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, 1996
[ ] 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 10, 1996, the number of shares of Registrant's common stock
outstanding was: Class A - 3,291,338 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995
Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Three Months Ended March 31, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1996 and 1995 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended March 31, 1996 and 1995 (Unaudited)
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1996 1995
<S> <C> <C>
Cash and investments:
Securities held to maturity, at amortized cost $ 1,718,570 1,643,211
Securities available for sale, at fair value 568,423 600,794
Mortgage loans, net of allowances for possible
losses ($5,668 and $5,668) 190,780 191,674
Policy loans 149,277 147,923
Other long-term investments 29,832 30,970
Cash and short-term investments 8,649 10,024
Total cash and investments 2,665,531 2,624,596
Accrued investment income 35,060 36,127
Deferred policy acquisition costs 282,861 270,167
Other assets 18,409 21,392
Assets of discontinued operations 4,573 6,177
$ 3,006,434 2,958,459
<FN>
Note: The balance sheet at December 31, 1995 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
<CAPTION>
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 174,462 174,946
Universal life and investment annuity
contracts 2,430,745 2,401,098
Other policyholder liabilities 23,863 22,833
Federal income taxes payable:
Current 5,125 413
Deferred 8,739 12,287
Other liabilities 43,980 28,718
Liabilities of discontinued operations 4,573 6,177
Total liabilities 2,691,487 2,646,472
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,291,338 shares issued and
outstanding in 1996 and 1995 3,291 3,291
Class B - $1 par value; 200,000 shares
authorized, issued and outstanding in 1996
and 1995 200 200
Additional paid-in capital 24,647 24,647
Net unrealized gains on investment securities 9,411 15,195
Retained earnings 277,398 268,654
Total stockholders' equity 314,947 311,987
$ 3,006,434 2,958,459
<FN>
Note: The balance sheet at December 31, 1995 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
<CAPTION>
1996 1995
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 4,274 4,853
Universal life and investment annuity
contract revenues 18,816 17,066
Net investment income 50,655 47,995
Other income 1,101 459
Realized gains on investments 623 133
Total premiums and other revenue 75,469 70,506
Benefits and expenses:
Life and other policy benefits 8,678 11,550
Change in liabilities for future
policy benefits (484) (1,250)
Amortization of deferred policy
acquisition costs 8,361 9,253
Universal life and investment annuity
contract interest 38,835 34,271
Other insurance operating expenses 6,554 6,858
Total benefits and expenses 61,944 60,682
Earnings from continuing operations before
Federal income taxes 13,525 9,824
Provision (benefit) for Federal income taxes:
Current 5,213 2,556
Deferred (432) 211
Total Federal income taxes 4,781 2,767
Earnings from continuing operations 8,744 7,057
Losses from discontinued operations (net of
Federal income taxes of $100 in 1995) - (1,733)
Net earnings $ 8,744 5,324
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 2.50 2.03
Losses from discontinued operations - (0.50)
Net earnings $ 2.50 1.53
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year
and end of period 3,491 3,488
Common stock:
Balance at beginning of year and end of period $ 3,491 3,488
Additional paid-in capital:
Balance at beginning of year and end of period 24,647 24,475
Net unrealized gains (losses) on securities available
for sale, net of effects of deferred policy
acquisition costs and taxes:
Balance at beginning of year 15,195 (2,199)
Change in unrealized gains (losses) during period (5,524) 4,060
Amortization of net unrealized gains related to
transfers of securities available for sale to
securities held to maturity (260) (343)
Balance at end of period 9,411 1,518
Retained earnings:
Balance at beginning of year 268,654 249,370
Net earnings 8,744 5,324
Balance at end of period 277,398 254,694
Total stockholders' equity $ 314,947 284,175
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,744 5,324
Adjustments to reconcile net earnings to net
cash from operating activities:
Universal life and investment annuity
contract interest 38,835 34,271
Surrender charges (9,937) (8,532)
Realized gains on investments (623) (133)
