UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 11, 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:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1994 (Unaudited) and December 31, 1993
Condensed Consolidated Statements of Earnings -
For the Three Months Ended March 31, 1994 and 1993 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Three Months Ended March 31, 1994 and 1993 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 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 March 31, 1994 and 1993 (Unaudited)
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1994 1993
<S> <C> <C>
Cash and investments:
Securities held to maturity, at
amortized cost $ 753,866 1,787,360
Securities available for sale, at
fair value in 1994 and aggregate
market in 1993 1,145,517 39,355
Mortgage loans, net of allowances for
possible losses ($6,824 and $6,849) 194,550 188,920
Policy loans 152,806 153,822
Other long-term investments 35,073 43,921
Securities purchased under agreements
to resell 236,249 186,896
Trading securities, at fair value 189,911 116,918
Cash and short-term investments 16,213 32,823
Total cash and investments 2,724,185 2,550,015
Brokerage trade receivables, net of
allowances for possible losses
($1,000 and $123) 44,226 55,163
Accrued investment income 29,330 28,901
Deferred policy acquisition costs 258,451 287,711
Other assets 24,840 19,261
$3,081,032 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)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 177,104 177,157
Universal life and investment
annuity contracts 2,114,771 2,115,352
Other policyholder liabilities 23,222 24,211
Short-term borrowings 120,323 82,852
Securities sold not yet purchased 53,325 78,835
Securities sold under agreements
to repurchase 245,564 127,971
Brokerage trade payables 43,728 39,422
Federal income tax payable:
Current 3,469 4,823
Deferred 9,489 3,078
Other liabilities 25,527 44,632
Total liabilities 2,816,522 2,698,333
<FN>
COMMITMENTS AND CONTINGENCIES (Note 6)
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY:
<S> <C> <C>
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 13,024 (257)
Retained earnings 223,645 215,134
Total stockholders' equity 264,510 242,718
$3,081,032 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 March 31, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1994 1993
Premiums and other revenue:
<S> <C> <C>
Life and annuity premiums $ 4,934 4,870
Universal life and investment annuity
contract revenues 16,248 16,017
Net investment income 45,764 44,803
Brokerage revenues 15,010 21,562
Other income 155 46
Realized gains on investments 1,714 514
Total premiums and other revenue 83,825 87,812
Benefits and expenses:
Life and other policy benefits 7,886 10,063
Decrease in liabilities for future
policy benefits (65) (620)
Amortization of deferred policy
acquisition costs 8,718 9,494
Universal life and investment annuity
contract interest 32,462 32,129
Other insurance operating expenses 6,029 5,999
Brokerage operating expenses 15,702 15,137
Total benefits and expenses 70,732 72,202
Earnings before Federal income tax 13,093 15,610
Provision (benefit) for Federal income tax:
Current 5,396 7,647
Deferred (814) (2,372)
Total Federal income tax expense 4,582 5,275
Earnings before cumulative effect of change
in accounting principle 8,511 10,335
Cumulative effect of change in accounting
for income taxes - 5,520
Net earnings $ 8,511 15,855
Earnings per share of common stock:
Earnings before cumulative effect of change
in accounting principle $ 2.44 2.97
Cumulative effect of change in accounting
for income taxes - 1.58
Net earnings $ 2.44 4.55
<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 Three Months Ended March 31, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
Common stock shares outstanding:
<S> <C> <C>
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 - 140
Balance at end of period 24,356 24,205
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 gains (losses) on
investment securities during the period (13,329) 566
Balance at end of period 13,024 704
Retained earnings:
Balance at beginning of year 215,134 158,410
Net earnings 8,511 15,855
Balance at end of period 223,645 174,265
Total stockholders' equity $ 264,510 202,655
<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 Three Months Ended March 31, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,511 15,855
Adjustments to reconcile net earnings to
net cash from operating activities:
Universal life and investment annuity
contract interest 32,462 32,129
Surrender charges (8,466) (8,307)
Realized gains on investments (1,714) (514)
Accrual and amortization of
investment income (2,655) (228)
Depreciation and amortization 242 189
Increase in insurance receivables
and other assets (5,602) (1,608)
Decrease in brokerage receivables 15,243 5,585
Decrease (increase) in accrued
investment income (429) 622
Decrease in deferred policy
acquisition costs 3,840 3,814
Decrease in liability for future policy
