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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ X ] No [ ]
As of August 10, 1998, the number of shares of Registrant's common stock
outstanding was: Class A - 3,296,428 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, 1998 (Unaudited) and December 31, 1997
Condensed Consolidated Statements of Earnings -
For the Three Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Earnings -
For the Six Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Six Months Ended June 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1998 and 1997 (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 10(k) - First Amendment to the National Western Life
Insurance Company 1995 Stock and Incentive Plan
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended June 30, 1998 and 1997 (Unaudited)
Exhibit 11 - Computation of Earnings per Share -
For the Six Months Ended June 30, 1998 and 1997 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and investments:
Securities held to maturity, at amortized cost $ 1,945,922 1,874,643
Securities available for sale, at fair value 692,513 651,736
Mortgage loans, net of allowance for possible
losses ($4,640 and $4,640) 170,166 181,878
Policy loans 128,974 133,826
Other long-term investments 32,501 27,387
Cash and short-term investments 13,104 7,870
Total cash and investments 2,983,180 2,877,340
Accrued investment income 42,796 41,050
Deferred policy acquisition costs 298,020 291,079
Other assets 14,283 15,202
Assets of discontinued operations 663 892
$ 3,338,942 3,225,563
<FN>
Note: The balance sheet at December 31, 1997, has been taken from the audited
financial statements at that date. Certain reclassifications have been made
in accordance with the implementation of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income."
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 168,795 170,423
Universal life and investment
annuity contracts 2,662,157 2,580,867
Other policyholder liabilities 25,084 25,001
Federal income taxes payable:
Current 3,205 2,470
Deferred 12,672 13,153
Other liabilities 41,876 31,894
Liabilities of discontinued operations 663 892
Total liabilities 2,914,452 2,824,700
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,296,428 and 3,291,738 shares
issued and outstanding in 1998 and 1997 3,296 3,292
Class B - $1 par value; 200,000
shares authorized, issued, and
outstanding in 1998 and 1997 200 200
Additional paid-in capital 24,829 24,662
Accumulated other comprehensive income 17,084 16,268
Retained earnings 379,081 356,441
Total stockholders' equity 424,490 400,863
$ 3,338,942 3,225,563
<FN>
Note: The balance sheet at December 31, 1997, has been taken from the audited
financial statements at that date. Certain reclassifications have been made
in accordance with the implementation of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income."
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 3,457 4,551
Universal life and investment annuity
contract revenues 20,291 21,250
Net investment income 57,261 54,958
Other income 276 88
Realized gains on investments 846 77
Total premiums and other revenue 82,131 80,924
Benefits and expenses:
Life and other policy benefits 8,454 10,310
Decrease in liabilities for future
policy benefits (536) (1,282)
Amortization of deferred policy
acquisition costs 11,455 11,183
Universal life and investment annuity
contract interest 37,215 36,344
Other insurance operating expenses 7,087 6,445
Total benefits and expenses 63,675 63,000
Earnings before Federal income taxes 18,456 17,924
Provision (benefit) for Federal income taxes:
Current 7,428 7,118
Deferred (1,242) (992)
Total Federal income taxes 6,186 6,126
Net earnings $ 12,270 11,798
Basic Earnings Per Share:
Net earnings $ 3.51 3.38
Diluted Earnings Per Share:
Net earnings $ 3.48 3.35
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 6,567 8,271
Universal life and investment annuity
contract revenues 40,591 40,681
Net investment income 112,799 107,511
Other income 811 156
Realized gains (losses) on investments 1,508 (2,779)
Total premiums and other revenue 162,276 153,840
Benefits and expenses:
Life and other policy benefits 19,128 20,009
Decrease in liabilities for future
policy benefits (1,493) (2,000)
Amortization of deferred policy
acquisition costs 20,400 20,885
Universal life and investment annuity
contract interest 75,550 74,064
Other insurance operating expenses 14,328 13,372
Total benefits and expenses 127,913 126,330
Earnings before Federal income taxes and
discontinued operations 34,363 27,510
Provision (benefit) for Federal income taxes:
Current 12,645 9,795
Deferred (922) (835)
Total Federal income taxes 11,723 8,960
Earnings from continuing operations 22,640 18,550
Losses from discontinued operations - (1,000)
Net earnings $ 22,640 17,550
Basic Earnings Per Share:
Earnings from continuing operations $ 6.48 5.32
Losses from discontinued operations - (0.29)
Net earnings $ 6.48 5.03
Diluted Earnings Per Share:
Earnings from continuing operations $ 6.42 5.27
Losses from discontinued operations - (0.28)
Net earnings $ 6.42 4.99
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net earnings $ 12,270 11,798
Other comprehensive income, net of effects of
deferred policy acquisition costs and taxes:
Unrealized gains on securities:
Unrealized holding gains arising
during period 1,948 2,909
Less: reclassification adjustment for
gains included in net earnings (417) (766)
Amortization of net unrealized gains
related to transferred securities (11) (303)
Net unrealized gains on securities 1,520 1,840
Foreign currency translation adjustments (93) 237
Other comprehensive income 1,427 2,077
Comprehensive income $ 13,697 13,875
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net earnings $ 22,640 17,550
Other comprehensive income, net of
effects of deferred
policy acquisition costs and taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains arising
during period 1,602 243
Less: reclassification adjustment for
gains included in net earnings (417) (765)
Amortization of net unrealized gains
related to transferred securities (334) (539)
Net unrealized gains (losses)
on securities 851 (1,061)
Foreign currency translation adjustments (35) 1,936
Other comprehensive income 816 875
Comprehensive income $ 23,456 18,425
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,492 3,491
Shares exercised under stock option plan 4 -
Balance at end of period 3,496 3,491
Additional paid-in capital:
Balance at beginning of year 24,662 24,647
Shares exercised under stock option plan 167 -
Balance at end of period 24,829 24,647
Accumulated other comprehensive income:
Unrealized gains (losses) on securities:
Balance at beginning of year 13,782 9,853
Change in unrealized gains (losses)
during period 851 (1,061)
Balance at end of period 14,633 8,792
Foreign currency translation adjustments:
Balance at beginning of year 2,486 -
Change in translation adjustments
during period (35) 1,936
Balance at end of period 2,451 1,936
Accumulated other comprehensive income
at end of period 17,084 10,728
Retained earnings:
Balance at beginning of year 356,441 314,869
Net earnings 22,640 17,550
Retained earnings at end of period 379,081 332,419
Total stockholders' equity $ 424,490 371,285
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 22,640 17,550
Adjustments to reconcile net earnings
to net cash from operating activities:
Universal life and investment annuity
contract interest 75,550 74,064
Surrender charges and other
policy revenues (19,720) (21,991)
Realized (gains) losses on investments (1,508) 2,779
Accrual and amortization of
investment income (4,495) (3,551)
Depreciation and amortization 481 502
Decrease (increase) in insurance
receivables and other assets 723 (325)
Increase in accrued investment income (1,746) (787)
Decrease (increase) in deferred
policy acquisition costs (7,345) 3,145
Decrease in liability for future
policy benefits (1,493) (2,000)
Increase in other policyholder liabilities 83 95
Increase (decrease) in Federal
income taxes payable (113) 3,066
Increase in other liabilities 9,982 3,715
Other (1,383) -
Net cash provided by operating activities 71,656 76,262
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity 2,978 -
Securities available for sale - 33,468
Other investments 2,442 868
Proceeds from maturities and
redemptions of:
Securities held to maturity 59,489 66,893
Securities available for sale 30,782 18,457
Purchases of:
Securities held to maturity (112,623) (91,068)
Securities available for sale (84,815) (69,800)
Other investments (7,337) (3,723)
Principal payments on mortgage loans 16,116 13,896
Cost of mortgage loans acquired (3,224) (14,580)
Decrease in policy loans 4,852 4,506
Decrease in assets of
discontinued operations 229 193
Decrease in liabilities of
discontinued operations (229) (193)
Other (255) (116)
Net cash used in investing activities (91,595) (41,199)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances for
universal life and
investment annuity contracts $ 195,073 127,857
Return of account balances on
universal life and
investment annuity contracts (170,071) (160,353)
Issuance of common stock under
stock option plan 171 -
Net cash provided by (used in)
financing activities 25,173 (32,496)
Net increase in cash and
short-term investments 5,234 2,567
Cash and short-term investments
at beginning of year 7,870 11,358
Cash and short-term investments
at end of period $ 13,104 13,925
<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 (Westcap), NWL
Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services,
Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage
operations during 1995 and filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation 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, 1998, and the results of its
operations for the three months and six months ended June 30, 1998 and 1997
and its cash flows for the six months ended June 30, 1998 and 1997. The
results of operations for the three months and six months ended June 30, 1998
and 1997 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, 1998 and 1997.
