UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 May 13, 1998, the number of shares of Registrant's common stock
outstanding was: Class A - 3,292,538 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997
Condensed Consolidated Statements of Earnings -
For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended March 31, 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)
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and investments:
Securities held to maturity,
at amortized cost $ 1,896,056 1,874,643
Securities available for sale,
at fair value 673,574 651,736
Mortgage loans, net of allowances
for possible
losses ($4,640 and $4,640) 176,130 181,878
Policy loans 131,797 133,826
Other long-term investments 29,671 27,387
Cash and short-term investments 2,496 7,870
Total cash and investments 2,909,724 2,877,340
Accrued investment income 40,720 41,050
Deferred policy acquisition costs 293,265 291,079
Other assets 15,432 15,202
Assets of discontinued operations 774 892
$ 3,259,915 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)
March 31, December 31,
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 169,412 170,423
Universal life and investment
annuity contracts 2,597,428 2,580,867
Other policyholder liabilities 24,544 25,001
Federal income taxes payable:
Current 6,177 2,470
Deferred 13,145 13,153
Other liabilities 37,813 31,894
Liabilities of discontinued operations 774 892
Total liabilities 2,849,293 2,824,700
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,291,738 shares issued and
outstanding in 1998 and 1997 3,292 3,292
Class B - $1 par value; 200,000
shares authorized, issued, and
outstanding in 1998 and 1997 200 200
Additional paid-in capital 24,662 24,662
Accumulated other comprehensive income 15,657 16,268
Retained earnings 366,811 356,441
Total stockholders' equity 410,622 400,863
$ 3,259,915 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 March 31, 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 $ 3,110 3,720
Universal life and investment
annuity contract revenues 20,300 19,431
Net investment income 55,538 52,553
Other income 535 68
Realized gains (losses) on investments 662 (2,856)
Total premiums and other revenue 80,145 72,916
Benefits and expenses:
Life and other policy benefits 10,674 9,699
Decrease in liabilities for
future policy benefits (957) (718)
Amortization of deferred policy
acquisition costs 8,945 9,702
Universal life and investment
annuity contract interest 38,335 37,720
Other insurance operating expenses 7,241 6,927
Total benefits and expenses 64,238 63,330
Earnings before Federal income taxes
and discontinued operations 15,907 9,586
Provision for Federal income taxes:
Current 5,217 2,677
Deferred 320 157
Total Federal income taxes 5,537 2,834
Earnings from continuing operations 10,370 6,752
Losses from discontinued operations - (1,000)
Net earnings $ 10,370 5,752
Basic Earnings Per Share:
Earnings from continuing operations $ 2.97 1.94
Losses from discontinued operations - (0.29)
Net earnings $ 2.97 1.65
Diluted Earnings Per Share:
Earnings from continuing operations $ 2.94 1.92
Losses from discontinued operations - (0.28)
Net earnings $ 2.94 1.64
<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 March 31, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net earnings $ 10,370 5,752
Other comprehensive income,
net of effects of deferred
policy acquisition costs and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (346) (2,666)
Less: reclassification
adjustment for losses
included in net earnings - 1
Amortization of net unrealized gains
related to transferred securities (323) (236)
Net unrealized losses on securities (669) (2,901)
Foreign currency translation adjustments 58 1,699
Other comprehensive income (611) (1,202)
Comprehensive income $ 9,759 4,550
<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 Three Months Ended March 31, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Common stock shares outstanding at
beginning of year and end of period 3,492 3,491
Common stock at beginning of
year and end of period $ 3,492 3,491
Additional paid-in capital at
beginning of year and end of period 24,662 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 (669) (2,901)
Balance at end of period 13,113 6,952
Foreign currency translation adjustments:
Balance at beginning of year 2,486 -
Change in translation adjustments
during period 58 1,699
Balance at end of period 2,544 1,699
Accumulated other comprehensive
income at end of period 15,657 8,651
Retained earnings:
Balance at beginning of year 356,441 314,869
Net earnings 10,370 5,752
Retained earnings at end of period 366,811 320,621
Total stockholders' equity $ 410,622 357,410
<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 Three Months Ended March 31, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 10,370 5,752
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment
annuity contract interest 38,335 37,720
Surrender charges and
other policy revenues (10,415) (9,986)
Realized (gains) losses on investments (662) 2,856
Accrual and amortization
of investment income (1,870) (1,683)
Depreciation and amortization 242 181
Increase in insurance receivables
and other assets (151) (607)
Decrease in accrued investment income 330 1,008
Decrease (increase) in deferred
policy acquisition costs (1,714) 1,322
Decrease in liability for
future policy benefits (957) (718)
Increase (decrease) in other
policyholder liabilities (457) 1,607
Increase in Federal income taxes payable 4,026 2,702
Increase in other liabilities 5,919 3,053
Other (1,270) -
Net cash provided by operating activities 41,726 43,207
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity 2,978 -
Securities available for sale - 15
Other investments 391 728
Proceeds from maturities and redemptions of:
Securities held to maturity 27,394 35,069
Securities available for sale 18,079 11,292
Purchases of:
Securities held to maturity (49,476) (81,433)