Accrual and amortization of investment income (1,583) (2,198)
Depreciation and amortization 180 160
Increase in insurance receivables
and other assets (315) (224)
Decrease in accrued investment income 1,067 1,078
Increase in deferred policy acquisition costs (1,222) (3,140)
Decrease in liability for future policy benefits (484) (1,250)
Increase (decrease) in other policyholder
liabilities 1,030 (609)
Increase in Federal income taxes payable 7,532 2,867
Increase in other liabilities 15,262 3,897
Net cash provided by operating activities 58,486 31,511
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 11,418 106
Other investments 599 1,004
Proceeds from maturities and redemptions of:
Securities held to maturity 21,471 14,099
Securities available for sale 3,478 1,274
Purchases of:
Securities held to maturity (96,694) (25,371)
Securities available for sale (943) (45,797)
Other investments (324) (1,854)
Principal payments on mortgage loans 5,653 2,701
Cost of mortgage loans acquired (3,876) (4,678)
Decrease (increase) in policy loans (1,354) 772
Decrease in assets of discontinued operations 1,604 9,017
Decrease in liabilities of discontinued
operations (1,604) (7,098)
Other (38) (64)
Net cash used in investing activities (60,610) (55,889)
<FN>
(Continued on next page)
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances for universal life
and investment annuity contracts $ 72,120 97,627
Return of account balances on universal life
and investment annuity contracts (71,371) (59,636)
Net cash provided by financing activities 749 37,991
Net increase (decrease) in cash and short-term
investments (1,375) 13,613
Cash and short-term investments at beginning
of year 10,024 17,723
Cash and short-term investments at end of period $ 8,649 31,336
<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, NWL Investments, Inc.,
NWL Properties, Inc., and NWL 806 Main, Inc. The Westcap Corporation ceased
brokerage operations during 1995 and, as a result, is reflected as
discontinued operations in the accompanying financial statements . All
significant intercorporate transactions and accounts have been eliminated in
consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 1996, and the results of its
operations and its cash flows for the three months ended March 31, 1996 and
1995. The results of operations for the three months ended March 31, 1996
and 1995 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 three months
ended March 31, 1996 and 1995.
(3) DISCONTINUED BROKERAGE OPERATIONS
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary,
Westcap Enterprises, Inc., separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court, Southern District of Texas, Houston Division. The
Westcap Corporation is the successor by merger to Westcap Securities
Investment, Inc., and Westcap Securities Management, Inc. Westcap
Enterprises, Inc. is the successor by merger to Westcap Securities, L.P.
The Westcap Corporation is a wholly owned brokerage subsidiary of National
Western Life Insurance Company (National Western).
The plan of reorganization filed in the Bankruptcy Court provides for the
merger of Westcap Enterprises, Inc. into The Westcap Corporation (Westcap),
with the survivor to conduct business as a real estate investment trust
under sections 856-58 of the Federal Tax Code. National Western has agreed
to participate in the Westcap plan of reorganization by contributing
approximately $5,000,000 of cash and $5,000,000 of income producing real
properties in exchange for a complete settlement and release of any claims
by Westcap against National Western and a continuing equity interest in the
reorganized entity. The reorganization plan is subject to approval by
Westcap's creditors and the Bankruptcy Court.
As previously reported, National Western's investment in Westcap was
completely written off during 1995 as losses of the subsidiary were
recognized on a consolidated basis until the subsidiary's equity was reduced
to zero. Additional losses relating to the above-mentioned contributions
will depend primarily on results of Westcap bankruptcy proceedings.
(4) STOCK AND INCENTIVE PLAN
On April 19, 1996, the Compensation and Stock Option Committee approved the
issuance of an additional 33,000 non-qualified stock options to selected
officers of the Company. The options were granted under the National
Western Life Insurance Company 1995 Stock and Incentive Plan (Plan).