(3) DISCONTINUED BROKERAGE OPERATIONS
National Western Life Insurance Company's brokerage subsidiary, The Westcap
Corporation, is currently in reorganization bankruptcy. As a result of
brokerage losses and the resulting bankruptcy, National Western Life's
investment in Westcap was completely written off during 1995. No earnings or
losses were reported for discontinued operations for the six months ended June
30, 1998. However, a $1,000,000 cash infusion was made to Westcap on March
18, 1997, for operational expenses incurred during its bankruptcy. This
contribution was reflected as losses from discontinued operations in the first
quarter of 1997.
The Westcap Corporation, the Creditors' Committee, and National Western Life
filed documents with the bankruptcy court on April 30, 1998, that could lead
to the settlement of all claims of the creditors of Westcap and the claims of
Westcap against National Western Life, with the exception of the claims of
Chicago City Colleges against National Western Life. The next step in the
settlement process is the approval of such agreements by the Westcap
creditors, Westcap and National Western Life, and the bankruptcy court. These
parties must vote to either accept or reject the agreements by August 21,
1998. Results of this process are anticipated to be released by the
bankruptcy court in September, 1998. If the plan is ultimately approved and
confirmed, National Western Life's obligations could total approximately $15
million for complete releases from all claims, except for the pending claims
asserted by Chicago City Colleges against National Western Life in federal
court litigation. Because it remains uncertain at this time whether the
agreements will be approved by all the parties, no amounts have been accrued
in the Company's financial statements for potential settlements.
(4) STOCK AND INCENTIVE PLAN
On April 17, 1998, the Board of Directors approved the issuance of an
additional 48,500 nonqualified 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). Also, on June 19, 1998,
stockholders' approved an amendment to the Plan which authorized the grant of
an additional 1,000 nonqualified stock options to each director. Accordingly,
10,000 options were granted in total to directors effective on such date.
The officers' 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 directors'
stock options vest 20% per year on each of the first five anniversary dates of
the grant. The exercise prices of the stock options were set at the fair
market values of the common stock on the dates of grant.
(5) STOCKHOLDERS' EQUITY
Detail of changes in shares of common stock outstanding is provided below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
(In thousands)
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year 3,492 3,491
Shares exercised under stock option plan 4 -
Shares outstanding at end of period 3,496 3,491
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. It also accepts applications from and issues
policies to residents of various Central and South American, Caribbean, and
Pacific Rim countries. A distribution of the Company's direct premium
revenues and deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
<S> <C> <C>
United States domestic market:
Investment annuities 80.4 % 73.1 %
Life insurance 7.1 9.6
Total domestic market 87.5 82.7
International market:
Investment annuities 0.1 0.6
Life insurance 12.4 16.7
Total international market 12.5 17.3
Total direct premiums collected 100.0 % 100.0 %
</TABLE>
Insurance Operations - Domestic Division
The Company's Domestic Division concentrates marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and a newly introduced equity-indexed annuity. Most of
these annuities can be sold as tax qualified or nonqualified products.
National Western Life markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and managing agents. The Company
currently has over 30 IMOs contracted for sales of life and annuity products.
Current marketing plans are to increase the number of IMOs under contract by
adding qualified, select organizations each year that are able to meet minimum
production standards.
Insurance Operations - International Division
The Company's International Division issues policies to foreign nationals in
upper socioeconomic classes with substantial financial resources. Insurance
sales are primarily on residents from Central and South America, the
Caribbean, and the Pacific Rim. Providing insurance policies to residents in
numerous countries in these different regions provides diversification that
helps to minimize large fluctuations in sales that can occur due to various
economic, political, and competitive pressures that may occur from one country
to another. Products sold in the international market are almost entirely
universal life and traditional life insurance products. However, certain
annuity and investment contracts are also available through the International
Division. The Company minimizes exposure to foreign currency risks, as almost
all foreign policies require payment of premiums and claims in United States
dollars.
The International Division's sales production is from independent broker-
agents, many of whom have been selling National Western Life products for 20
or more years. Currently marketing plans include expanding sales networks in
specifically targeted South American and Pacific Rim countries which have
higher growth potential than other countries. In accordance with these plans,
two new equity-indexed investment products similar to the Domestic Division's
new equity-indexed annuity were introduced in early 1998. While National
Western Life increases its sales efforts in the international arena, the
Company remains committed to its conservative, yet competitive, underwriting
practices which historically have resulted in claims experience similar to
that in the United States.
Other
In addition to the life insurance business, the Company had a brokerage
operations segment through its wholly owned subsidiary, The Westcap
Corporation (Westcap). However, during 1995 Westcap closed its sales offices
and approved a plan to cease all brokerage operations. Subsequently on April
12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc.,
separately filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. The brokerage segment is now reported as
discontinued operations throughout this report and in the accompanying
financial statements.
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 as
either securities held to maturity or securities available for sale. The
Company does not maintain a portfolio of trading securities. 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 June 30, 1998, approximately 25.4% 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 not classified as held to maturity 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 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 components
of stockholders' equity and other comprehensive income.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. Review procedures are also 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. Additionally, the Company closely monitors financial, economic, and
interest rate conditions to manage prepayment and extension risks in its
mortgage-backed securities portfolio.
