UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ x ] No [ ]
As of August 11, 1995, the number of shares of Registrant's common stock
outstanding was: Class A - 3,288,192 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1995 (Unaudited) and December 31, 1994
Condensed Consolidated Statements of Earnings -
For the Three Months Ended June 30, 1995 and 1994 (Unaudited)
Condensed Consolidated Statements of Earnings -
For the Six Months Ended June 30, 1995 and 1994 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Six Months Ended June 30, 1995 and 1994 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1995 and 1994 (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 June 30, 1995 and 1994 (Unaudited)
Exhibit 11 - Computation of Earnings per Common Share -
For the Six Months Ended June 30, 1995 and 1994 (Unaudited)
Signature
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1995 1994
<S> <C> <C> <C>
Cash and investments:
Securities held to maturity, at amortized cost $ 1,657,405 1,605,813
Securities available for sale, at fair value 466,678 354,300
Mortgage loans, net of allowances for possible
losses ($5,668 and $5,929) 194,732 189,632
Policy loans 150,315 151,487
Other long-term investments 27,891 24,872
Securities purchased under agreements to resell 123,188 153,971
Trading securities, at fair value 46,445 69,666
Cash and short-term investments 18,155 21,247
Total cash and investments 2,684,809 2,570,988
Brokerage trade receivables, net of allowances for
possible losses ($1,000 and $1,000) 3,789 675
Accrued investment income 34,450 32,711
Deferred policy acquisition costs 280,776 291,274
Other assets 16,623 19,406
$ 3,020,447 2,915,054
<FN>
Note: The balance sheet at December 31, 1994 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
LIABILITIES:
<S> <C> <C> <C>
Future policy benefits:
Traditional life and annuity products $ 175,561 177,429
Universal life and investment annuity contracts 2,324,223 2,194,264
Other policyholder liabilities 22,504 23,183
Short-term borrowings 3,301 29,698
Securities sold not yet purchased 49,546 87,336
Securities sold under agreements to repurchase 106,585 91,781
Brokerage trade payables 805 3,692
Federal income taxes payable:
Current 2,217 -
Deferred 5,410 1,996
Other liabilities 34,369 30,541
Total liabilities 2,724,521 2,639,920
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares authorized;
3,288,192 shares issued and outstanding in
1995 and 1994 3,288 3,288
Class B - $1 par value; 200,000 shares authorized,
issued and outstanding in 1995 and 1994 200 200
Additional paid-in capital 24,475 24,475
Net unrealized gains (losses) on
investment securities 5,859 (2,199)
Retained earnings 262,104 249,370
Total stockholders' equity 295,926 275,134
$ 3,020,447 2,915,054
<FN>
Note: The balance sheet at December 31, 1994 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 3,827 4,235
Universal life and investment annuity
contract revenues 17,088 17,121
Net investment income 50,849 47,336
Brokerage revenues 2,932 12,778
Other income 126 53
Realized gains on investments 168 390
Total premiums and other revenue 74,990 81,913
Benefits and expenses:
Life and other policy benefits 8,670 8,618
Decrease in liabilities for future policy benefits (618) (203)
Amortization of deferred policy acquisition costs 7,840 8,679
Universal life and investment annuity
contract interest 36,177 32,173
Other insurance operating expenses 7,122 6,020
Brokerage operating expenses 4,337 10,942
Total benefits and expenses 63,528 66,229
Earnings before Federal income taxes 11,462 15,684
Provision (benefit) for Federal income taxes:
Current 5,188 6,084
Deferred (1,136) (594)
Total Federal income taxes 4,052 5,490
Net earnings $ 7,410 10,194
Earnings per share of common stock:
Net earnings $ 2.12 2.93
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 8,680 9,169
Universal life and investment annuity
contract revenues 34,154 33,369
Net investment income 98,844 93,100
Brokerage revenues 6,657 27,788
Other income 585 208
Realized gains on investments 301 2,104
Total premiums and other revenue 149,221 165,738
Benefits and expenses:
Life and other policy benefits 20,220 16,504
Decrease in liabilities for future policy benefits (1,868) (268)
Amortization of deferred policy acquisition costs 17,093 17,397
Universal life and investment annuity
contract interest 70,448 64,635
Other insurance operating expenses 13,980 12,049
Brokerage operating expenses 9,695 26,644
Total benefits and expenses 129,568 136,961
Earnings before Federal income taxes 19,653 28,777
Provision (benefit) for Federal income taxes:
Current 7,844 11,480
Deferred (925) (1,408)
