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, 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 Office (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 8, 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 -
June 30, 1996 (Unaudited) and December 31, 1995
Condensed Consolidated Statements of Operations -
For the Three Months Ended June 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Operations -
For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended June 30, 1996 and 1995 (Unaudited)
Exhibit 11 - Computation of Earnings per Share -
For the Six Months Ended June 30, 1996 and 1995 (Unaudited)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 1,769,759 1,643,211
Securities available for sale,
at fair value 534,398 600,794
Mortgage loans, net of allowances
for possible
losses ($5,668 and $5,668) 200,641 191,674
Policy loans 147,710 147,923
Other long-term investments 25,655 30,970
Cash and short-term investments 7,500 10,024
Total cash and investments 2,685,663 2,624,596
Accrued investment income 38,239 36,127
Deferred policy acquisition costs 291,742 270,167
Other assets 24,548 21,392
Assets of discontinued operations 1,939 6,177
$ 3,042,131 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)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 173,880 174,946
Universal life and investment annuity
contracts 2,467,412 2,401,098
Other policyholder liabilities 34,629 22,833
Federal income taxes payable:
Current 1,676 413
Deferred 6,977 12,287
Other liabilities 31,804 28,718
Liabilities of discontinued operations 1,939 6,177
Total liabilities 2,718,317 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 6,438 15,195
Retained earnings 289,238 268,654
Total stockholders' equity 323,814 311,987
$ 3,042,131 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 June 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
<CAPTION>
1996 1995
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 4,319 3,827
Universal life and investment annuity
contract revenues 20,027 17,088
Net investment income 54,028 50,849
Other income 38 126
Realized gains on investments 1,098 168
Total premiums and other revenue 79,510 72,058
Benefits and expenses:
Life and other policy benefits 8,813 8,670
Change in liabilities for future
policy benefits (431) (618)
Amortization of deferred policy
acquisition costs 7,427 7,840
Universal life and investment annuity
contract interest 39,119 36,177
Other insurance operating expenses 6,438 7,122
Total benefits and expenses 61,366 59,191
Earnings from continuing operations before
Federal income taxes 18,144 12,867
Provision (benefit) for Federal income taxes:
Current 6,694 5,109
Deferred (390) (1,136)
Total Federal income taxes 6,304 3,973
Earnings from continuing operations 11,840 8,894
Losses from discontinued operations (net of
Federal income taxes of $79 in 1995) - (1,484)
Net earnings $ 11,840 7,410
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 3.40 2.54
Losses from discontinued operations - (0.42)
Net earnings $ 3.40 2.12
<FN>
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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
<CAPTION>
1996 1995
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 8,593 8,680
Universal life and investment annuity
contract revenues 38,843 34,154
Net investment income 104,683 98,844
Other income 1,139 585
Realized gains on investments 1,721 301
Total premiums and other revenue 154,979 142,564
Benefits and expenses:
Life and other policy benefits 17,491 20,220
Change in liabilities for future
policy benefits (915) (1,868)
Amortization of deferred policy
acquisition costs 15,788 17,093
Universal life and investment
annuity contract interest 77,954 70,448
Other insurance operating expenses 12,992 13,980
Total benefits and expenses 123,310 119,873
Earnings from continuing operations before
Federal income taxes 31,669 22,691
Provision (benefit) for Federal income taxes:
Current 11,907 7,665
Deferred (822) (925)
Total Federal income taxes 11,085 6,740
Earnings from continuing operations 20,584 15,951
Losses from discontinued operations (net of
Federal income taxes of $179 in 1995) - (3,217)
Net earnings $ 20,584 12,734
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 5.90 4.57
Losses from discontinued operations - (0.92)
Net earnings $ 5.90 3.65
<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 Six months Ended June 30, 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 (8,141) 8,738
Amortization of net unrealized gains
related to transfers of securities
available for sale to securities
held to maturity (616) (680)
Balance at end of period 6,438 5,859
Retained earnings:
Balance at beginning of year 268,654 249,370
Net earnings 20,584 12,734
Balance at end of period 289,238 262,104
Total stockholders' equity $ 323,814 295,926
<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 Six Months Ended June 30, 1996 and 1995
(Unaudited)
(In Thousands)
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 20,584 12,734
Adjustments to reconcile net earnings
to net cash from operating activities:
Universal life and investment annuity
contract interest 77,954 70,448
Surrender charges (20,928) (16,811)
Realized gains on investments (1,721) (301)
Accrual and amortization of
investment income (3,474) (3,809)
Depreciation and amortization 356 327
Decrease (increase) in insurance receivables
and other assets (13,684) 534
Increase in accrued investment income (2,112) (2,820)
Increase in deferred policy
acquisition costs (4,744) (7,385)
Decrease in liability for future
policy benefits (915) (1,868)
Increase (decrease) in other
policyholder liabilities 11,796 (679)
Increase in Federal income taxes payable 11,007 2,219
Increase in other liabilities 3,086 4,781
Net cash provided by operating activities 77,205 57,370
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 4,180
Securities available for sale 29,318 31,200
Other investments 1,243 1,135