Securities available for sale (41,263) (500)
Other investments (1,540) (105)
Principal payments on mortgage loans 9,016 3,534
Cost of mortgage loans acquired (3,211) (3,481)
Decrease in policy loans 2,029 2,376
Decrease (increase) in assets
of discontinued operations 118 (266)
Increase (decrease) in liabilities
of discontinued operations (118) 266
Other (138) (77)
Net cash used in investing activities (35,741) (32,582)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 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 $ 74,784 62,362
Return of account balances on universal
life and investment annuity contracts (86,143) (73,239)
Net cash used in financing activities (11,359) (10,877)
Net decrease in cash and
short-term investments (5,374) (252)
Cash and short-term investments
at beginning of year 7,870 11,358
Cash and short-term investments
at end of period $ 2,496 11,106
<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 March 31, 1998, and the results of its
operations and its cash flows for the three months ended March 31, 1998 and
1997. The results of operations for the three months ended March 31, 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 three months
ended March 31, 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 first quarter of
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. This
process is anticipated to take several months. 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. It remains uncertain at this time whether
the settlement will be approved by all the parties, including the bankruptcy
court. Accordingly, no amounts have been accrued in the Company's financial
statements for potential settlements.
(4) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS No. 130 affects the Company's reporting presentation of certain items
such as foreign currency translation adjustments and unrealized gains and
losses on investment securities. These items are now a component of other
comprehensive income, as reported in the accompanying financial statements.
Prior period financial statements have been reclassified for comparative
purposes in accordance with SFAS No. 130. Components of other comprehensive
income and related taxes are provided below for the three months ended March
31, 1998 and 1997:
<TABLE>
<CAPTION>
Amounts Amounts
Before (Taxes) Net of
Taxes Benefits Taxes
(In thousands)
<S> <C> <C> <C>
1998:
Unrealized gains (losses)
on securities, net of
effects of deferred
policy acquisition costs
of $689:
Unrealized holding gains
(losses) arising during period $ (533) 187 (346)
Less: reclassification adjustment
for (gains) losses included
in net earnings - - -
Amortization of net unrealized gains
related to transferred securities (497) 174 (323)
Net unrealized gains
(losses) on securities (1,030) 361 (669)
Foreign currency translation adjustments 90 (32) 58
Other comprehensive income $ (940) 329 (611)
1997:
Unrealized gains (losses) on
securities, net of effects of
deferred policy acquisition
costs of $4,522:
Unrealized holding gains (losses)
arising during period $ (4,101) 1,435 (2,666)
Less: reclassification adjustment
for (gains) losses included
in net earnings 2 (1) 1
Amortization of net unrealized gains
related to transferred securities (363) 127 (236)
Net unrealized gains
(losses) on securities (4,462) 1,561 (2,901)
Foreign currency translation adjustments 2,614 (915) 1,699
Other comprehensive income $ (1,848) 646 (1,202)
</TABLE>
(5) 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.
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.
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>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
United States domestic market:
Investment annuities 77.3 % 75.1%
Life insurance 8.6 9.2
Total domestic market 85.9 84.3
International market:
Investment annuities - 0.6
Life insurance 14.1 15.1
Total international market 14.1 15.7
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 increasingly 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. These plans also include the
introduction in 1998 of two new equity-indexed investment products similar to
the Domestic Division's new equity-indexed annuity. 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 March 31, 1998, approximately 25.5% 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 March 31, 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
March 31, December 31,
1998 1997
<S> <C> <C>
Debt securities 87.8% 87.3%
Mortgage loans 6.1 6.3
Policy loans 4.5 4.7
Equity securities 0.5 0.5
Real estate 0.5 0.5
Other 0.6 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 March 31, 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 $ 1,970,156 1,896,056 74,100
Securities available for sale:
Debt securities 658,620 629,901 28,719
Equity securities 14,954 11,266 3,688
Totals $ 2,643,730 2,537,223 106,507
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities are a
small component of the portfolio. Gross unrealized gains totaling
$106,507,000 on the securities portfolio at March 31, 1998, is 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 and losses on the Company's securities
portfolio for the quarter ended March 31, 1998, is detailed below:
<TABLE>
<CAPTION>
Change in
Gross Unrealized Gains Unrealized
At At Gains (Losses)
March 31, December 31, During 1st
1998 1997 Quarter 1998
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 74,100 75,233 (1,133)
Securities available for sale:
Debt securities 28,719 30,287 (1,568)
Equity securities 3,688 3,175 513
Totals $ 106,507 108,695 (2,188)
</TABLE>
Changes in interest rates typically have a significant impact on the market
values of the Company's debt securities. Unrealized gains at March 31, 1998,
decreased only slightly from year-end 1997 as market interest rate
fluctuations were minimal. 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 March 31, 1998, corporate and public utility securities
represented over 66% of the entire debt securities portfolio.