The Company's overall conservative investment philosophy is reflected in the
allocation of its investments which is detailed below as of June 30, 1998 and
December 31, 1997. The Company emphasizes investment grade debt securities,
with smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
June 30, December 31,
1998 1997
<S> <C> <C>
Debt securities 88.0 % 87.3 %
Mortgage loans 5.7 6.3
Policy loans 4.3 4.7
Equity securities 0.5 0.5
Real estate 0.4 0.5
Other 1.1 0.7
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 corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include U.S. government agency and private issue
pass-through securities and collateralized mortgage obligations (CMOs).
At June 30, 1998, the Company's debt and equity securities were classified as
follows:
<TABLE>
<CAPTION>
Gross
Fair Amortized Unrealized
Value Cost Gains
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,031,614 1,945,922 85,692
Securities available for sale:
Debt securities 677,967 645,298 32,669
Equity securities 14,546 10,769 3,777
Totals $ 2,724,127 2,601,989 122,138
</TABLE>
As detailed above, debt securities comprise almost the entire securities
portfolio, as equity securities represent only a small component. Gross
unrealized gains totaling $122,138,000 on the securities portfolio at June 30,
1998, are a reflection of market interest rates at quarter-end. The fair
values, or market values, of fixed income debt securities correlate to
external market interest rate conditions. Because the interest rates are
fixed on almost all of the Company's debt securities, market values typically
increase when market interest rates decline, and decrease when market interest
rates rise. An analysis of gross unrealized gains on the Company's securities
portfolio for the quarter ended June 30, 1998 is detailed below:
<TABLE>
<CAPTION>
Change in
Gross Unrealized Gains Unrealized
At At Gains
June 30, March 31, During 2nd
1998 1998 Quarter 1998
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 85,692 74,100 11,592
Securities available for sale:
Debt securities 32,669 28,719 3,950
Equity securities 3,777 3,688 89
Totals $ 122,138 106,507 15,631
</TABLE>
Changes in interest rates typically have a significant impact on the market
values of the Company's debt securities, as reflected above. Unrealized gains
at June 30, 1998, increased over $15 million from March 31, 1998, as market
interest rates of the ten year U.S. Treasury bond declined approximately 20
basis points during the quarter. Because the majority of the Company's debt
securities are classified as held to maturity, which are recorded at amortized
cost, changes in market values have relatively small effects on the Company's
financial statements. Also, the Company has the intent and ability to hold
these securities to maturity, and it is unlikely that sales of such securities
would be required which would realize market gains or losses.
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,
extensions, and calls, the Company takes steps to manage and minimize such
risks. The Company continues to invest primarily in corporate debt
securities, many of which are noncallable, which helps reduce prepayment and
call risks. At June 30, 1998, corporate and public utility securities
represented over 67% of the entire debt securities portfolio.
Mortgage-backed securities are also an important component of the Company's
debt securities portfolio, representing 25% of the portfolio at June 30, 1998.
Although holdings of mortgage-backed securities are subject to prepayment and
extension risks, both of these risks are addressed by specific portfolio
management strategies which add stability to the Company's cash flow
management. The Company substantially reduces both prepayment and extension
risks of mortgage-backed securities 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.
As of June 30, 1998, CMOs represent about 90% of the Company's mortgage-backed
securities. Furthermore, PAC I CMOs account for approximately 90% of this CMO
portfolio. The CMOs in the Company's portfolio have been modeled and
subjected to detailed, comprehensive analysis by the Company's investment
staff. The overall structure of the CMO as well as the individual tranche
being considered for purchase have been evaluated to ensure that the security
fits 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
closely manages the credit quality of its investments in debt securities.
Thorough credit analysis is performed on potential corporate investments
including examinations of a company's credit and industry outlook, financial
ratios and trends, and event risks. The Company continues to follow its
conservative investment philosophy by minimizing its holdings of below
investment grade debt securities, as these securities generally have greater
default risk than higher rated corporate debt. These issuers usually are more
sensitive to adverse industry or economic conditions than are investment grade
issuers. The Company's small holdings of below investment grade debt
securities are summarized below.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
June 30, 1998 $ 44,860 45,861 1.5%
December 31, 1997 $ 41,149 41,969 1.4%
December 31, 1996 $ 38,696 38,784 1.4%
</TABLE>
The Company's strong credit risk management and commitment to quality has
resulted in minimal defaults in the debt securities portfolio in recent years.
At June 30, 1998, no securities were in default and on nonaccrual 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 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 has resulted
in higher quality mortgage loans with fewer defaults.
While mortgage loans remain an important component of the Company's investment
portfolio, loans as a percentage of the portfolio have been declining in
recent years. Competition for high quality mortgage loans in a declining
interest rate environment has impacted the Company's level of mortgage loan
originations, and the Company is unwilling to compromise its strict
underwriting guidelines to maintain specific mortgage loan levels.
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 also
participates in several real estate joint ventures and limited partnerships.
The joint ventures and partnerships, which are not a significant portion of
the Company's investment portfolio, invest primarily in income-producing
retail properties.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $170,166,000 and
$181,878,000, or 5.7% and 6.3% of total invested assets, at June 30, 1998, and
December 31, 1997, 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, 1998 and December 31,
1997, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
West South Central 55.5% 54.9%
Mountain 12.0 11.3
South Atlantic 10.7 11.4
Pacific 8.4 8.0
East South Central 5.5 5.2
East North Central 2.5 3.9
Other 5.4 5.3
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Retail 60.6% 62.2%
Office 17.4 16.6
Hotel/Motel 8.3 7.9
Apartment 4.4 4.1
Land/Lots 3.4 3.3
Nursing Homes 3.2 3.2
Other 2.7 2.7
Totals 100.0% 100.0%
</TABLE>
As of June 30, 1998, the allowance for possible losses on mortgage loans was
$4,640,000. No additions were made to the allowance in the second quarter of
1998. Although management believes that the current balance is adequate,
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
nonaccrual status, thus recognizing no interest income on the loans. 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 six months ended June 30, 1998 and 1997, the
reductions in interest income due to nonaccrual and restructured mortgage
loans were not significant.
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling approximately $13,817,000 and $15,027,000 at June
30, 1998, and December 31, 1997, respectively. This small concentration of
properties represents less than one percent of the Company's entire investment
portfolio. The real estate holdings consist primarily of income-producing
properties which are being operated by the Company. The Company recognized
operating gains on these properties of approximately $222,000 and $76,000 for
the three months ended June 30, 1998 and 1997.