Proceeds from maturities and redemptions of:
Securities held to maturity 34,159 28,006
Securities available for sale 12,178 3,338
Purchases of:
Securities held to maturity (161,532) (83,489)
Securities available for sale - (112,692)
Other investments (4,201) (3,805)
Principal payments on mortgage loans 7,838 8,133
Cost of mortgage loans acquired (8,099) (13,902)
Decrease in policy loans 213 1,172
Decrease in assets of
discontinued operations 4,238 56,773
Decrease in liabilities of
discontinued operations (4,238) (53,224)
Other (133) (115)
Net cash used in investing activities (89,016) (133,290)
<FN>
(Continued on next page)
</FN>
</TABLE>
<TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 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 $ 158,007 196,308
Return of account balances on universal life
and investment annuity contracts (148,720) (119,985)
Net cash provided by financing activities 9,287 76,323
Net increase (decrease) in cash and
short-term investments (2,524) 403
Cash and short-term investments at
beginning of year 10,024 17,723
Cash and short-term investments at end of period $ 7,500 18,126
<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 June 30, 1996, and the results
of its operations and its cash flows for the three months and six months
ended June 30, 1996 and 1995. The results of operations for the three
months and six months ended June 30, 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 six months
ended June 30, 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
estate properties in exchange for a complete settlement and release of any
claims by Westcap against National Western and a continuing equity interest
in the reorganized entity. 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 June 30, 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
p r evailing strategy within this philosophy is the intent to hold
investments in debt securities to maturity. However, the Company
continually 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
over all asset/liability management strategy. At June 30, 1996,
approximately 23.3% 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 June 30, 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
June 30, December 31,
1996 1995
<S> <C> <C>
Debt securities 84.9% 84.5%
Mortgage loans 7.5 7.3
Policy loans 5.5 5.6
Equity securities 0.9 1.0
Real estate 0.6 0.7
Other 0.6 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 June 30, 1996, securities held to maturity totaled $1.770 billion or
65.9% of total invested assets. The fair value of these securities was
$1.759 billion which reflects gross unrealized losses of $11 million. This
reflects a $27 million unrealized loss during the second quarter of 1996,
due primarily to increases in market interest rates. Market interest rates
rose almost 50 basis points during the quarter ended June 30, 1996.
Securities available for sale totaled $534 million at June 30, 1996.
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 $23 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 $3.9 million at June 30, 1996,
reflecting a decrease of $2.6 million from March 31, 1996, due to
increasing market interest rates as previously 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
June 30, 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>
June 30, 1996 $ 22,219 21,974 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 June 30, 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 $200,641,000
and $191,674,000, or 7.5% and 7.3% of total invested assets, at June 30,
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 June 30, 1996 and December 31,
1995, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
West South Central 56.1% 54.0%
Mountain 14.8 12.9
South Atlantic 8.6 9.2
Other 20.5 23.9
Totals 100.0% 100.0%
<CAPTION>
June 30, December 31,
1996 1995
<S> <C> <C>
Retail 63.3% 67.0%
Office 19.9 15.9
Hotel/Motel 7.7 8.3
Other 9.1 8.8
Totals 100.0% 100.0%
</TABLE>
As of June 30, 1996, 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, 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 June 30, 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 $15,972,000 and
$19,066,000 at June 30, 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 $253,000 and $129,000 for the three months ended June 30,
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 June 30, 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
Summary of Consolidated Operations
A summary of operating results for the periods ended June 30, 1996 and 1995
is provided below:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
(In thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance revenues
excluding realized
gains on investments $ 78,412 71,890 153,258 142,263
Realized gains on
investments 1,098 168 1,721 301
Total revenues $ 79,510 72,058 154,979 142,564
Earnings:
Earnings from
insurance operations $ 11,126 8,784 19,465 15,755
Losses from
discontinued
brokerage operations - (1,484) - (3,217)
Net realized
gains on investments 714 110 1,119 196
Net earnings $ 11,840 7,410 20,584 12,734
Earnings Per Share:
Earnings from
insurance operations $ 3.19 2.51 5.58 4.51
Losses from
discontinued
brokerage operations - (0.42) - (0.92)
Net realized
gains on investments 0.21 0.03 0.32 0.06
Net earnings $ 3.40 2.12 5.90 3.65
</TABLE>
Significant changes and fluctuations in income and expense items between
the three months ended June 30, 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 June 30, 1996, were $11,126,000 compared to $8,784,000
for the second quarter of 1995. This represents an increase of $2,342,000,
or 26.7%, over 1995 second quarter earnings. This increase in earnings was
primarily due to higher revenues from universal life and annuity products
and lower insurance operating expenses. Insurance operating expenses
declined in 1996 primarily due to lower state guaranty fund assessment
expenses.