Mortgage-backed securities are also an important component of the Company's
debt securities portfolio, representing 26% of the portfolio at March 31,
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 March 31, 1998, CMOs represent about 90% of the Company's mortgage-
backed securities, and 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. The decrease in below investment grade debt
securities from 1997 is due to a rating upgrade of one security and a sale of
another security.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
March 31, 1998 $ 33,055 33,860 1.1%
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.
In fact, at March 31, 1998 and December 31, 1997, no securities were in
default and on nonaccrual status. Also, during the quarter ended March 31,
1998, the Company sold a held to maturity security due to the significant
credit deterioration of the issuing company. Amortized cost of the security
totaled $2,981,000 and a realized loss of $3,000 was recognized on the sale.
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 invest primarily in income-producing
retail properties.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $176,130,000 and
$181,878,000, or 6.1% and 6.3% of total invested assets, at March 31, 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 March 31, 1998 and December 31,
1997, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
West South Central 53.8% 54.9%
South Atlantic 11.7 11.4
Mountain 11.6 11.3
Pacific 8.2 8.0
East South Central 5.3 5.2
East North Central 4.0 3.9
Other 5.4 5.3
Totals 100.0% 100.0%
March 31, December 31,
1998 1997
Retail 61.5% 62.2%
Office 17.0 16.6
Hotel/Motel 8.1 7.9
Apartment 4.2 4.1
Land/Lots 3.3 3.3
Nursing Homes 3.2 3.2
Other 2.7 2.7
Totals 100.0% 100.0%
</TABLE>
As of March 31, 1998, allowance for possible losses on mortgage loans was
$4,640,000. No additions were made to the allowance in the first 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 three months ended March 31, 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 $14,904,000 and $15,027,000 at March
31, 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 $122,000 and $189,000 for
the three months ended March 31, 1998 and 1997. The Company does not
anticipate significant changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties on a
regular basis. No significant realized losses were recognized due to declines
in values of properties for the three months ended March 31, 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 ended March 31, 1998 and
1997 is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
(In thousands except per share data)
<S> <C> <C>
Revenues:
Insurance revenues excluding
realized gains (losses) on investments $ 79,483 75,772
Realized gains (losses) on investments 662 (2,856)
Total revenues $ 80,145 72,916
Earnings:
Earnings from insurance operations $ 9,940 8,608
Losses from discontinued
brokerage operations - (1,000)
Net realized gains
(losses) on investments 430 (1,856)
Net earnings $ 10,370 5,752
Basic Earnings Per Share:
Earnings from insurance operations $ 2.85 2.47
Losses from discontinued
brokerage operations - (0.29)
Net realized gains
(losses) on investments 0.12 (0.53)
Net earnings $ 2.97 1.65
Diluted Earnings Per Share:
Earnings from insurance operations $ 2.82 2.44
Losses from discontinued
brokerage operations - (0.28)
Net realized gains
(losses) on investments 0.12 (0.52)
Net earnings $ 2.94 1.64
</TABLE>
Significant changes and fluctuations in income and expense items between the
three months ended March 31, 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 March 31, 1998, were $9,940,000 compared to $8,608,000 for the
first quarter of 1997. This reflects an increase of $1,332,000, or 15.5%,
over 1997 first quarter earnings. National Western Life continues to record
increases in universal life and annuity contract revenues and net investment
income, which contributed to the higher earnings. Amortization of deferred
policy acquisition costs, primarily capitalized agents' commissions, was also
lower in 1998 versus 1997. However, life insurance benefit claims were higher
in the first quarter of 1998, partially offsetting the positive impacts to
earnings.