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, 1998 and 1997,
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 three months and six months ended June
30, 1998 and 1997 is provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
(In thousands except per share data)
<S> <C> <C> <C> <C>
Revenues:
Insurance revenues
excluding
realized gains (losses)
on investments $ 81,285 80,847 160,768 156,619
Realized gains (losses)
on investments 846 77 1,508 (2,779)
Total revenues $ 82,131 80,924 162,276 153,840
Earnings:
Earnings from
insurance operations $ 11,720 11,748 21,660 20,356
Losses from
discontinued
brokerage operations - - - (1,000)
Net realized gains
(losses)
on investments 550 50 980 (1,806)
Net earnings $ 12,270 11,798 22,640 17,550
Basic Earnings Per
Share:
Earnings from
insurance operations $ 3.35 3.36 6.20 5.83
Losses from
discontinued
brokerage operations - - - (0.29)
Net realized gains
(losses)
on investments 0.16 0.02 0.28 (0.51)
Net earnings $ 3.51 3.38 6.48 5.03
Diluted Earnings Per
Share:
Earnings from
insurance operations $ 3.32 3.34 6.14 5.78
Losses from
discontinued
brokerage operations - - - (0.28)
Net realized gains
(losses)
on investments 0.16 0.01 0.28 (0.51)
Net earnings $ 3.48 3.35 6.42 4.99
</TABLE>
Significant changes and fluctuations in income and expense items between the
three months ended June 30, 1998 and 1997 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, 1998, were $11,720,000 compared to $11,748,000 for the
second quarter of 1997. Although net investment income and universal life
insurance revenues continue to grow, second quarter 1998 earnings were
comparable to 1997 earnings primarily due to lower annuity surrender charge
revenues. However, surrender charge revenues were significantly higher in the
second quarter of 1997 than in any other quarter of 1997 or 1998. Also, much
of the increase in net investment income was offset by increases in universal
life and annuity contract credited interest as is expected with interest
sensitive products. A significant portion of the increase in net investment
income was due to yield and amortization adjustments on mortgage-backed
securities resulting from lower market interest rates.
Life and Annuity Premiums: This revenue category represents the premiums on
traditional type products. However, sales in most of the Company's markets
continue to consist of nontraditional types such as universal life and
investment annuities. The Company's current plans are to continue to focus
the majority of its product development and marketing efforts on universal
life and investment annuities. As a result, as in past years, no significant
growth is anticipated for these premiums in the near future, and actual
declines in this category are likely.
Universal Life and Investment Annuity Contract Revenues: These revenues are
from the Company's nontraditional products which are universal life and
investment annuities. Revenues from these types of products consist of policy
charges for the cost of insurance, surrender charges, policy administration
fees, and other miscellaneous revenues. These revenues decreased from
$21,250,000 for the quarter ended June 30, 1997, to $20,291,000 for the same
1998 period. The lower revenues are due to decreases in surrender charge
revenues totaling $1,953,000 for two-tier annuities and universal life
insurance. Policy surrenders were 19.7% and 17.3% lower for two-tier
annuities and universal life, respectively, for the second quarter of 1998
compared to the same period of 1997. However, surrenders were significantly
higher in the second quarter of 1997 than in any other quarter of 1997 or
1998. Partially offsetting the decline in surrender charge revenues were
increases in cost of insurance revenues. These revenues increased $768,000 as
the Company's universal life insurance in force continues to grow.
Policy fees and other revenues consist primarily of policy administration fee
charges on universal life products and recognition of deferred revenues
relating to immediate annuities. Annuitizations result in transfers of
policies from deferred to immediate or payout status. The deferred revenues
related to the immediate annuities are amortized into income during the payout
period. A comparative detail of the components of universal life and
investment annuity contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended June, 30
1998 1997
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 4,434 5,951
Universal life insurance 1,894 2,330
Single-tier annuities 1,718 1,446
Total surrender charges 8,046 9,727
Cost of insurance revenues 9,335 8,567
Policy fees and other revenues 2,910 2,956
Totals $ 20,291 21,250
</TABLE>
Actual universal life and investment annuity deposits collected for the
quarters ended June 30, 1998 and 1997, are detailed below. Deposits collected
on these nontraditional 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,
1998 1997
(In thousands)
<S> <C> <C>
Investment annuities:
First year and single premiums $ 108,491 51,351
Renewal premiums 4,916 6,516
Total annuities 113,407 57,867
Universal life insurance:
First year and single premiums 5,788 4,075
Renewal premiums 12,639 12,798
Total universal life insurance 18,427 16,873
Totals $ 131,834 74,740
</TABLE>
Annuities sold include flexible premium deferred annuities, single premium
deferred annuities, and single premium immediate annuities. These products
can be tax qualified or nonqualified annuities. In recent years the majority
of annuities sold have been nonqualified single premium deferred annuities.
The Company also continues to collect additional premiums on existing two-tier
annuities, as a large portion of the two-tier block of business were flexible
premium annuities on which renewal premiums continue to be collected.
Although annuity sales declined in 1996 and 1997 from previous levels, the
Company experienced significant growth in annuity production once again in the
first and second quarters of 1998. The growth is primarily attributable to
the Company's new equity-indexed annuity. In fact, the growth has been
dramatic as annuity production increased 96% from $57,867,000 for the second
quarter of 1997 to $113,407,000 for the same period of 1998. This growth is
almost entirely from the Company's new equity-indexed annuity.
The Company diversified its annuity products offered to customers by
introducing an equity-indexed annuity in late 1997. This product is a
flexible premium deferred annuity which combines the features associated with
traditional fixed annuities, with the option to have interest rates that are
linked in part to an equity index, the S&P 500 Composite Stock Price Index.
This new annuity is a long-term contract designed as a planning vehicle for
retirement security. Significant initial sales totaling $81,790,000 in the
first six months of 1998 indicate that this product is attractive to
customers, as it has guaranteed minimum interest rates, coupled with the
potential for significantly higher returns based on an equity index component.
Also, because the Company does not offer variable products or mutual funds,
this new product provides a key equity-based alternative to the Company's
existing fixed annuity products.
The Company has implemented an investment hedging program to offset the
potential higher returns required to be paid on these products. Specifically,
the Company purchases index options from highly rated banks and brokerage
firms. These index options act as hedges to match closely the returns based
on the S&P 500 Composite Stock Price Index which may be paid to policyholders.
Universal life insurance premiums showed significant growth in the second
quarter of 1998. Universal life premiums totaled $18,427,000 for the quarter
ended June 30, 1998, compared to $16,873,000 for the same period of 1997,
reflecting an increase of 9.2%. This growth is primarily from domestic life
insurance sales as the Company's increased marketing efforts and additional
personnel are producing positive results.
While the increase in second quarter universal life insurance premiums is
primarily from the domestic market, the majority of the Company's life
insurance production continues to come from the international market,
primarily Central and South American countries. While the Company continues
to see economic and competitive pressures in the Central and South American
market, which has resulted in relatively flat insurance production over the
past few years, first year universal life insurance premiums showed modest
growth in the second quarter of 1998. The Company has been accepting policies
from foreign nationals for over 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
pressures with continued strong production and successful marketing efforts.
While international life insurance production remains consistent, the
Company's goal is to increase sales in this market. To accomplish this goal,
the Company has continued to modify its market, distribution, and product
strategies. For example, the Company just introduced two new equity-indexed
investment products similar to the equity-indexed annuity sold in the domestic
market. These new products are targeted primarily to specific South American
countries for pension and retirement planning needs. The Company also plans
to modify the current portfolio of international universal life products to
better meet the needs in expanded market niches. For example, new life
insurance products will be developed for large policy cases and with low
minimum premiums specifically for business cases.