Total Federal income taxes 6,919 10,072
Net earnings $ 12,734 18,705
Earnings per share of common stock:
Net earnings $ 3.65 5.37
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year and
end of period 3,488 3,485
Common stock:
Balance at beginning of year and end of period $ 3,488 3,485
Additional paid-in capital:
Balance at beginning of year and end of period 24,475 24,356
Net unrealized gains (losses) on investment
ecurities:
Balance at beginning of year (2,199) (257)
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 8,738 (27,875)
Amortization of net unrealized gain related
to transfer of securities available for
sale to securities held to maturity (680) -
Balance at end of period 5,859 (1,522)
Retained earnings:
Balance at beginning of year 249,370 215,134
Net earnings 12,734 18,705
Balance at end of period 262,104 233,839
Total stockholders' equity $ 295,926 260,158
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,734 18,705
Adjustments to reconcile net earnings to net cash
from operating activities:
Universal life and investment annuity
contract interest 70,448 64,635
Surrender charges (16,811) (17,755)
Realized gains on investments (301) (2,104)
Accrual and amortization of investment income (3,809) (5,136)
Depreciation and amortization 525 501
Decrease in insurance receivables
and other assets 1,887 800
Decrease (increase) in brokerage receivables, net (6,001) 16,536
Increase in accrued investment income (1,739) (1,936)
Decrease (increase) in deferred policy
acquisition costs (7,385) 6,876
Decrease in liability for future policy benefits (1,868) (268)
Decrease in other policyholder liabilities (679) (2,336)
Increase (decrease) in Federal income
taxes payable 2,219 (6,013)
Increase (decrease) in other liabilities 3,735 (14,423)
Net decrease (increase) in repurchase
agreements less related liabilities 7,797 (5,376)
Decrease in trading securities 23,221 22,726
Net cash provided by operating activities 83,973 75,432
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity 4,180 -
Securities available for sale 31,200 7,210
Other investments 1,135 13,567
Proceeds from maturities and redemptions of:
Securities held to maturity 28,006 20,722
Securities available for sale 3,338 76,877
Purchases of:
Securities held to maturity (83,489) (105,573)
Securities available for sale (112,692) (51,051)
Other investments (3,805) (5,887)
Principal payments on mortgage loans 8,133 19,251
Cost of mortgage loans acquired (13,902) (15,024)
Decrease in policy loans 1,172 2,271
Other (267) (216)
Net cash used in investing activities (136,991) (37,853)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash flows from financing activities:
Decrease in short-term borrowings $ (26,397) (20,240)
Deposits to account balances for universal life
and investment annuity contracts 196,308 59,055
Return of account balances on universal life
and investment annuity contracts (119,985) (108,283)
Net cash provided by (used in) financing activities 49,926 (69,468)
Net decrease in cash and short-term investments (3,092) (31,889)
Cash and short-term investments at beginning of year 21,247 32,823
Cash and short-term investments at end of period $ 18,155 934
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of National Western Life Insurance Company and its wholly-owned
subsidiaries (the Company), The Westcap Corporation, Commercial Adjusters,
Inc., NWL Investments, Inc., NWL Properties, Inc., and NWL 806 Main, Inc.
Commercial Adjusters, Inc. was dissolved in October, 1994, and all remaining
assets and liabilities were assumed by National Western Life Insurance
Company. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 1995, and the results of
its operations for the three months and six months ended June 30, 1995 and
1994 and its cash flows for the six months ended June 30, 1995 and 1994.
The results of operations for the three months and six months ended June
30, 1995 and 1994 are not necessarily indicative of the results to be
expected for the full year.
(2) DIVIDENDS
The Company paid no cash dividends on common stock during the six months
ended June 30, 1995 and 1994.
(3) CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," which amends SFAS No. 114. These statements
address the accounting by creditors for impairment of certain loans and
related financial statement disclosures. The statements are applicable to
all creditors and to all loans, uncollateralized as well as collateralized,
with certain exceptions and also apply to all loans that are restructured
in a troubled debt restructuring involving a modification of terms. The
statements require that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent.