The stock options begin to vest following three full years of service to the
Company after date of grant, with 20% of the options to vest at the
beginning of the fourth year of service, and with 20% thereof to vest at the
beginning of each of the next four years of service. The exercise price of
the stock options was set at the fair market value of the common stock on
the date of grant. Total outstanding stock options under the Plan totaled
92,500 at March 31, 1996.
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 manages its portfolio,
which entails monitoring and reacting to all components which affect changes
in the price, value, or credit rating of investments in debt and equity
securities.
Investments in debt and equity securities are classified and reported 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. At March 31, 1996,
approximately 24.7% of the Company's total debt and equity securities, based
on fair values, were classified as securities available for sale. These
holdings provide flexibility to the Company to react to market opportunities
and conditions and to practice active management within the portfolio to
provide adequate liquidity to meet policyholder obligations and other cash
needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong
cash flows and matches expected maturities of assets and liabilities, the
Company has the ability to hold the securities, as it would be unlikely that
forced sales of securities would be required prior to maturity to cover
payments of liabilities. As a result, securities held to maturity are
carried at amortized cost less declines in value that are other than
temporary. However, certain situations may change the Company's intent to
hold a particular security to maturity, the most notable of which is a
deterioration in the issuer's creditworthiness. Accordingly, a security may
be sold to avoid a further decline in realizable value when there has been a
significant change in the credit risk of the issuer. Securities that are
held for current resale are classified as trading securities, as the intent
is to sell them, producing a trading profit. The Company does not maintain
a portfolio of trading securities.
Securities that are not classified as either held to maturity or trading
securities are reported as securities available for sale. These securities
may be sold if market or other measurement factors change unexpectedly after
the securities were acquired. For example, opportunities arise when factors
change that allow the Company to improve the performance and credit quality
of the investment portfolio by replacing an existing security with an
alternative security while still maintaining an appropriate matching of
expected maturities of assets and liabilities. Examples of such improvements
are as follows: improving the yield earned on invested assets, improving the
credit quality, changing the duration of the portfolio, and selling
securities in advance of anticipated calls or other prepayments. Securities
available for sale are reported in the Company's financial statements at
fair value. Any unrealized gains or losses resulting from changes in the
fair value of the securities are reflected as a component of stockholders'
equity.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. 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.
The Company's overall conservative investment philosophy is reflected in the
allocation of investments of its insurance operations which is detailed
below as of March 31, 1996 and December 31, 1995. The Company emphasizes
debt securities, with smaller holdings in mortgage loans and real estate
than industry averages.
<TABLE>
<CAPTION>
Allocation
of Investments
March 31, December 31,
1996 1995
<S> <C> <C>
Debt securities 84.8 % 84.5 %
Mortgage loans 7.2 7.3
Policy loans 5.6 5.6
Equity securities 1.0 1.0
Real estate 0.7 0.7
Other 0.7 0.9
Totals 100.0 % 100.0 %
</TABLE>
Portfolio Analysis
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily U.S.
government, public utilities, corporate and mortgage-backed securities.
Investments in mortgage-backed securities include U.S. government and
private issue mortgage-backed pass-through securities as well as
collateralized mortgage obligations (CMOs).
At March 31, 1996, securities held to maturity totaled $1.719 billion or
64.5% of total invested assets. The fair value of these securities was
$1.735 billion which reflects gross unrealized gains of $16 million.
Unrealized gains on this portfolio declined significantly during the first
quarter of 1996, due primarily to increases in market interest rates.
Market interest rates rose almost 100 basis points during the quarter ended
March 31, 1996.
Securities available for sale totaled $568 million at March 31, 1996, or
21.3% 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 $26 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 $6.5
million at March 31, 1996, reflecting a decrease of $5.5 million from
December 31, 1995, due to increasing market interest rates as previous
described.