Net Investment Income: Net investment income increased 4.2% from the second
quarter of 1997, due primarily to corresponding increases in invested assets
for the same period and due to yield and amortization adjustments on mortgage-
backed securities resulting from lower market interest rates. This adjustment
totaled $985,000. The increase in invested assets was primarily from debt
securities. While overall investment income increases, the Company continues
to experience declines in investment income from mortgage loans which is
consistent with decreases in mortgage loans as previously described. A detail
of net investment income is provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 48,828 46,180
Mortgage loans 4,311 4,845
Policy loans 2,300 2,506
Other 2,636 2,354
Total investment income 58,075 55,885
Investment expenses 814 927
Net investment income $ 57,261 54,958
</TABLE>
Realized Gains on Investments: The Company recorded realized gains of $846,000
in 1998 compared to realized gains of $77,000 in 1997. The gains in 1998 were
primarily from calls of investments in debt securities. The 1997 gains are
net of an increase in the mortgage loan allowance for losses totaling
$100,000. No significant writedowns on investments were recorded in 1998.
Life and Other Policy Benefits: Expenses in 1998 and 1997 were $8.5 million
and $10.3 million, respectively. The significant decrease in expenses is due
to a decrease in surrenders of traditional products and lower life insurance
benefit claims. Mortality claims were $728,000 lower in the second quarter of
1998 than in 1997. Traditional product surrenders also decreased $959,000 in
1998 over the comparable 1997 period. However, much of this decrease in
surrender expense is offset by corresponding changes in liabilities for future
policy benefits. A comparative detail of life and other policy benefits is
provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 5,231 5,959
Surrenders of traditional products 2,824 3,783
Other policy benefits 399 568
Totals $ 8,454 10,310
</TABLE>
Amortization of Deferred Policy Acquisition Costs: This expense item
represents the amortization of the costs of acquiring or producing new
business, which consists primarily of agents' commissions. The majority of
such costs are amortized in direct relation to the anticipated future gross
profits of the applicable blocks of business. Amortization is also impacted
by the level and types of policy surrenders. Amortization for 1998 was
$11,455,000 compared to $11,183,000 for 1997.
Universal Life and Investment Annuity Contract Interest: Interest expense was
up from $36,344,000 in 1997 to $37,215,000 in 1998. Increases in annuity
production, resulting in corresponding increases in policy liabilities, was
the primary reason for the higher expenses. Most of the increase in annuity
production in the second quarter of 1998 was from sales of equity-indexed
annuities.
Significant changes and fluctuations in income and expense items between the
six months ended June 30, 1998 and 1997 are described in detail for insurance
operations and discontinued brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations
increased $1,304,000, or $0.36 per diluted share, compared to the first six
months of 1997. Earnings for the six months ended June 30, 1998, benefited
from increases in net investment income and other income, combined with lower
amortization of deferred policy acquisition costs.
Universal Life and Investment Annuity Contract Revenues: These revenues
decreased slightly from $40,681,000 for the six months ended June 30, 1997, to
$40,591,000 for the same 1998 period. Cost of insurance revenues continue to
increase as the Company's universal life insurance in force consistently
grows. However, surrender charge revenues decreased, offsetting this income
growth. Surrender charge revenues declined due to lower two-tier annuity and
universal life insurance policy surrenders as previously described for the
three months ended June 30, 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 9,264 10,358
Universal life insurance 3,861 4,927
Single-tier annuities 3,209 2,368
Total surrender charges 16,334 17,653
Cost of insurance revenues 18,533 16,998
Policy fees and other revenues 5,724 6,030
Totals $ 40,591 40,681
</TABLE>
Actual universal life and investment annuity deposits collected for the six
months ended June 30, 1998 and 1997, are detailed below. Deposits collected
on these nontraditional 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,
1998 1997
(In thousands)
<S> <C> <C>
Investment annuities:
First year and single premiums $ 172,135 103,346
Renewal premiums 10,746 12,621
Total annuities 182,881 115,967
Universal life insurance:
First year and single premiums 10,106 7,039
Renewal premiums 23,937 23,541
Total universal life insurance 34,043 30,580
Totals $ 216,924 146,547
</TABLE>
Annuity sales increased $66,914,000, or 58%, for the six months ended June 30,
1998, compared to the same period of 1997. This increase is almost entirely
from sales of equity-indexed annuities. Universal life insurance premiums
also increased significantly from $30,580,000 to $34,043,000 for the six
months ended June 30, 1997 and 1998, respectively. This reflects growth of
11.3% and is primarily from increased sales in the domestic life insurance
market.
Net Investment Income: Net investment income increased 4.9% from $107,511,000
in 1997 to $112,799,000 in 1998, primarily due to the reasons as previously
described for the three months ended June 30, 1998. However, net investment
income for the six months ended June 30, 1998, also increased due to other
investment income from index options used to hedge the equity return component
of the Company's equity-indexed annuity products. This increase was primarily
attributable to the first quarter of 1998 based on market fluctuations of the
S&P 500 Composite Stock Price Index. A detail of net investment income is
provided below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 96,164 91,846
Mortgage loans 8,799 9,511
Policy loans 4,725 4,848
Other 4,513 2,863
Total investment income 114,201 109,068
Investment expenses 1,402 1,557
Net investment income $ 112,799 107,511
</TABLE>
Other Income: Other income increased significantly from $156,000 in 1997 to
$811,000 in 1998. The increase was primarily due to proceeds received from
the U.S. government in the first quarter of 1998 related to previous
litigation involving a failed savings and loan institution. The litigation
related to the Company's previous investment in bonds of the financial
institution and subsequent losses incurred upon its failure.
Realized Gains and Losses on Investments: The Company recorded realized gains
of $1,508,000 in 1998 compared to realized losses of $2,779,000 in 1997. The
gains in 1998 were primarily from calls of investments in debt securities.
The losses in 1997 were primarily from net losses on debt securities totaling
$2.0 million. The Company also incurred net losses totaling $849,000 on
mortgage loans primarily relating to a foreclosure during the first quarter of
1997.
Life and Other Policy Benefits: Expenses in 1998 and 1997 were $19.1 million
and $20.0 million, respectively. The significant decrease in expenses is due
primarily to lower traditional product surrenders as previously described for
the three months ended June 30, 1998. The lower surrenders were offset
slightly by higher life insurance benefit claims for the six months ended June
30, 1998.
Amortization of Deferred Policy Acquisition Costs: Amortization was consistent
between six months periods at $20,400,000 in 1998 compared to $20,885,000 in
1997.
Universal Life and Investment Annuity Contract Interest: Interest expense was
up from $74.1 million in 1997 to $75.6 million in 1998. As previously
described for the three months ended June 30, 1998, increases in annuity
production, primarily equity-indexed annuities, was the primary reason for the
higher expenses.
Other Insurance Operating Expenses: Included in 1998 expenses is a $200,000
lawsuit settlement payment by National Western Life to San Patricio County.