Effective January 1, 1995, the Company adopted both SFAS No. 114 and No.
118. As the Company was already providing for impairment of loans through
an allowance for possible losses, the implementation of this statement had
no effect on the level of this allowance. As a result, there was no net
impact on the Company's results of operations or stockholders' equity.
However, additional disclosures are required by these statements which are
provided below.
As of June 30, 1995 and 1994, impaired mortgage loans on real estate were as
follows:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C> <C>
Impaired loans:
With allowance * $ - 370
Without allowance - 721
Total impaired loans $ - 1,091
<FN>
* Represents gross amounts before allowance for mortgage loan losses of
$117,000 at June 30, 1994.
</FN>
</TABLE>
For the quarter ended June 30, 1995, the Company had no investments in
impaired mortgage loans. For the quarter ended June 30, 1994, average
investments in impaired mortgage loans were $1,509,000. Interest income
recognized on impaired loans during the quarters ended June 30, 1995
and 1994 was not significant.
Impaired loans are typically placed on non-accrual status and no interest
income is recognized. However, if cash is received on the impaired loan, it
is applied to principal and interest on past due payments, beginning with
the most delinquent payment.
Detailed below are the changes in the allowance for mortgage loan losses for
the six months ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 5,929 6,849
Net additions charged to realized investment
gains and losses - -
Deductions resulting from foreclosures (261) (694)
Balance at end of period $ 5,668 6,155
</TABLE>
(4) STOCK AND INCENTIVE PLAN
General
On April 21, 1995, the Company's Board of Directors adopted the National
Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan),
subject to the approval of the Plan by the stockholders. The Plan was
subsequently approved by the Company's stockholders on June 17, 1995, at the
annual meeting of stockholders. The purpose of the Plan is to align the
personal financial incentives of key personnel with the long-term growth of
the Company and the interests of the Company's stockholders through the
ownership and performance of the Company's Class A, $1.00 par value, common
stock, to enhance the Company's ability to retain key personnel, and to
attract outstanding prospective employees and directors.
The adoption of the Plan is part of the establishment of the Company's
initial long-term incentive programs. In structuring the Plan, the Board of
Directors sought to provide for a variety of awards that could be flexibly
administered. This flexibility will permit the Company to keep pace with
changing developments in management compensation and make the Company
competitive with those companies that offer creative incentives to attract
and keep key management employees. The Plan is designed to allow the
Company to respond to changing circumstances such as changes in tax laws,
accounting rules, securities regulations, and other rules regarding benefit
plans. The Plan grants the Compensation and Stock Option Committee, which
administers the Plan, flexibility in creating the terms and restrictions
deemed appropriate for particular awards as facts and circumstances warrant.
Types of Awards
The Plan provides for the grant of any or all of the following types of
awards: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights, in tandem with
stock options or freestanding; (3) restricted stock; (4) incentive
awards; and (5) performance awards. Any stock option granted in the form
of an incentive stock option must satisfy the applicable requirements of
Section 422 of the Internal Revenue Code. Awards may be made to the same
person on more than one occasion and may be granted singly, in combination,
or in tandem as determined by the Compensation and Stock Option Committee of
the Board of Directors (the Committee).
Term
The Plan is effective as of April 21, 1995, and will terminate on April 20,
2005, unless terminated earlier by the Board of Directors. Termination of
the Plan will not affect awards made prior to termination, but awards will
not be made after termination.
Administration
The Plan is administered by the Committee. None of the members of the
Committee are officers or employees of the Company or its subsidiaries.
Subject to the terms of the Plan, the Committee, consistent with the terms
of the Plan, has authority (i) to select personnel to receive awards, (ii)
to determine the timing, form, amount or value, and terms of grants and
awards, and the conditions and restrictions, if any, subject to which grants
and awards will be made and become payable under the Plan (other than
non-discretionary stock options for non-employee Directors), (iii) to
construe the Plan and to prescribe rules and regulations with respect to the
administration of the Plan, and (iv) to make such other determinations
authorized under the Plan as the Committee deems necessary or appropriate.