policy benefits (65) (620)
Increase (decrease) in other
policyholder liabilities (989) 2,960
Decrease in Federal income tax payable (2,168) (5,828)
Decrease in other liabilities (18,758) (15,483)
Net decrease in repurchase agreements
less related liabilities 42,730 22,016
Increase in trading securities (72,993) (15,200)
Other (240) (72)
Net cash provided by (used in)
operating activities (11,051) 35,310
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 757 -
Investments in debt securities - 36,649
Other investments 11,652 3,298
Proceeds from maturities and redemptions of:
Securities held to maturity 14,223 -
Securities available for sale 52,269 -
Investments in debt securities - 101,002
Purchases of:
Securities held to maturity (79,434) -
Securities available for sale (10,294) -
Investments in debt securities - (188,197)
Other investments (1,968) (3,269)
Principal payments on mortgage loans 2,204 2,943
Cost of mortgage loans acquired (8,664) (8,780)
Decrease (increase) in policy loans 1,016 (128)
Other (112) (102)
Net cash used in investing activities (18,351) (56,584)
</TABLE>
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1994 and 1993
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Cash flows from financing activities:
Net increase in short-term borrowings $ 37,471 9,736
Deposits to account balances for
universal life
and investment annuity contracts 26,785 35,938
Return of account balances on universal
life and investment annuity contracts (51,464) (51,954)
Net cash provided by (used in) financing
activities 12,792 (6,280)
Net decrease in cash and short-term
investments (16,610) (27,554)
Cash and short-term investments at
beginning of year 32,823 31,203
Cash and short-term investments at
end of period $ 16,213 3,649
<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 March 31, 1994,
and the results of its operations and its cash flows for the three months
ended March 31, 1994 and 1993.
2. The results of operations for the three months ended March 31, 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 three
months ended March 31, 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. Approximately
60% of the Company's debt securities are now reported as securities
available for sale with the remainder classified as securities held to
maturity. The Company's relatively small holdings of equity securities are
also reported as securities available for sale. Trading securities are
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 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 acquision costs (52,849)
Increase in deferred federal income taxes (14,329)
Effect of change in accounting for investments
in debt and equity securities $ 26,610
</TABLE>
Net unrealized gains on investment securities included in stockholders'
equity at March 31, 1994 and December 31, 1993 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 60,068 1,708
Gross unrealized losses (14,610) (2,176)
Adjustments for:
Deferred policy acquisition costs (25,420) -
Deferred Federal income taxes (7,014) 211
Net unrealized gains (losses) on
investment securities $ 13,024 (257)
</TABLE>
The tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at March 31, 1994:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and other U.S.
government corporations and agencies $ 21,200 969 - 22,169
States and political subdivisions 6,424 1,008 - 7,432
Foreign governments 17,677 - 1,402 16,275
Public utilities 197,426 2,767 6,016 194,177
Corporate 305,861 3,514 11,954 297,421
Mortgage-backed 205,278 1,169 9,221 197,226
Totals $ 753,866 9,427 28,593 734,700
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and other U.S.
government corporations and agencies $ 14,873 588 2,156 13,305
States and political subdivisions 2,000 84 - 2,084
Foreign governments 6,743 215 1,006 5,952
Public utilities 89,221 2,202 1,047 90,376
Corporate 204,332 8,443 3,763 209,012
Mortgage-backed 754,908 46,894 5,529 796,273
Equity securities 27,982 1,642 1,109 28,515
Totals $ 1,100,059 60,068 14,610 1,145,517
</TABLE>
The amortized cost and fair values of investments in debt securities at
March 31, 1994, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Securities
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Due in 1 year or less $ - - 1,999 2,045
Due after 1 year through 5 years 16,055 16,872 48,227 46,495
Due after 5 years through 10 years 181,310 174,326 100,854 102,258
Due after 10 years 351,223 346,276 166,089 169,931
548,588 537,474 317,169 320,729
Mortgage-backed securities 205,278 197,226 754,908 796,273
Totals $ 753,866 734,700 1,072,077 1,117,002
</TABLE>
Proceeds from sales of securities available for sale totaled $757,000 for
the quarter ended March 31, 1994. Gross gains of $7,000 were realized on
those sales. The Company uses the specific identification method in
computing realized gains and losses. Net increases in the fair values of
trading securities totaled $228,000 for the quarter ended March 31, 1994,
and have been included in earnings.