An important aspect of the Company's investment philosophy is managing the
cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments and
calls, the Company takes steps to manage and minimize such risks. More
specifically, the Company has been increasing its holdings in noncallable
corporate securities during 1995 and 1996. Corporate holdings as a
percentage of the entire portfolio increased from 32.5% in 1994 to over 40%
in 1996.
The Company's holdings of mortgage-backed securities are also subject to
prepayment risk, as well as extension risk. Both of these risks are
addressed by specific portfolio management strategies. The Company
substantially reduces both prepayment and extension risks by investing
primarily in collateralized mortgage obligations which have more predictable
cash flow patterns than pass-through securities. These securities, known
as planned amortization class I (PAC I) CMOs, are designed to amortize in a
more predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
PAC I CMOs account for approximately 90% of the total CMO portfolio as of
March 31, 1996. The CMOs that the Company purchases are modeled and
subjected to detailed, comprehensive analysis by the Company's investment
staff before any investment decision is made. The overall structure of the
entire CMO is evaluated, and an average life sensitivity analysis is
performed on the individual tranche being considered for purchase under
increasing and decreasing interest rate scenarios. This analysis provides
information used in selecting securities that fit appropriately within the
Company's investment philosophy and asset/liability management parameters.
The Company's investment mix between mortgage-backed securities and other
fixed income securities helps effectively balance prepayment, extension, and
credit risks.
In addition to managing prepayment, extension, and call risks, the Company
continues to maintain a high credit quality portfolio. 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,
have increased slightly from 1995 primarily due to several corporate issuers
that had ratings downgraded.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(in thousands)
<S> <C> <C> <C>
March 31, 1996 $ 22,597 22,493 0.8%
December 31, 1995 $ 14,244 14,567 0.5%
December 31, 1994 $ 31,861 28,670 1.4%
</TABLE>
The level of investments in debt securities which are in default as to
principal or interest payments is indicative of the Company's high quality
portfolio. At March 31, 1996, and December 31, 1995, securities with
principal balances totaling $2,945,000 and $3,575,000 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 seeks to minimize the credit and default risk in its mortgage
loan portfolio through strict underwriting guidelines and diversification of
underlying property types and geographic locations. In addition to being
secured by the property, mortgage loans with leases on the underlying
property are often guaranteed by the lessee, in which case the Company
approves the loan based on the credit strength of the lessee. This
approach, implemented in 1991, has significantly improved the quality of the
Company's mortgage loan portfolio and reduced defaults.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio, and the majority of real estate
owned was acquired through mortgage loan foreclosures. However, the Company
is also currently participating in several real estate joint ventures and
limited partnerships. The joint ventures and partnerships invest primarily
in income-producing retail properties. While not a significant portion of
the Company's investment portfolio, the investments have produced favorable
returns to date. 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 $190,780,000 and
$191,674,000, or 7.2% and 7.3% of total invested assets, at March 31, 1996,
and December 31, 1995, respectively. The loans are real estate mortgages,
substantially all of which are related to commercial properties and
developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic regions of
the United States and by property type as of March 31, 1996 and December 31,
1995, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
West South Central 56.1 % 54.0 %
Mountain 12.8 12.9
South Atlantic 9.1 9.2
Other 22.0 23.9
Totals 100.0 % 100.0 %
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Retail 64.5 % 67.0 %
Office 17.5 15.9
Hotel/Motel 8.2 8.3
Other 9.8 8.8
Totals 100.0 % 100.0 %
</TABLE>
As of March 31, 1996, the allowance for possible losses on mortgage loans
was $5,668,000. No additions were made to the allowance in the quarter ended
March 31, 1996, as management believes that the current balance is adequate.
However, while management uses available information to recognize losses,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in the West South Central region which
includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the
highest concentrations of the Company's mortgage loans.
The Company currently places all loans past due three months or more on
non-accrual status and no interest income is recognized during this period.
Also, the Company will at times restructure mortgage loans under certain
conditions which may involve changes in interest rates, payment terms, or
other modifications. For the three months ended March 31, 1996 and 1995,
the reductions in interest income due to non-accural and restructured
mortgage loans were not significant.