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 $17,088,000 for the quarter ended June 30, 1995, to $20,027,000 for
the same 1996 period. Increases totaling $2,341,000 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 $426,000.
Actual universal life and investment annuity deposits collected for the
quarters ended June 30, 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 June 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C>
Investment annuities $ 77,360 89,412 23,160
Universal life insurance 17,563 17,891 16,581
Totals $ 94,923 107,303 39,741
</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 6.3% from the
second quarter of 1995 while average total invested assets increased over
8% 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.
Realized Gains on Investments: The Company had realized gains of $1,098,000
in 1996 compared to realized gains of $168,000 in 1995. The gains were
primarily from sales of real estate and investments in debt securities. No
significant write-downs on investments were recorded in 1996. However,
writedowns on investments in debt securities totaled $1,300,000 in 1995.
Universal Life and Investment Annuity Contract Interest: Interest expense
was up $2,942,000 from $36,177,000 in 1995 to $39,119,000 in 1996.
Increases in annuity production, resulting in corresponding increases in
policy liabilities, are the primary reason for the higher expenses.
Other Insurance Operating Expenses: Other insurance operating expenses were
down significantly in 1996 primarily due to lower state guaranty fund
assessment 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 31%. Federal
income taxes for the three months ended June 30, 1995, include a tax
benefit of $429,000 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 second 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 $1,484,000, or $0.42 per share, for the
quarter ended June 30, 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 estate properties in exchange for a
complete settlement and release of any claims by Westcap against National
Western and a continuing equity interest in the reorganized entity.
Additional losses relating to the contributions will depend primarily on
results of Westcap bankruptcy proceedings.
Significant changes and fluctuations in income and expense items between
the six months ended June 30, 1996 and 1995 are described in detail for
insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations
increased $3,710,000, or $1.07 per share, compared to the first six months
of 1995. The increase in earnings for the six months ended June 30, 1996,
results primarily from lower life insurance benefit claims and higher
revenues from universal life and annuity products. 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: For the six months
ended June 30, 1996, these revenues increased $4,689,000 compared to the
1995 period. Increases totaling $3,542,000 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 $599,000.
Actual universal life and investment annuity deposits collected for the six
months ended June 30, 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>
Six Months Ended June 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C> <C>
Investment annuities $ 142,481 178,626 43,644
Universal life insurance 33,441 35,025 31,025
Totals $ 175,922 213,651 74,669
</TABLE>
Net Investment Income: Net investment income increased $5,839,000 from
$98,844,000 in 1995 to $104,683,000 in 1996, primarily due to increases in
invested assets resulting from increased annuity production. Market
interest rates for the first six months of 1996 have been significantly
lower than rates for the comparable 1995 period. This has resulted in
purchases of lower yielding securities during 1996 which has had a minor
impact on investment income.
Other Income: Other income increased significantly from $585,000 in 1995
to $1,139,000 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
$1,721,000 in 1996 compared to $301,000 in 1995. The 1996 realized gains,
resulting primarily from sales of real estate and investments in debt
securities, 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 in 1996 and 1995 were $17.5
million and $20.2 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 in the first quarter.
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 $7,506,000 from $70,448,000 in 1995 to $77,954,000 in 1996 for the
same reasons as previously described for the three months ended June 30,
1996.
Other Insurance Operating Expenses: Other insurance operating expenses are
down $988,000 in 1996 due primarily to lower state guaranty fund assessment
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 30%. Federal
income taxes for the six months ended June 30, 1995, include a tax benefit
of $1.1 million 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
Consistent with the results reported for the first and second quarters of
1996, no earnings or losses were reported for discontinued brokerage
operations for the six months ended June 30, 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 $3,217,000, or $0.92 per share,
for the six months ended June 30, 1995.