Eligibility
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company (other than
Committee members) are eligible for restricted stock awards, incentive
awards, and performance awards, and non-employee directors (including
members of the Committee) receive non-discretionary stock options. The
selection of participants from eligible personnel is within the discretion
of the Committee, except with respect to non-discretionary stock options
automatically awarded to non-employee directors.
Shares Subject to the Plan
The number of shares of Class A, $1.00 par value, common stock which may be
issued under the Plan, or as to which stock appreciation rights or other
awards may be granted, may not exceed 300,000. These shares may be
authorized and unissued shares or treasury shares.
Stock Options Granted
On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified
stock options to selected officers of the Company. The Committee also
granted 7,000 non-qualified, non-discretionary stock options to non-employee
Company directors. The stock options begin to vest following three full
years of service to the Company, with 20% of the options to vest at the
beginning of the fourth year of service, and with 20% thereof to vest at the
beginning of each of the next four years of service. The exercise price of
the stock options was set at the fair market value of the common stock on
the date of grant, May 19, 1995.
(5) BROKERAGE OPERATIONS
Effective July 17, 1995, The Westcap Corporation discontinued all sales and
trading activities in its Houston, Texas office. The Westcap Corporation
(Westcap) is a wholly owned brokerage subsidiary of National Western Life
Insurance Company (the Company). Although the costs to be incurred relating
to the discontinuation of these sales activities are not yet determinable,
there will not be a material impact to National Western Life Insurance
Company's consolidated financial position.
Recent declines in both sales revenues and earnings were the principal
reasons for ceasing the sales activity. Increasing market interest rates
and resulting adverse bond market conditions during 1994 and 1995 compared
to previous years has had a negative impact on the entire bond brokerage
industry. These conditions, coupled with adverse publicity about litigation
related to sales of collateralized mortgage obligation (CMO) products, led
to the declines in sales and earnings. The publicity surrounding these
claims has made it extremely difficult to keep Westcap's customer base and
sales force in place. Additionally, because much publicity characterizes
CMOs as derivatives, adverse publicity about derivatives has impacted the
market for CMOs and decreased Westcap's prospects for future sales.
In previous years, Westcap has contributed significantly to the consolidated
earnings of National Western Life Insurance Company. However, more
recently, brokerage operations have produced losses due to the reasons cited
above. A summary of net earnings and losses from brokerage operations since
1992 is provided below. Substantially all of such earnings and losses are
attributable to the Houston office.
<TABLE>
<CAPTION>
Earnings (Losses) from Brokerage Operations
(In thousands except per share amounts)
<S> <C> <C>
Six months ended June 30, 1995 $ (3,217)
Year ended December 31, 1994 (2,936)
Year ended December 31, 1993 21,832
Year ended December 31, 1992 26,728
Per Share:
Six months ended June 30, 1995 $ (0.92)
Year ended December 31, 1994 (0.84)
Year ended December 31, 1993 6.27
Year ended December 31, 1992 7.68
</TABLE>
Westcap intends to continue its corporate operations and small sales
operations in its New Jersey office. All outstanding claims and lawsuits as
previously described will be vigorously defended by Westcap and the Company.
Although the alleged damages would be material to Westcap's and the
Company's financial positions, a reasonable estimate of any actual losses
which may result from such claims cannot be made at this time.
Because Westcap's fiscal year end is September 30 and National Western Life
Insurance Company's is December 31, the consolidated financial statements
reflect Westcap's financial condition and results of operations three months
in arrears. Therefore, for the quarter ended June 30, 1995, the
consolidated financial statements include Westcap's financial condition and
results of operations as of and for the quarter ended March 31, 1995.
Westcap's results of operations for the quarter ended June 30, 1995,
resulted in additional losses totaling $4,356,000. These losses will be
reported in the consolidated financial statements in the quarter ended
September 30, 1995. Westcap's stockholder's equity position and National
Western Life Insurance Company's corresponding investment in Westcap totaled
$8,578,000 at June 30, 1995.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio
of investment grade debt and equity securities that provide adequate
liquidity to meet policyholder obligations and other cash needs. The
prevailing strategy within this philosophy is the intent to hold investments
in debt securities to maturity. However, the Company does manage its
portfolio, which entails monitoring and reacting to all components which
affect changes in the price or value of investments in debt and equity
securities. Additionally, the Company's overall conservative investment
philosophy is reflected in the allocation of investments of its insurance
operations which is detailed below as of June 30, 1995, and December 31,
1994. The Company emphasizes debt securities with smaller holdings in
mortgage loans and real estate than industry averages.