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $18,194,000 and $19,066,000
at March 31, 1996, and December 31, 1995, 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 $114,000 and $122,000 for the three months ended March 31,
1996, and 1995. 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, 1996
and 1995, respectively. The Company makes repairs and capital improvements
to keep the properties in good condition and will continue this maintenance
as needed.
RESULTS OF OPERATIONS
<TABLE>
Summary of Consolidated Operations
A summary of operating results for the periods ended March 31, 1996 and 1995
is provided below:
<CAPTION>
Three Months Ended March 31,
1996 1995
(in thousands except per share data)
<S> <C> <C> <C>
Revenues:
Insurance revenues excluding
realized gains on investments $ 74,846 70,373
Realized gains on investments 623 133
Total revenues $ 75,469 70,506
Earnings:
Earnings from insurance operations $ 8,339 6,971
Losses from discontinued brokerage
operations - (1,733)
Net realized gains on investments 405 86
Net earnings $ 8,744 5,324
Earnings Per Share:
Earnings from insurance operations $ 2.39 2.00
Losses from discontinued brokerage
operations - (0.50)
Net realized gains on investments 0.11 0.03
Net earnings $ 2.50 1.53
</TABLE>
Significant changes and fluctuations in income and expense items between the
three months ended March 31, 1996 and 1995 are described in detail for
insurance operations and discontinued brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations for
the quarter ended March 31, 1996, were $8,339,000 compared to $6,971,000 for
the first quarter of 1995. This represents an increase of $1,368,000, or
19.6%, over 1995 first quarter earnings. The increase is attributable
primarily to lower life insurance benefit claims. These expenses were
significantly higher in the first quarter of 1995 than the Company's
historical averages. The Company also recognized nonrecurring income
totaling $552,000, net of taxes, from a lawsuit settlement in the first
quarter of 1996.
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 increased from
$17,066,000 for the quarter ended March 31, 1995, to $18,816,000 for the
same 1996 period. Increases totaling $1,201,000 in surrender charge
revenues resulted in the majority of the increase in these contract
revenues. Increases in cost of insurance revenues, primarily from increased
universal life insurance in force, totaled $173,000.
Actual universal life and investment annuity deposits collected for the
quarters ended March 31, 1996, 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 March 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C>
Investment annuities $ 65,121 89,214 20,484
Universal life insurance 15,878 17,134 14,444
Totals $ 80,999 106,348 34,928
</TABLE>
Prior to 1993, most of the Company's investment annuity production was from
the sale of two-tier annuity products. However, in the third quarter of
1992, the Company discontinued sales of all two-tier annuities due to
declines in sales and certain regulatory issues concerning two-tier
products. The vast majority of the two-tier annuities were sold by a single
independent marketing organization.
Subsequent to discontinuing the two-tier annuity sales, the Company set
goals to not only develop new annuity products to replace the lost two-tier
production, but to diversify and strengthen distribution channels to avoid
dependence on one primary independent marketing organization. The Company
achieved this by developing new annuity products in 1994 and by contracting
new marketing organizations with extensive experience, financial resources,
and success in marketing life and annuity products. The combination of new
products, primarily a single premium deferred annuity, and new marketing
organizations started to produce results in the latter half of 1994 as
annuity production began to increase significantly. This increased
production continued throughout 1995. Although annuity deposits have slowed
in 1996, production continues to be significantly higher under the more
diversified distribution system.
The majority of the Company's universal life insurance production is from
the international market, primarily Central and South American countries.
The Company has seen increased competition in the Central and South American
market in recent years causing production growth to slow. However, the
Company has been accepting policies from foreign nationals for almost thirty
years and has developed strong relationships with carefully selected brokers
in the foreign countries. This experience and strong broker relations have
enabled the Company to meet the increased competition with new product
enhancements and marketing efforts. The Company's strategic plans for the
international market include development of additional life insurance
products to complement the universal life portfolio and the continued
acceptance of new broker/agents from existing agencies in Latin America.