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 increased from
$19,431,000 for the quarter ended March 31, 1997, to $20,300,000 for the same
1998 period. Increases in cost of insurance resulted in the majority of the
increase in these contract revenues, as the Company's universal life insurance
in force continues to grow. Although total life surrenders were down in the
first quarter of 1998 compared to 1997, surrender charge revenues increased in
1998 due to higher surrenders of both single and two-tier annuities. Single-
tier annuity surrenders and related revenues should continue to increase in
relation to two-tier annuities, as sales of two-tier annuities were
discontinued several years ago.
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 pay-out 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 March 31,
1998 1997
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 4,830 4,407
Universal life insurance 1,967 2,597
Single-tier annuities 1,491 922
Total surrender charges 8,288 7,926
Cost of insurance revenues 9,198 8,431
Policy fees and other revenues 2,814 3,074
Totals $ 20,300 19,431
</TABLE>
Actual universal life and investment annuity deposits collected for the
quarters ended March 31, 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 March 31,
1998 1997
(In thousands)
<S> <C> <C>
Investment annuities:
First year and single premiums $ 63,644 51,995
Renewal premiums 5,830 6,105
Total annuities 69,474 58,100
Universal life insurance:
First year and single premiums 4,318 2,964
Renewal premiums 11,298 10,743
Total universal life insurance 15,616 13,707
Totals $ 85,090 71,807
</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 quarter of 1998. The growth is primarily attributable to the Company's
new equity-indexed annuity.
The Company has 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 $21,732,000 in the
first quarter 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.
The majority of the Company's life insurance production is 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 growth in the first 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. Domestic life insurance sales increased even more
significantly than international sales during the first quarter of 1998 versus
the same period in 1997, as increased marketing efforts and additional
personnel start to take effect.
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. The Company's plans for international products include the
development of two new equity-indexed investment products similar to the
equity-indexed annuity developed for the domestic market. These new products,
expected to be released in the second quarter of 1998, will be 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 5.7% from the first
quarter of 1997, due primarily to corresponding increases in invested assets
for the same period and due to other investment income from index options used
to hedge the equity return component of the Company's equity-indexed annuity
products. The increase in invested assets was primarily from debt securities.
The Company experienced 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 March 31,
1998 1997
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 47,336 45,666
Mortgage loans 4,488 4,666
Policy loans 2,425 2,342
Other investment income 1,877 509
Total investment income 56,126 53,183
Investment expenses 588 630
Net investment income $ 55,538 52,553
</TABLE>
Other Income: Other income increased significantly from $68,000 in 1997 to
$535,000 in 1998. The increase was due to proceeds received from the U.S.
government in 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 $662,000 in 1998 compared to realized losses of $2,856,000 in 1997. The
gains in 1998 were primarily from debt securities that were called. The
losses in 1997 were primarily from net losses on debt securities totaling $1.9
million. The Company also incurred losses totaling $1.1 million on mortgage
loans relating to a foreclosure during the first quarter of 1997.
Life and Other Policy Benefits: Expenses in 1998 and 1997 were $10.7 million
and $9.7 million, respectively. The significant increase in expenses is due
to higher life insurance benefit claims. Mortality claims experience
fluctuates from period to period, and such deviations are not uncommon in the
life insurance industry. Over extended periods of time, higher claims
experience tends to be offset by periods of lower claims experience. Also, as
the Company's insurance in force continues to grow, increases in life
insurance claims are to be expected. However, the Company utilizes
reinsurance to help minimize its exposure to adverse mortality experience.
The Company's general policy is to reinsure amounts in excess of $200,000 on
the life of any one individual. A comparative detail of life and other policy
benefits is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 7,578 6,557
Surrenders of traditional
products 2,642 2,638
Other policy benefits 454 504
Totals $ 10,674 9,699
</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
$8,945,000 compared to $9,702,000 for 1997. The higher amortization in 1997
was impacted by changes in timing and levels of anticipated future gross
profits for certain blocks of business.
Universal Life and Investment Annuity Contract Interest: Interest expense was
up from $37,720,000 in 1997 to $38,335,000 in 1998. Increases in annuity
production, resulting in corresponding increases in policy liabilities, was
the primary reason for the higher expenses. Also, much of the increase in
annuity production in the first quarter of 1998 was from sales of equity-
indexed annuities. The contract interest expense was higher on these
products, than the Company's other annuities, due to the equity return
component which is linked to the S&P 500 Composite Stock Price Index. As
previously described, the Company implemented a hedging program to provide
investment income to offset the higher returns that can be paid on these
annuities. As a result of this hedging program, the increase in contract
interest expense related to the equity return component was completely offset
by additional net investment income recognized from the Company's investments
in index options during the first quarter of 1998.