<TABLE>
<CAPTION>
Percent of Insurance
Operations Investments
1995 1994
<S> <C> <C>
Debt securities 83.0 % 82.5 %
Mortgage loans 7.7 8.1
Policy loans 5.9 6.5
Equity securities 1.2 1.1
Real Estate 0.7 0.8
Other 1.5 1.0
Totals 100.0 % 100.0 %
</TABLE>
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company classifies its investments in debt and
equity 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, securities held to maturity are
carried at amortized cost less declines in value that are other than
temporary. However, certain situations may change the Company's intent to
hold a particular security to maturity, the most notable of which is a
deterioration in the issuer's creditworthiness. Accordingly, a security may
be sold to avoid a further decline in realizable value when there has been a
significant change in the credit risk of the issuer.
Securities 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
securities are reported as securities available for sale. At June 30, 1995,
approximately 22% of the Company's total carrying value of debt and equity
securities were classified as securities available for sale. These holdings
provide flexibility to the Company to react to market opportunities and
conditions and to practice active management within the portfolio to provide
adequate liquidity to meet policyholder obligations and other cash needs.
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
investment portfolio. In addition, review procedures are performed on
securities that have had significant declines in fair value. The Company's
objective in these circumstances is to determine if the decline in fair
value is due to changing market expectations regarding inflation and general
interest rates or other factors.
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 June 30, 1995, securities held to maturity totaled $1.657 billion or
61.7% of total invested assets. The fair value of these securities was $1.7
billion which reflects gross unrealized gains of $43 million. This
represents an unrealized gain of $161 million since December 31, 1994, due
primarily to decreases in market interest rates.
Securities available for sale totaled $467 million at June 30, 1995, or
17.4% 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 $30 million. Securities
available for sale are reported in the accompanying financial statements at
fair value with changes in values reported as a separate component of
stockholders' equity, net of taxes and adjustments to deferred policy
acquisition costs. Net unrealized gains on these securities totaled $5.9
million at June 30, 1995, reflecting an increase of $8.1 million from
December 31, 1994. Again, the positive results for the six months are due
primarily to decreases in market interest rates.
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 $46.4 million at June 30, 1995, or
1.7% of total invested assets. Net decreases in the fair values of these
securities totaled $58,000 for the quarter ended June 30, 1995, 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).
The Company substantially reduces prepayment and extension risks in its
mortgage-backed securities portfolio by investing primarily in
collateralized mortgage obligations which have more predictable cash flow
patterns than pass-through securities. The Company invests primarily in
planned amortization class I (PAC I) CMOs which are designed to amortize in
a more predictable manner than other CMO classes or pass-throughs. Due to
this strategy, the Company continues to manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
In addition to managing prepayment and extension risks, 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 are summarized as follows:
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<C> <C> <C> <C> <C>
June 30, 1995 $ 21,264 20,311 0.8%
December 31, 1994 $ 31,861 28,670 1.2%
</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 June 30, 1995, and
December 31, 1994, securities with principal balances totaling $2,781,000
and $2,415,000 were in default and on non-accrual status.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans
is typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities. The Company
currently seeks loans ranging from $500,000 to $11,000,000, with terms
ranging from three to twenty-five years, at interest rates dictated by the
marketplace.
The Company 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.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio, and the majority of real estate
owned was acquired through mortgage loan foreclosures. However, the Company
is also currently participating in several real estate joint ventures. The
joint ventures invest primarily in income-producing retail properties.
While not a significant portion of the Company's investment portfolio, the
joint ventures have produced favorable returns to date. The Company has no
current plans to significantly increase its investments in real estate in
the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $194,732,000 and
$189,632,000, or 7.3% and 7.4% of total invested assets, at June 30, 1995,
and December 31, 1994, 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 June 30, 1995, the allowance for possible losses on mortgage loans was
$5,668,000. No additions were made to the allowance in the quarter ended
June 30, 1995, 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 where the majority of the
loans and underlying properties are located. This region includes Texas,
Louisiana, Oklahoma, and Arkansas.