Net Investment Income: Net investment income increased 5.5% from the first
quarter of 1995 while average total invested assets increased over 10% for
the same period. The increase in invested assets was primarily due to the
increased annuity production as previously described. The growth in net
investment income lagged the growth in invested assets primarily due to
declines in market interest rates throughout 1995.
Other Income: Other income increased significantly from $459,000 in 1995 to
$1,101,000 in 1996. The increase was due to proceeds received in 1996 from
a lawsuit settlement totaling $850,000. The lawsuit related to the
Company's previous investment in a mortgage loan.
Realized Gains on Investments: The Company had realized gains of $623,000 in
1996 compared to realized gains of $133,000 in 1995. The gains were
primarily from bonds that were called and from sales of real estate. No
significant write-downs on investments were recorded in 1996 or 1995.
Life and Other Policy Benefits: Expenses in 1996 and 1995 were $8.7 million
and $11.6 million, respectively. The significant decrease in expenses is
due to lower life insurance benefit claims. The 1995 expenses were
abnormally high due to adverse claims experience. 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.
Universal Life and Investment Annuity Contract Interest: Interest expense
was up $4,564,000 from $34,271,000 in 1995 to $38,835,000 in 1996.
Increases in annuity production, resulting in corresponding increases in
policy liabilities, are the primary reason for the higher expenses.
Federal Income Taxes: Federal income taxes for 1996 reflect an effective
tax rate of 35% which is the current statutory rate. However, the 1995
taxes reflect a significantly lower effective tax rate of 28%. Federal
income taxes for the three months ended March 31, 1995, include a tax
benefit of $672,000 resulting from the Company's subsidiary brokerage
operations losses. This tax benefit was reflected in earnings from
continuing operations in accordance with the Company's tax allocation
agreement with its subsidiaries.
Discontinued Brokerage Operations
No earnings or losses were reported for discontinued brokerage operations
for the first quarter of 1996 as National Western's investment in The
Westcap Corporation was written-off in 1995, and there have been no
significant changes in estimated costs to cease operations. Losses from
discontinued operations totaled $1,733,000, or $0.50 per share, for the
quarter ended March 31, 1995.
As described in note 3 to the accompanying financial statements, Westcap and
its wholly owned subsidiary separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on April 12,
1996. National Western has agreed to participate in the Westcap plan of
reorganization by contributing approximately $5,000,000 of cash and
$5,000,000 of income producing real properties in exchange for a complete
settlement and release of any claims by Westcap against National Western and
a continuing equity interest in the reorganized entity. Additional losses
relating to the contributions will depend primarily on results of Westcap
bankruptcy proceedings.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds
provided from operations. Premium deposits and revenues, investment income,
and investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary
sources of liquidity to meet cash needs are the Company's securities
available for sale portfolio, net cash provided by operations, and bank line
of credit. The Company's investments consist primarily of marketable debt
securities that could be readily converted to cash for liquidity needs. The
Company may also borrow up to $60 million on its bank line of credit for
short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is
the risk of early policyholder withdrawals. Consequently, the Company
closely evaluates and manages the risk of early surrenders or withdrawals.
The Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests
under various market interest rate scenarios to assist in evaluating
liquidity needs and adequacy. The Company currently expects available
liquidity sources and future cash flows to be adequate to meet the demand
for funds.
In the past, cash flows from the Company's insurance operations have been
more than adequate to meet current needs. Cash flows from operating
activities were $58.5 million and $31.5 million for the three months ended
March 31, 1996 and 1995, respectively. Additionally, net cash flows from
the Company's deposit product operations, which includes universal life and
investment annuity products, totaled $749,000 and $38.0 million for the
first quarters of 1996 and 1995, respectively. The decrease in cash flows
in 1996 was due primarily to lower universal life and annuity deposits and
higher policy surrenders.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $24.9 million and $15.4 million for the quarters
ended March 31, 1996 and 1995, respectively. The Company again expects
significant cash flows from these sources throughout the remainder of 1996
at levels similar to 1995 and 1994.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as
there has been no long-term debt outstanding in 1996 or recent years. The
Company does not anticipate the need for any long-term debt in the near
future. There are also no current or anticipated material commitments for
capital expenditures in 1996.