Other Insurance Operating Expenses: These expenses totaled $7,241,000 and
$6,927,000 for the quarters ended March 31, 1998 and 1997, respectively.
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 more fully described in Part II, Item 1, Legal Proceedings.
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 35% which is the current federal rate. However, the 1997 taxes
reflect a significantly lower effective tax rate of 30%. Federal income taxes
for the three months ended March 31, 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.
Discontinued Brokerage Operations
As more fully described in note 3 to the accompanying financial statements,
National Western Life's brokerage subsidiary, The Westcap Corporation, is
currently in reorganization bankruptcy. No earnings or losses were reported
for discontinued operations for the first quarter of 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 a 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 $41.7 million and $43.2 million for the three months ended March 31, 1998
and 1997, respectively. Net cash flows from the Company's deposit product
operations, which includes universal life and investment annuity products,
reflected net cash outflows in the first quarters of 1998 and 1997 totaling
$11.4 million and $10.9 million, respectively. The net cash outflows from the
deposit product operations were due primarily to higher policy surrenders,
offset significantly by higher annuity production from the Company's new
equity-indexed annuity product.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $45.5 million and $46.4 million for the quarters
ended March 31, 1998 and 1997, respectively. The Company again expects
significant cash flows 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 $410.6 million at March 31, 1998, reflecting an
increase of $9.8 million from December 31, 1997. The increase in capital is
primarily from net earnings of $10.4 million and a small foreign currency
translation adjustment, offset by a decline in net unrealized gains on
investment securities totaling $669,000 during the first quarter of 1998.
Book value per share at March 31, 1998, was $117.60.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court
of San Patricio County, Texas, against National Western Life Insurance Company
(the Company) and its chief executive officer, Robert L. Moody. The suit
arose from derivative investments purchased by San Patricio County from
Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of
The Westcap Corporation. The suit alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit was
settled effective March 9, 1998, with a payment of $200,000 by National
Western Life to San Patricio County and with no admission of liability. In
exchange for the payment, National Western Life and Robert L. Moody received a
general release of all claims asserted, including all claims that have been
asserted against Westcap Securities, L.P. or could have been asserted in
another court against Westcap Securities, L.P., and the lawsuit was dismissed.
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 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. This process is anticipated to take
several months. 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. It
remains uncertain at this time whether the settlement will be approved by all
the parties, including the bankruptcy court. Accordingly, no amounts have
been accrued in the Company's financial statements for potential settlements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share (filed on page __ of this
report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 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: May 13, 1998 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: May 13, 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: May 13, 1998 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 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 $ 10,370 6,752
Losses from discontinued operations - (1,000)
Net earnings $ 10,370 5,752
Denominator:
Basic earnings per share -
weighted-average shares 3,492 3,491
Effect of dilutive stock options 33 27
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,525 3,518
Basic earnings per share:
Earnings from continuing operations $ 2.97 1.94
Losses from discontinued operations - (0.29)
Net earnings $ 2.97 1.65
Diluted earnings per share:
Earnings from continuing operations $ 2.94 1.92
Losses from discontinued operations - (0.28)
Net earnings $ 2.94 1.64
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 658,620
<DEBT-CARRYING-VALUE> 1,896,056
<DEBT-MARKET-VALUE> 1,970,156
<EQUITIES> 14,954
<MORTGAGE> 176,130
<REAL-ESTATE> 14,904
<TOTAL-INVEST> 2,909,724
<CASH> 2,496
<RECOVER-REINSURE> 5,821
<DEFERRED-ACQUISITION> 293,265
<TOTAL-ASSETS> 3,259,915
<POLICY-LOSSES> 2,766,840
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,155
<POLICY-HOLDER-FUNDS> 9,389
<NOTES-PAYABLE> 2,628
0
0
<COMMON> 3,492
<OTHER-SE> 407,130
<TOTAL-LIABILITY-AND-EQUITY> 3,259,915
23,410<F1>
<INVESTMENT-INCOME> 55,538
<INVESTMENT-GAINS> 662
<OTHER-INCOME> 535
<BENEFITS> 48,052<F2>
<UNDERWRITING-AMORTIZATION> 8,945
<UNDERWRITING-OTHER> 7,241
<INCOME-PRETAX> 15,907
<INCOME-TAX> 5,537
<INCOME-CONTINUING> 10,370
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,370
<EPS-PRIMARY> 2.97
<EPS-DILUTED> 2.94
<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 $3,110 revenues from traditional contracts subject to FAS 60
accounting treatment and $20,300 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $10,674 benefits paid to policyholders, $(957) decrease in
reserves on traditional contracts and $38,335 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