The lawsuit arose from derivative investments purchased by San Patricio County
from affiliates of The Westcap Corporation. As part of the settlement,
National Western Life received a general release of all claims asserted with
no admission of liability.
Federal Income Taxes: Federal income taxes for 1998 reflect an effective tax
rate of 34.1%, slightly lower than the current federal tax rate of 35%.
However, the 1997 taxes reflect a lower effective tax rate of 32.6%. Federal
income taxes for the six months ended June 30, 1997, include a tax benefit of
$350,000 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,
resulting in the lower effective tax rate.
Discontinued Brokerage Operations
As more fully described in note 3 to the accompanying financial statements,
National Western Life Insurance Company's brokerage subsidiary, The Westcap
Corporation, is currently in reorganization bankruptcy. No earnings or losses
were reported for discontinued brokerage operations for the six months ended
June 30, 1998. However, a $1,000,000 cash infusion was made by the Company to
Westcap on March 18, 1997, for operational expenses incurred during its
bankruptcy. This contribution was reflected as losses from discontinued
operations in the first quarter of 1997.
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 $71.7 million and $76.3 million for the six months ended June 30, 1998
and 1997, respectively. Additionally, net cash flows from the Company's
deposit product operations, which includes universal life and investment
annuity products, totaled $25.2 million for the first six months of 1998, but
reflected a net cash outflow totaling $32.5 million for the same period of
1997. The increase in cash flows from the deposit product operations was due
primarily to increases in sales of the Company's new equity-indexed annuity.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $90.3 million and $85.4 million for the six months
ended June 30, 1998 and 1997, respectively. The Company expects significant
cash flows to continue from these sources throughout the remainder of 1998.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1998 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 1998.
Stockholders' equity totaled $424.5 million at June 30, 1998, reflecting an
increase of $23.6 million from December 31, 1997. The increase in capital is
primarily from net earnings of $22.6 million and an increase in net unrealized
gains on investment securities totaling $851,000 during the first six months
of 1998. Book value per share at June 30, 1998, was $121.41.
YEAR 2000 ISSUES
The "Year 2000" problem arose because many existing computer programs use only
the last two digits to refer to a year, resulting in these programs' inability
to recognize "00" in the date field as the year 2000. If not corrected, many
computer systems may be unable to process date sensitive data accurately
beyond the year 1999, resulting in possible system failures or generation of
erroneous results.
Because of the potential financial and operational problems this could
present, the Company has conducted a review of its computer systems to
identify systems that could be affected by the "Year 2000" issue. The Company
is primarily utilizing its own resources to correct, reprogram, and test
internally developed and maintained systems. The Company anticipates this
process will be substantially completed prior to year-end 1998. Computer
systems purchased from software developers are also being reviewed for "Year
2000" compliance. These systems are either already "Year 2000" compliant or
the software developers are in the process of completing the required
programing changes. Additionally, the Company is reviewing possible
implications from its major service providers, which include investment trust,
banking, and telephone services. This review has been substantially completed
and the Company does not anticipate significant problems from these services
related to "Year 2000" issues.
The Company has reviewed potential costs to modify its existing systems, and
such costs are not expected to exceed $200,000. A significant amount of any
such costs will not be incremental costs to the Company, as internal
information technology resources are primarily being used and will continue to
be utilized and reallocated as needed. Also, for externally developed systems
under licensing contracts, costs are primarily borne by the software
developer.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Pending Litigation
On March 28, 1994, the Community College District No. 508, County of Cook and
State of Illinois (The City Colleges) filed a complaint in the United States
District Court for the Northern District of Illinois, Eastern Division,
against National Western Life Insurance Company (the Company or National
Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned
subsidiary of the Company. The suit sought rescission of securities purchase
transactions by The City Colleges from Westcap between September 9, 1993, and
November 3, 1993, alleged compensatory damages, punitive damages, injunctive
relief, declaratory relief, fees, and costs. National Western was named as a
"controlling person" of the Westcap defendants. Westcap filed Chapter 11
bankruptcy, and The City Colleges filed a claim in the bankruptcy court
against Westcap. The claim was tried before the bankruptcy court and in
September, 1997, a $56,173,000 judgment was entered against Westcap favorable
to The City Colleges. Westcap appealed this decision to the United States
District Court for the Southern District of Texas (Houston Division). On July
24, 1998, the United States District Court affirmed the orders of the
bankruptcy court with respect to their underlying conclusion that Westcap is
liable to The City Colleges under the Texas Securities Act, but the Court
vacated the orders and remanded them to the bankruptcy court to determine the
correct amount of damages in a manner consistent with the Court's opinion and
the Texas Securities Act. It is expected that Westcap will appeal the
District Court's judgment to the Fifth Circuit Court of Appeals. While
Westcap is a wholly owned subsidiary of the Company, the Company is not a
party to the bankruptcy or the judgment against Westcap by the bankruptcy
court or the United States District Court. The lawsuit against the Company
was stayed in September, 1994, pending resolution of The City Colleges' claim
against Westcap. Following the judgment against Westcap in the bankruptcy
court, on December 2, 1997, the stay was lifted by the United States District
Court in Illinois, and The City Colleges filed an amended complaint seeking to
hold the Company liable for the claim allowed in the bankruptcy court against
Westcap under the "control person" provision of the Texas Securities Act. The
suit seeks approximately $56 million plus fees and costs. The Company filed
jurisdictional and venue motions to have the case transferred to the United
States District Court for the Western District of Texas, which motions were
agreed to by the Plaintiff, and the case in now pending in the United States
District Court for the Western District of Texas, where the parties are
engaged in discovery activities. The Company believes it has reasonable and
adequate defenses to the suit. Although the alleged damages, if sustained,
would be material to the Company's financial statements, a reasonable estimate
of any actual losses which may result from the suit cannot be made at this
time.
The Westcap Corporation Bankruptcy Proceedings
The Westcap Corporation, which is currently in Chapter 11 bankruptcy, the
Creditors' Committee, and National Western Life filed documents with the
bankruptcy court on April 30, 1998, that could lead to the settlement of all
claims of the creditors of Westcap and the claims of Westcap against National
Western Life, with the exception of the claims of The City Colleges against
National Western Life. The next step in the settlement process is the
approval of such agreements by the Westcap creditors, Westcap and National
Western Life, and the bankruptcy court. These parties must vote to either
accept or reject the agreements by August 21, 1998. Results of this process
are anticipated to be released by the bankruptcy court in September, 1998. If
the plan is ultimately approved and confirmed, National Western Life's
obligations could total approximately $15 million for complete releases from
all claims, except for the pending claims asserted by The City Colleges
against National Western Life in federal court litigation. Because it remains
uncertain at this time whether the agreements will be approved by all the
parties, no amounts have been accrued in the Company's financial statements
for potential settlements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 1998, 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 2,562,939 22,524
Arthur O. Dummer 2,559,531 25,932
Harry L. Edwards 2,559,636 25,827
E. J. Pederson 2,565,470 19,993
</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>
(c) The adoption of the First Amendment to the National Western Life Insurance
Company 1995 Stock and Incentive Plan. The results of the voting were as
follows: For - 2,524,308; Against - 53,816; Abstain - 7,339. The amendment to
the plan provides additional stock options for directors of National Western
Life.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(k) - First Amendment to the National Western Life Insurance
Company 1995 Stock and Incentive Plan
effective June 19, 1998 (filed on page __ of this
report.).