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 produced a net loss from brokerage
operations of $450,000 or $0.13 per share for the quarter ended March 31,
1994. As a result of these losses, the Company has purchased an additional
$4,400,000 of preferred stock of The Westcap Corporation 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 28, 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. No discovery has
occurred, no judicial proceedings or hearings have occurred, and no answers
or responses have been prepared or filed. Westcap and the Company are of
the opinions that Westcap has adequate documentation to validate all of 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.
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. Although approximately 60% of the Company's debt
securities are now reported as securities available for sale, a significant
strategy within the Company's investment philosophy is still the intent to
hold investments in debt securities to maturity. However, the significant
holdings of securities available for sale 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. 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
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 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 March 31, 1994, securities held to maturity totaled $754 million or 27.7%
of total invested assets. The fair value of these securities was $735
million which reflects gross unrealized losses of $19 million. The
unrealized losses within this portfolio result from the recent increases in
market interest rates.
Securities available for sale totaled $1.146 billion at March 31, 1994, or
42.0% 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 $29 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. The fair value of this portfolio declined $13.3
million during the quarter ended March 31, 1994, net of effects of deferred
federal income taxes and adjustments to deferred policy acquisition costs.
This decline is also reflective of the recent increase in market interest
rates. However, the portfolio still maintained net unrealized gains
totaling $13 million at March 31, 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 $190 million at March 31, 1994, or
7.0% of total invested assets. Net increases in the fair values of these
securities totaled $228,000 for the quarter ended March 31, 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 the recent increase in
market interest rates, the Company has experienced lower principal
prepayments in the first quarter of 1994.
PAC I tranches continue to account for over 80% of the total CMO portfolio
as of March 31, 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.
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 has been a factor in the reduction of calls in the quarter ended
March 31, 1994.
In addition to managing prepayment and call risk, the Company continues to
maintain high quality investments in debt securities. Much attention is
often placed on a company's holdings of below investment grade debt
securities, as these securities generally have greater default risk than
higher rated corporate debt. These issuers usually have high levels of
indebtedness and are more sensitive to adverse industry or economic
conditions than are investment grade issuers. The Company's small holdings
of below investment grade debt securities, which are summarized as follows,
increased slightly from 1993 primarily due to two corporate issuers that
were downgraded.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
March 31, 1994 $ 32,262 34,233 1.2%
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 March 31, 1994, and
December 31, 1993, securities with principal balances totaling $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 most cases, mortgage loans are
now guaranteed by the borrower and secured by the property, amortized over
the term of the lease on the property which is guaranteed by the lessee, and
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 still
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 $194,550,000 and
$188,920,000, or 7.1% and 7.4% of total invested assets, at March 31, 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 March 31, 1994, the allowance for possible losses on mortgage loans
was $6,824,000. No additions were made to the allowance in the quarter ended
March 31, 1994, 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 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
March 31, 1994, and December 31, 1993, the Company had approximately
$3,242,000 and $4,191,000, respectively, of mortgage loan principal balances
on a non-accrual status. For the three months ended March 31, 1994 and 1993,
the approximate reduction in interest income associated with non-accrual
loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
(In thousands)
<S> <C> <C>
Interest income at contract rate $ 87 224
Interest income recognized 15 33
Interest income not accrued $ 72 191
</TABLE>
In addition to the non-accrual loans, the Company had mortgage loans with
restructured terms totaling approximately $17,231,000 and $14,257,000 at
March 31, 1994, and December 31, 1993, respectively. For the three months
ended March 31, 1994 and 1993, the approximate reduction in interest income
associated with restructured loans was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
(In thousands)
<S> <C> <C>
Interest income under original terms $ 465 432
Interest income recognized 413 370
Reduction in interest income $ 52 62
</TABLE>
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $22,303,000 and $22,672,000
at March 31, 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 small operating losses on these properties
of approximately $60,000 and $81,000 for the three months ended March 31,
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. No significant realized losses were recognized due to
declines in values of properties for the three months ended March 31, 1994
and 1993, respectively. 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 has 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
March 31, 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 these revenues were up slightly in 1994 as
compared to 1993, the change in marketing 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. There were no significant
changes in the level or mix of these revenues for the quarter ended March
31, 1994, as compared to the same 1993 period. However, these revenues have
been increasing steadily over the past two years. The majority of the
increase is due to surrender charge revenues from increased policy
surrenders. Lowering of credited interest rates and increased competition
over the past two years has had a significant impact on the level of policy
surrenders. Also, although these revenues have been trending upward, the
actual universal life and investment annuity deposits collected have
decreased over the past several years. Deposits collected for the quarters
ended March 31, 1994 and 1993 were $34.6 million and $43.6 million,
respectively.