Stockholders' equity totaled $314.9 million at March 31, 1996, reflecting an
increase of $3.0 million from December 31, 1995. The increase in capital is
primarily from net earnings of $8.7 million, offset by a decline in net
unrealized gains on investment securities totaling $5.7 million during the
first quarter of 1996. The increase in market interest rates during the
first quarter of 1996 resulted in the significant decrease in unrealized
gains. Book value per share at December 31, 1995, was $90.21.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 12, 1996, The Westcap Corporation and it wholly owned subsidiary,
Westcap Enterprises, Inc., separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court, Southern District of Texas, Houston Division as
more fully described in note 3 to the accompanying financial statements.
Other than the proceedings described above and those previously described in
the Company's 1995 Form 10-K, no other legal proceedings presently pending
by or against the Company or its subsidiaries are described, because
management believes the outcome of such litigation should not have a
material adverse effect on the financial position of the Company or its
subsidiaries taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2 - Debtors' First Proposed Joint Plan of Reorganization
(incorporated by reference to the Company's Form 8-K filing dated April 12,
1996).
Exhibit 11 - Computation of Earnings Per Share (filed on page ___ of this
report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
A report on Form 8-K dated April 12, 1996, was filed by the Company
disclosing The Westcap Corporation and its wholly owned subsidiary's
separate filings of voluntary petitions for reorganization under Chapter 11
of the U.S. Bankruptcy Code.
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 10, 1996 /S/ Ross R. Moody
Ross R. Moody
President and Chief Operating Officer
Date: May 10, 1996 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer
<TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Data)
<CAPTION>
1996 1995
<S> <C> <C>
Earnings applicable to common shares:
Earnings from continuing operations $ 8,744 7,057
Losses from discontinued operations - (1,733)
Net earnings $ 8,744 5,324
Weighted average common shares outstanding 3,491 3,488
Earnings per common share:
Earnings from continuing operations $ 2.50 2.03
Losses from discontinued operations - (0.50)
Net earnings $ 2.50 1.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 542,864
<DEBT-CARRYING-VALUE> 1,718,570
<DEBT-MARKET-VALUE> 1,735,383
<EQUITIES> 25,559
<MORTGAGE> 190,780
<REAL-ESTATE> 18,194
<TOTAL-INVEST> 2,665,531
<CASH> 8,649
<RECOVER-REINSURE> 1,255
<DEFERRED-ACQUISITION> 282,861
<TOTAL-ASSETS> 3,006,434
<POLICY-LOSSES> 2,605,207
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 13,979
<POLICY-HOLDER-FUNDS> 9,884
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,491
<OTHER-SE> 311,456
<TOTAL-LIABILITY-AND-EQUITY> 3,006,434
23,090<F1>
<INVESTMENT-INCOME> 50,655
<INVESTMENT-GAINS> 623
<OTHER-INCOME> 1,101
<BENEFITS> 47,029<F2>
<UNDERWRITING-AMORTIZATION> 8,361
<UNDERWRITING-OTHER> 6,554
<INCOME-PRETAX> 13,525
<INCOME-TAX> 4,781
<INCOME-CONTINUING> 8,744
<DISCONTINUED> 0
<EXTRAORDINARY> 00
<CHANGES> 0
<NET-INCOME> 8,744
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.50
<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 $4,274 revenues from traditional contracts subject to FAS 60
accounting treatment and $18,816 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $8,678 benefits paid to policyholders, $(484) decrease in
reserves on traditional contracts and $38,835 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