The Company typically places impaired loans on non-accrual status and no
interest income is recognized during this period. Also, the Company will at
times restructure mortgage loans under certain conditions which may involve
changes in interest rates, payment terms or other modifications. For the
three months ended June 30, 1995 and 1994, the reductions in interest income
due to impaired and restructured mortgage loans was not significant.
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $17,586,000 and $17,766,000
at June 30, 1995, and December 31, 1994, respectively. This small
concentration of properties represents less than one percent of the
Company's entire investment portfolio. The real estate holdings consist
primarily of income-producing properties which are being operated by the
Company. The Company recognized small operating gains on these properties
of approximately $129,000 for the three months ended June 30, 1995, and
losses of $157,000 for the three months ended June 30, 1994. The Company
does not anticipate significant changes in these operating results in the
near future.
The Company monitors the conditions and market values of these properties on
a regular basis. No significant realized losses were recognized due to
declines in values of properties for the three months ended June 30, 1995
and 1994, 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
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the periods ended June 30,
1995 and 1994 is provided below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance revenues excluding
realized gains on investments $ 71,890 68,745 142,263 135,846
Brokerage revenues 2,932 12,778 6,657 27,788
Realized gains on investments 168 390 301 2,104
Total revenues $ 74,990 81,913 149,221 165,738
Earnings:
Earnings from insurance
operations $ 8,784 8,747 15,755 16,594
Earnings (losses) from
brokerage operations (1,484) 1,194 (3,217) 744
Net realized gains on
investments 110 253 196 1,367
Net earnings $ 7,410 10,194 12,734 18,705
Earnings Per Share:
Earnings from insurance
operations $ 2.51 2.51 4.51 4.76
Earnings (losses) from
brokerage operations (0.42) 0.34 (0.92) 0.21
Net realized gains on
investments 0.03 0.08 0.06 0.40
Net earnings $ 2.12 2.93 3.65 5.37
</TABLE>
Significant changes and fluctuations in income and expense items between the
three months ended June 30, 1995 and 1994 are described in detail for
insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations for
the quarter ended June 30, 1995, were relatively stable at $8,784,000
compared to $8,747,000 for the second quarter of 1994. Earnings for the
second quarter of 1995 include an increase in other insurance operating
expenses of approximately $1.1 million. Much of this increase in expenses
is related to state guaranty fund assessments.
Universal Life and Investment Annuity Contract Revenues: These revenues are
from the Company's non-traditional products which are universal life and
investment annuities. Revenues from these types of products consist of
policy charges for the cost of insurance, policy administration fees and
surrender charges assessed during the period. These revenues decreased
slightly from $17,121,000 for the quarter ended June 30, 1994, to
$17,088,000 for the same 1995 period. Increases totaling $804,000 in cost
of insurance revenues were more than offset by decreases in surrender charge
revenues resulting in the overall net decline in these contract revenues.
Increases in cost of insurance revenues are primarily from increased
universal life insurance in force.
Actual universal life and investment annuity deposits collected for the
quarters ended June 30, 1995 and 1994, are detailed below. Deposits
collected on these non-traditional products are not reflected as revenues in
the Company's statements of earnings, as they are recorded directly to
policyholder liabilities upon receipt, in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
Three Months Ended June 30,
1995 1994
(In thousands)
<S> <C> <C> <C>
Investment annuities $ 89,412 23,160
Universal life insurance 17,891 16,581
Totals $ 107,303 39,741
</TABLE>
As detailed above, deposits increased significantly from 1994 due primarily
to investment annuities. The Company's increased marketing efforts through
agency additions and new product developments, beginning in latter 1994,
continue to produce positive sales results.
Net Investment Income: Net investment income increased $3,513,000 from
$47,336,000 in 1994 to $50,849,000 in 1995. The majority of the increase
resulted from increases in invested assets. The increases in invested
assets are attributable primarily to increases in annuity production as
previously described.
Realized Gains on Investments: The Company had realized gains of $168,000
in 1995 compared to $390,000 in 1994. The 1995 realized gains result
primarily from sales of investments in debt securities while the 1994
realized gains result primarily from investments in debt securities called
for redemption. Although no significant write-downs on investments were
recorded in 1994, write-downs on investments in debt securities totaling
$1,300,000 were recorded in 1995. The write-downs were related to the
Company's investments in principal exchange rate linked securities. The
total carrying value of these securities has now been reduced to $5,558,000
as of June 30, 1995.
