GAINS> 2,486
<OTHER-INCOME> 957
<BENEFITS> 119,890<F2>
<UNDERWRITING-AMORTIZATION> 25,112
<UNDERWRITING-OTHER> 18,410
<INCOME-PRETAX> 46,849
<INCOME-TAX> 16,397
<INCOME-CONTINUING> 30,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,452
<EPS-PRIMARY> 8.74
<EPS-DILUTED> 8.74
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Consists of $14,003 revenues from traditional contracts subject to FAS 60
accounting treatment and $48,972 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $24,250 benefits paid to policyholders, $<240> decrease in
reserves on traditional contracts and $95,880 interest on univeral life and
investment annuity contracts.
</FN>
</TABLE>