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
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
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 10, 1998 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: August 10, 1998 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: August 10, 1998 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 10(k) - MATERIAL CONTRACTS
FIRST AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY
1995 STOCK AND INCENTIVE PLAN
Paragraph VII(h) of the 1995 Stock and Incentive Plan has been amended to read
as follows:
"(h) Fixed Grants to Directors. Each individual who was a non-employee
Director of the Company on the date of approval of the Plan received an Option
to purchase 1,000 shares of Common Stock at the Fair Market Value thereof on
the date of the grant. Each individual who is a Director of the Company on the
date of the approval of this First Amendment shall receive an Option to
purchase an additional 1,000 shares of Common Stock at the Fair Market Value
thereof at the date of grant of the Option. Each additional individual person
who thereafter becomes a new Director of the Company shall, on completion of
three (3) years of continuous service following election to such office,
receive an Option to purchase 1,000 shares of Common Stock at the Fair Market
Value thereof at the date of grant of the Option, and each such person, upon
completion of five (5) years of continuous service as a Director of the
Company, shall receive an Option to purchase an additional 1,000 shares of
Common Stock at the Fair Market Value thereof at the date of grant of the
Option. However, in no event shall a Director receive options to purchase any
such Director shares that in the aggregate total more than 2,000 shares under
the Plan. Each Option granted under this paragraph VII(h) shall (i) not
constitute an Incentive Stock Option, (ii) not have Stock Appreciation Rights
granted in connection therewith, (iii) have a term of ten years, (iv) vest
twenty percent (20%) per year on each of the first five anniversary dates of
the grant thereof for Directors subject to acceleration and vesting pursuant
to paragraph XII(c), and (v) cease to be exercisable after the date which is
three months after the termination of such individual's service as a Director
(provided that such exercise period shall be extended to one year in the event
of the death of the Director). Any Director holding Options granted under this
paragraph VII(h) who is a member of the Committee shall not participate in any
action of the Committee with respect to any claim or dispute involving any
such Director."
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Numerator for basic and diluted earnings per
share:
Earnings available to common stockholders
before and after assumed conversions:
Net earnings $ 12,270 11,798
Denominator:
Basic earnings per share -
weighted-average shares 3,494 3,491
Effect of dilutive stock options 37 28
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,531 3,519
Basic earnings per share:
Net earnings $ 3.51 3.38
Diluted earnings per share:
Net earnings $ 3.48 3.35
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to common stockholders
before and after assumed conversions:
Earnings from continuing operations $ 22,640 18,550
Losses from discontinued operations - (1,000)
Net earnings $ 22,640 17,550
Denominator:
Basic earnings per share -
weighted-average shares 3,493 3,491
Effect of dilutive stock options 35 28
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,528 3,519
Basic earnings per share:
Earnings from continuing operations $ 6.48 5.32
Losses from discontinued operations - (0.29)
Net earnings $ 6.48 5.03
Diluted earnings per share:
Earnings from continuing operations $ 6.42 5.27
Losses from discontinued operations - (0.28)
Net earnings $ 6.42 4.99
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 677,967
<DEBT-CARRYING-VALUE> 1,945,922
<DEBT-MARKET-VALUE> 2,031,614
<EQUITIES> 14,546
<MORTGAGE> 170,166
<REAL-ESTATE> 13,817
<TOTAL-INVEST> 2,983,180
<CASH> 13,104
<RECOVER-REINSURE> 4,514
<DEFERRED-ACQUISITION> 298,020
<TOTAL-ASSETS> 3,338,942
<POLICY-LOSSES> 2,830,952
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,701
<POLICY-HOLDER-FUNDS> 9,383
<NOTES-PAYABLE> 2,609
0
0
<COMMON> 3,496
<OTHER-SE> 420,994
<TOTAL-LIABILITY-AND-EQUITY> 3,338,942
47,158<F1>
<INVESTMENT-INCOME> 112,799
<INVESTMENT-GAINS> 1,508
<OTHER-INCOME> 811
<BENEFITS> 93,185<F2>
<UNDERWRITING-AMORTIZATION> 20,400
<UNDERWRITING-OTHER> 14,328
<INCOME-PRETAX> 34,363
<INCOME-TAX> 11,723
<INCOME-CONTINUING> 22,640
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,640
<EPS-PRIMARY> 6.48
<EPS-DILUTED> 6.42
<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 $6,567 revenues from traditional contracts subject to FAS 60
accounting treatment and $40,591 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $19,128 benefits paid to policyholders, $(1,493) decrease in
reserves on traditional contracts and $75,550 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 574,934
<DEBT-CARRYING-VALUE> 1,643,211
<DEBT-MARKET-VALUE> 1,726,469
<EQUITIES> 25,860
<MORTGAGE> 191,674
<REAL-ESTATE> 19,066
<TOTAL-INVEST> 2,624,596
<CASH> 10,024
<RECOVER-REINSURE> 1,339
<DEFERRED-ACQUISITION> 270,167
<TOTAL-ASSETS> 2,958,459
<POLICY-LOSSES> 2,576,044
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 12,908
<POLICY-HOLDER-FUNDS> 9,925
<NOTES-PAYABLE> 2,781
0
0
<COMMON> 3,491
<OTHER-SE> 308,496
<TOTAL-LIABILITY-AND-EQUITY> 2,958,459
87,173<F1>
<INVESTMENT-INCOME> 201,816
<INVESTMENT-GAINS> (2,415)
<OTHER-INCOME> 661
<BENEFITS> 180,276<F2>
<UNDERWRITING-AMORTIZATION> 33,675
<UNDERWRITING-OTHER> 27,084
<INCOME-PRETAX> 46,200
<INCOME-TAX> 10,566
<INCOME-CONTINUING> 35,634
<DISCONTINUED> (16,350)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,284
<EPS-PRIMARY> 5.53
<EPS-DILUTED> 5.52
<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 $17,390 revenues from traditional contracts subject to FAS 60
accounting treatment and $69,783 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $39,823 benefits paid to policyholders, $(2,487) decrease in
reserves on traditional contracts and $142,940 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<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> 0
<CHANGES> 0
<NET-INCOME> 8,744