Universal Life and Investment Annuity Contract Interest: Interest expense
was up $4,004,000 from $32,173,000 in 1994 to $36,177,000 in 1995.
Increases in annuity production, resulting in corresponding increases in
policy liabilities, are the primarily reason for the higher expenses. Also,
some of the Company's new annuity products credit higher interest rates in
the first policy year resulting in higher interest costs.
Other Insurance Operating Expenses: Other insurance operating expenses
increased 18%, or $1,102,000 in 1995, due primarily to state guaranty fund
assessments. These expenses include accruals for additional assessments and
amortization of capitalized assessments.
Brokerage Operations
Second quarter 1995 losses from the Company's brokerage subsidiary, The
Westcap Corporation, totaled $1,484,000, or $0.42 per share, compared to
earnings of $1,194,000, or $0.34 per share, for the second quarter of 1994.
Increasing market interest rates and resulting adverse bond market
conditions during 1994 and 1995 compared to previous years has had a
negative impact on the entire bond brokerage industry. These conditions,
coupled with adverse publicity about litigation related to sales of
collateralized mortgage obligation (CMO) products, led to declines in both
sales and earnings.
As more fully described in note 5 to the financial statements, effective
July 17, 1995, The Westcap Corporation discontinued all sales and trading
activities in its Houston, Texas office. However, Westcap intends to
continue its corporate operations and small sales operations in its New
Jersey office. All outstanding claims and lawsuits as previously described
will be vigorously defended by Westcap and the Company. Although the
alleged damages would be material to Westcap's and the Company's financial
positions, a reasonable estimate of any actual losses which may result from
such claims cannot be made at this time.
Significant changes and fluctuations in income and expense items between the
six months ended June 30, 1995 and 1994 are described in detail for
insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operation
decreased $839,000, or $0.25 per share, compared to the first six months of
1994. The decrease in earnings for the six months ended June 30, 1995,
results primarily from increased life insurance benefit claims during the
first quarter. These expenses were up over $1.8 million, net of taxes, in
first quarter of 1995 compared to 1994.
Universal Life and Investment Annuity Contract Revenues: Although these
revenues were down for the quarter, for the six months ended June 30, 1995,
such revenues increased $785,000 compared to the 1994 period. This increase
is due to increases in cost of insurance revenues offset somewhat by
decreases in surrender charge revenues.
Actual universal life and investment annuity deposits collected for the six
months ended June 30, 1995 and 1994, are detailed below. Deposits collected
on these non-traditional products are not reflected as revenues in the
Company's statements of earnings, as they are recorded directly to
policyholder liabilities upon receipt, in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1995 1994
(In thousands)
<S> <C> <C> <C>
Investment annuities $ 178,626 43,644
Universal life insurance 35,025 31,025
Totals $ 213,651 74,669
</TABLE>
Net Investment Income: Net investment income increased $5,744,000 from
$93,100,000 in 1994 to $98,844,000 in 1995, primarily due to increases in
invested assets resulting from increased annuity production.
Realized Gains on Investments: The Company had realized gains of $301,000
in 1995 compared to $2,104,000 in 1994. The 1994 realized gains, resulting
primarily from debt securities redemptions, include no significant
write-downs. The 1995 realized gains are primarily from sales of
investments in debt securities and include write-downs of $1,300,000 as
previously described for the three months ended June 30, 1995.
Life and Other Policy Benefits: Expenses for 1995 and 1994 were $20.2
million and $16.5 million, respectively. The significant increase in
expenses is due to higher life insurance benefit claims. The 1995 expenses
are abnormally high due to adverse claims experience in the first quarter of
1995 . Throughout the Company's history, it has experienced both periods of
higher and lower benefit claims in comparison to Company averages. The
first quarter of 1995 reflects such a period as benefit claims were
significantly higher. Such deviations are not uncommon in the life
insurance industry and, over extended periods of time, tend to be offset by
periods of lower claims experience. Second quarter 1995 benefit claims
experience was consistent with that incurred in the 1994 second quarter
which is more consistent with previous Company averages.