The decline in universal life and investment annuity deposits is related to
the discontinuance of the Company's two-tier annuity products in 1992 and
increased competition due to market interest rate conditions. The
discontinued products have been replaced with single-tier annuities, and the
Company anticipates somewhat lower deposit collections than in previous
years during this transition period. However, the Company anticipates that
this decline will be reversed as efforts have continued to develop new
annuity and life products for sale and distribution through independent
marketing organizations. In addition to new product developments, the
Company has contracted with additional independent marketing organizations
to further strengthen and diversify distribution channels. Also, many
products are developed specifically for these organizations to meet the
needs for a particular customer base.
Net Investment Income: Net investment income increased $961,000 from
$44,803,000 in 1993 to $45,764,000 in 1994. The majority of the increase
resulted from additional amortization of discounts on investments in debt
securities.
Brokerage Revenues and Expenses: 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
produced a net loss from brokerage operations of $450,000 or $0.13 per share
for the quarter ended March 31, 1994.
Realized Gains on Investments: The Company had realized gains of $1,714,000
in 1994 as compared to $514,000 in 1993. The 1994 realized gains consist
primarily of gains on investments in debt securities called for redemption.
The 1993 gains are net of write-downs totaling $2,000,000 relating to real
estate, mortgage loans and investments in debt securities. No write-downs
were recorded in 1994.
Life and Other Policy Benefits: Expenses for 1994 and 1993 were $7.9
million and $10.1 million, respectively. The significant decrease in
expenses is due to lower life insurance benefit claims and surrenders.
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.
Cumulative Effect of Change in Accounting for Income Taxes: In February,
1992, the Financial Accounting Standards Board issued SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires a change from the
deferred method of accounting for income taxes of Accounting Principles
Board Opinion 11 to the asset and liability method of accounting for income
taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative
effect of this change in accounting for income taxes of $5,520,000 was
determined as of January 1, 1993, and is reported separately in the
statement of earnings for the three months ended March 31, 1993.
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. 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) Reports on Form 8-K: There were no reports on Form 8-K filed
during the quarter ended March 31, 1994.
EXHIBIT 11
<TABLE>
<CAPTION>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Three Months Ended March 31, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Data)
1994 1993
<S> <C> <C>
Earnings applicable to common shares:
Earnings before cumulative effect of
change in accounting principle $ 8,511 10,335
Cumulative effect of change in
accounting for income taxes - 5,520
Net earnings $ 8,511 15,855
Weighted average common shares outstanding 3,485 3,481
Earnings per common share:
Earnings before cumulative effect of
change in accounting principle $ 2.44 2.97
Cumulative effect of change in
accounting for income taxes - 1.58
Net earnings $ 2.44 4.55
</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: May 11, 1994 /S/ Ross R. Moody
Ross R. Moody
President and Chief Operating Officer
Date: May 11, 1994 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer