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 $77.2 million and $57.4 million for the six months ended
June 30, 1996 and 1995, respectively. Additionally, net cash flows from
the Company's deposit product operations, which includes universal life and
investment annuity products, totaled $9.3 million and $76.3 million for the
six months ended June 30, 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 $46.3 million and $31.3 million for the six months
ended June 30, 1996 and 1995, respectively. The Company again expects
significant cash flows from these sources throughout the remainder of 1996.
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 $323.8 million at June 30, 1996, reflecting an
increase of $11.8 million from December 31, 1995. The increase in capital
is primarily from net earnings of $20.6 million, offset by a decline in net
unrealized gains on investment securities totaling $8.8 million during the
first six months of 1996. The increase in market interest rates during the
first half of 1996 resulted in the significant decrease in unrealized
gains. Book value per share at June 30, 1996, was $92.75.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 21, 1996, the stockholders voted upon the following matters at the
annual stockholders meeting:
(a) The election of Class A directors to serve one-year terms. The results
of the voting were as follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Robert L. Moody 2,704,945 11,172
Arthur O. Dummer 2,702,879 13,238
Harry L. Edwards 2,702,679 13,438
E. J. Pederson 2,706,346 9,771
</TABLE>
(b) The election of Class B directors to serve one-year terms. The results
of the voting were as follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
E. Douglas McLeod 200,000 -
Charles D. Milos, Jr. 200,000 -
Frances A. Moody 200,000 -
Ross R. Moody 200,000 -
Russell S. Moody 200,000 -
Louis E. Pauls, Jr. 200,000 -
</TABLE>
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 pages __ and __
of this report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
A report on Form 8-K dated 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: August 8, 1996 /S/ Ross R. Moody
Ross R. Moody
President and Chief
Operating Officer
Date: August 8, 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 June 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Data)
<CAPTION>
1996 1995
<S> <C> <C> <C>
Earnings applicable to common shares:
Earnings from continuing operations $ 11,840 8,894
Losses from discontinued operations - (1,484)
Net earnings $ 11,840 7,410
Weighted average common shares outstanding 3,491 3,488
Primary and fully diluted earnings
per common share:
Earnings from continuing operations $ 3.40 2.54
Losses from discontinued operations - (0.42)
Net earnings $ 3.40 2.12
</TABLE>
<TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Data)
<CAPTION>
1996 1995
<S> <C> <C> <C>
Earnings applicable to common shares:
Earnings from continuing operations $ 20,584 15,951
Losses from discontinued operations - (3,217)
Net earnings $ 20,584 12,734
Weighted average common shares outstanding 3,491 3,488
Primary and fully diluted earnings
per common share:
Earnings from continuing operations $ 5.90 4.57
Losses from discontinued operations - (0.92)
Net earnings $ 5.90 3.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 511,087
<DEBT-CARRYING-VALUE> 1,769,759
<DEBT-MARKET-VALUE> 1,759,030
<EQUITIES> 23,311
<MORTGAGE> 200,641
<REAL-ESTATE> 15,972
<TOTAL-INVEST> 2,685,663
<CASH> 7,500
<RECOVER-REINSURE> 2,378
<DEFERRED-ACQUISITION> 291,742
<TOTAL-ASSETS> 3,042,131
<POLICY-LOSSES> 2,641,292
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 24,755
<POLICY-HOLDER-FUNDS> 9,874
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,491
<OTHER-SE> 320,323
<TOTAL-LIABILITY-AND-EQUITY> 3,042,131
47,436<F1>
<INVESTMENT-INCOME> 104,683
<INVESTMENT-GAINS> 1,721
<OTHER-INCOME> 1,139
<BENEFITS> 94,530<F2>
<UNDERWRITING-AMORTIZATION> 15,788
<UNDERWRITING-OTHER> 12,992
<INCOME-PRETAX> 31,669
<INCOME-TAX> 11,085
<INCOME-CONTINUING> 20,584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,584
<EPS-PRIMARY> 5.90
<EPS-DILUTED> 5.90
<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 $8,593 revenues from traditional contracts subject to FAS 60
accounting treatment and $38,843 revenues from universal life and
investment annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $17,491 benefits paid to policyholders, $(915) decrease in
reserves on traditional contracts and $77,954 interest on universal life
and investment annuity contracts.
</FN>
</TABLE>