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.49
<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>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<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> 5.87
<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>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 513,787
<DEBT-CARRYING-VALUE> 1,809,197
<DEBT-MARKET-VALUE> 1,808,262
<EQUITIES> 20,148
<MORTGAGE> 195,437
<REAL-ESTATE> 15,752
<TOTAL-INVEST> 2,726,036
<CASH> 18,402
<RECOVER-REINSURE> 3,250
<DEFERRED-ACQUISITION> 295,252
<TOTAL-ASSETS> 3,071,791
<POLICY-LOSSES> 2,668,380
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 11,145
<POLICY-HOLDER-FUNDS> 9,852
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,491
<OTHER-SE> 332,909
<TOTAL-LIABILITY-AND-EQUITY> 3,071,791
69,797<F1>
<INVESTMENT-INCOME> 159,461
<INVESTMENT-GAINS> 1,275
<OTHER-INCOME> 1,171
<BENEFITS> 139,991<F2>
<UNDERWRITING-AMORTIZATION> 21,733
<UNDERWRITING-OTHER> 18,989
<INCOME-PRETAX> 50,991
<INCOME-TAX> 17,847
<INCOME-CONTINUING> 33,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,144
<EPS-PRIMARY> 9.49
<EPS-DILUTED> 9.45
<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 $11,799 revenues from traditional contracts subject to FAS 60
accounting treatment and $57,998 revenues from universal life and
investment annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $26,393 benefits paid to policyholders, $(1,924) decrease in
reserves on traditional contracts and $115,522 interest on universal life
and investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 510,008
<DEBT-CARRYING-VALUE> 1,873,561
<DEBT-MARKET-VALUE> 1,896,847
<EQUITIES> 17,619
<MORTGAGE> 193,311
<REAL-ESTATE> 15,209
<TOTAL-INVEST> 2,770,931
<CASH> 11,358
<RECOVER-REINSURE> 216
<DEFERRED-ACQUISITION> 295,666
<TOTAL-ASSETS> 3,120,829
<POLICY-LOSSES> 2,701,872
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,562
<POLICY-HOLDER-FUNDS> 9,841
<NOTES-PAYABLE> 2,716
0
0
<COMMON> 3,491
<OTHER-SE> 349,369
<TOTAL-LIABILITY-AND-EQUITY> 3,120,829
92,577<F1>
<INVESTMENT-INCOME> 214,302
<INVESTMENT-GAINS> 1,612
<OTHER-INCOME> 2,718
<BENEFITS> 184,788<F2>
<UNDERWRITING-AMORTIZATION> 30,361
<UNDERWRITING-OTHER> 25,722
<INCOME-PRETAX> 70,338
<INCOME-TAX> 24,123
<INCOME-CONTINUING> 46,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,215
<EPS-PRIMARY> 13.24
<EPS-DILUTED> 13.17
<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 $16,611 revenues from traditional contracts subject to FAS 60
accounting treatment and $75,966 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $35,354 benefits paid to policyholders, $(2,041) decrease in
reserves on traditional contracts and $151,475 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 493,896
<DEBT-CARRYING-VALUE> 1,917,284
<DEBT-MARKET-VALUE> 1,907,383
<EQUITIES> 16,453
<MORTGAGE> 190,022
<REAL-ESTATE> 17,361
<TOTAL-INVEST> 2,792,932
<CASH> 11,106
<RECOVER-REINSURE> 1,341
<DEFERRED-ACQUISITION> 298,865
<TOTAL-ASSETS> 3,148,293
<POLICY-LOSSES> 2,717,962
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 16,336
<POLICY-HOLDER-FUNDS> 9,674
<NOTES-PAYABLE> 2,699
0
0
<COMMON> 3,491
<OTHER-SE> 353,919
<TOTAL-LIABILITY-AND-EQUITY> 3,148,293
23,151<F1>
<INVESTMENT-INCOME> 52,553
<INVESTMENT-GAINS> (2,856)
<OTHER-INCOME> 68
<BENEFITS> 46,701<F2>
<UNDERWRITING-AMORTIZATION> 9,702
<UNDERWRITING-OTHER> 6,927
<INCOME-PRETAX> 9,586
<INCOME-TAX> 2,834
<INCOME-CONTINUING> 6,752
<DISCONTINUED> (1,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,752
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.64
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Consists of $3,720 revenues from traditional contracts subject to FAS 60
accounting treatment and $19,431 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $9,699 benefits paid to policyholders, $(718) decrease in
reserves on traditional contracts and $37,720 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 531,274
<DEBT-CARRYING-VALUE> 1,894,787
<DEBT-MARKET-VALUE> 1,913,814
<EQUITIES> 15,852
<MORTGAGE> 190,705
<REAL-ESTATE> 17,238
<TOTAL-INVEST> 2,811,884
<CASH> 13,925
<RECOVER-REINSURE> 2,719
<DEFERRED-ACQUISITION> 294,026
<TOTAL-ASSETS> 3,163,774
<POLICY-LOSSES> 2,719,396
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,966
<POLICY-HOLDER-FUNDS> 9,532
<NOTES-PAYABLE> 2,682
0
0
<COMMON> 3,491
<OTHER-SE> 367,794
<TOTAL-LIABILITY-AND-EQUITY> 3,163,774
48,952<F1>
<INVESTMENT-INCOME> 107,511
<INVESTMENT-GAINS> (2,779)
<OTHER-INCOME> 156
<BENEFITS> 92,073<F2>
<UNDERWRITING-AMORTIZATION> 20,885
<UNDERWRITING-OTHER> 13,372
<INCOME-PRETAX> 27,510
<INCOME-TAX> 8,960
<INCOME-CONTINUING> 18,550
<DISCONTINUED> (1,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,550
<EPS-PRIMARY> 5.03
<EPS-DILUTED> 4.99
<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 $8,271 revenues from traditional contracts subject to FAS 60
accounting treatment and $40,681 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $20,009 benefits paid to policyholders, $(2,000) decrease in
reserves on traditional contracts and $74,064 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by refernce to such
financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 604,017
<DEBT-CARRYING-VALUE> 1,878,334
<DEBT-MARKET-VALUE> 1,934,324
<EQUITIES> 13,208
<MORTGAGE> 182,312
<REAL-ESTATE> 16,343
<TOTAL-INVEST> 2,846,999
<CASH> 6,224
<RECOVER-REINSURE> 2,121
<DEFERRED-ACQUISITION> 290,480
<TOTAL-ASSETS> 3,192,974
<POLICY-LOSSES> 2,737,554
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 16,193
<POLICY-HOLDER-FUNDS> 9,356
<NOTES-PAYABLE> 2,664
0
0
<COMMON> 3,491
<OTHER-SE> 380,777
<TOTAL-LIABILITY-AND-EQUITY> 3,192,974
71,666<F1>
<INVESTMENT-INCOME> 160,419
<INVESTMENT-GAINS> (2,371)
<OTHER-INCOME> 220
<BENEFITS> 137,455<F2>
<UNDERWRITING-AMORTIZATION> 30,670
<UNDERWRITING-OTHER> 19,750
<INCOME-PRETAX> 42,059
<INCOME-TAX> 13,980
<INCOME-CONTINUING> 28,079
<DISCONTINUED> (1,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,079
<EPS-PRIMARY> 7.76
<EPS-DILUTED> 7.70
<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 $11,682 revenues from traditional contracts subject to FAS 60
accounting treatment and $59,984 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $29,371 benefits paid to policyholders, $(2,096) decrease in
reserves on traditional contracts and $110,180 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