Universal Life and Investment Annuity Contract Interest: Interest expense
was up over $5,813,000 from $64,635,000 in 1994 to $70,448,000 in 1995 for
the same reasons as previously described for the three months ended June 30,
1995.
Other Insurance Operating Expenses: Other insurance operating expenses are
up significantly in 1995 due primarily to state guaranty fund assessments.
Brokerage Operations
Losses for the six months ended June 30, 1995, from the Company's brokerage
subsidiary, The Westcap Corporation, totaled $3,217,000, or $0.92 per share,
compared to earnings of $744,000, or $0.21 per share, for the six months
ended June 30, 1994. The losses from the subsidiary are due to both adverse
bond market conditions and adverse publicity about litigation involving
sales of CMO products as previously described for the three months ended
June 30, 1995, and in note 5 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by funds
provided from operations. Premium deposits and revenues, investment income,
and investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary
sources of liquidity to meet unexpected cash needs are the Company's
securities available for sale portfolio, net cash provided by operations and
a $60 million bank line of credit. The Company's brokerage subsidiary also
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.
A primary liquidity concern for the Company's life insurance operations is
the risk of early policyholder withdrawals. Consequently, the Company
closely evaluates and manages the risk of early surrenders or withdrawals.
The Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests
under various market interest rate scenarios to assist in evaluating
liquidity needs and adequacy. The Company currently expects available
liquidity sources and future cash flows to be adequate to meet the demand
for funds.
The Company had no long-term debt during 1995 or 1994. There are no present
material commitments for capital expenditures in 1995, and the Company does
not anticipate incurring any such commitments in the remainder of 1995.
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: A report on Form 8-K dated July 17, 1995, was
filed by the Company disclosing the discontinuation of all sales and trading
activities in The Westcap Corporation's Houston, Texas office. Also
reported were Westcap's intentions to continue its corporate operations and
small sales operations in its New Jersey office.
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Three Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
Earnings applicable to common shares:
Net earnings $ 7,410 10,194
Weighted average common shares outstanding 3,488 3,485
Earnings per common share:
Net earnings $ 2.12 2.93
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Six Months Ended June 30, 1995 and 1994
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C>
Earnings applicable to common shares:
Net earnings $ 12,734 18,705
Weighted average common shares outstanding 3,488 3,485
Earnings per common share:
Net earnings $ 3.65 5.37
</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: August 11, 1995 /S/ Ross R. Moody
Ross R. Moody
President and Chief Operating Officer
Date: August 11, 1995 /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 JUNE
30, 1995 FINANCIAL STATEMENTS OF NATIONAL WESTERN LIFE INSURANCE COMPANY
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 483,368
<DEBT-CARRYING-VALUE> 1,657,405
<DEBT-MARKET-VALUE> 1,699,863
<EQUITIES> 29,755
<MORTGAGE> 194,732
<REAL-ESTATE> 17,586
<TOTAL-INVEST> 2,684,809
<CASH> 18,155
<RECOVER-REINSURE> 1,684
<DEFERRED-ACQUISITION> 280,776
<TOTAL-ASSETS> 3,020,447
<POLICY-LOSSES> 2,499,784
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 12,326
<POLICY-HOLDER-FUNDS> 10,178
<NOTES-PAYABLE> 3,301
<COMMON> 3,488
0
0
<OTHER-SE> 292,438
<TOTAL-LIABILITY-AND-EQUITY> 3,020,447
20,915<F1>
<INVESTMENT-INCOME> 50,849
<INVESTMENT-GAINS> 168
<OTHER-INCOME> 126
<BENEFITS> 44,229<F2>
<UNDERWRITING-AMORTIZATION> 7,840
<UNDERWRITING-OTHER> 7,122
<INCOME-PRETAX> 11,462
<INCOME-TAX> 4,052
<INCOME-CONTINUING> 7,410
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,410
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.12
<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 $3,827 revenues from traditional contracts subject to FAS
60 accounting treatment and $17,088 revenues from universal life and
investment annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $8,670 benefits paid to policyholders, $(618) decrease in
reserves on traditional contracts and $36,177 interest on universal life
and investment annuity contracts.
</FN>
</TABLE>
