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 September 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 November 11, 1998, the number of shares of Registrant's common stock
outstanding was: Class A - 3,298,128 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
September 30, 1998 (Unaudited) and December 31, 1997
Condensed Consolidated Statements of Earnings
For the Three Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Earnings
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 10(l) - Fifth Amendment to the National Western Life
Insurance Company Non-Qualified Deferred Compensation Plan
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended September 30, 1998 and 1997 (Unaudited)
Exhibit 11 - Computation of Earnings per Share
For the Nine Months Ended September 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)
September 30, December 31,
ASSETS 1998 1997
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,015,048 1,874,643
Securities available for sale, at fair value 718,316 651,736
Mortgage loans, net of allowance for possible
losses ($4,640 and $4,640) 158,304 181,878
Policy loans 125,925 133,826
Other long-term investments 31,641 27,387
Cash and short-term investments 11,172 7,870
Total cash and investments 3,060,406 2,877,340
Accrued investment income 42,603 41,050
Deferred policy acquisition costs 300,712 291,079
Other assets 18,806 15,202
Assets of discontinued operations 609 892
$ 3,423,136 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)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 167,985 170,423
Universal life and investment
annuity contracts 2,724,171 2,580,867
Other policyholder liabilities 24,804 25,001
Federal income taxes payable:
Current - 2,470
Deferred 16,061 13,153
Other liabilities 44,015 31,894
Liabilities of discontinued operations 14,734 892
Total liabilities 2,991,770 2,824,700
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,298,128
and 3,291,738 shares issued and
outstanding in 1998 and 1997 3,298 3,292
Class B - $1 par value; 200,000
shares authorized, issued,
and outstanding in 1998 and 1997 200 200
Additional paid-in capital 24,899 24,662
Accumulated other comprehensive income 22,117 16,268
Retained earnings 380,852 356,441
Total stockholders' equity 431,366 400,863
$ 3,423,136 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 September 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 $ 3,050 3,411
Universal life and investment
annuity contract revenues 22,150 19,303
Net investment income 50,689 52,908
Other income 80 64
Realized gains on investments 606 408
Total premiums and other revenue 76,575 76,094
Benefits and expenses:
Life and other policy benefits 9,155 9,362
Decrease in liabilities for
future policy benefits (945) (96)
Amortization of deferred policy
acquisition costs 11,137 9,785
Universal life and investment
annuity contract interest 33,177 36,116
Other insurance operating expenses 7,501 6,378
Total benefits and expenses 60,025 61,545
Earnings before Federal income
taxes and discontinued operations 16,550 14,549
Provision (benefit) for Federal income taxes:
Current (26) 6,741
Deferred 680 (1,721)
Total Federal income taxes 654 5,020
Earnings from continuing operations 15,896 9,529
Losses from discontinued operations (14,125) -
Net earnings $ 1,771 9,529
Basic earnings per share:
Earnings from continuing operations $ 4.55 2.73
Losses from discontinued operations (4.04) -
Net earnings $ 0.51 2.73
Diluted earnings per share:
Earnings from continuing operations $ 4.48 2.71
Losses from discontinued operations (3.98) -
Net earnings $ 0.50 2.71
<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 Nine Months Ended September 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 $ 9,617 11,682
Universal life and investment
annuity contract revenues 62,741 59,984
Net investment income 163,488 160,419
Other income 891 220
Realized gains (losses) on investments 2,114 (2,371)
Total premiums and other revenue 238,851 229,934
Benefits and expenses:
Life and other policy benefits 28,283 29,371
Decrease in liabilities for
future policy benefits (2,438) (2,096)
Amortization of deferred policy
acquisition costs 31,537 30,670
Universal life and investment
annuity contract interest 108,727 110,180
Other insurance operating expenses 21,829 19,750
Total benefits and expenses 187,938 187,875
Earnings before Federal income
taxes and discontinued operations 50,913 42,059
Provision (benefit) for Federal income taxes:
Current 12,619 16,536
Deferred (242) (2,556)
Total Federal income taxes 12,377 13,980
Earnings from continuing operations 38,536 28,079
Losses from discontinued operations (14,125) (1,000)
Net earnings $ 24,411 27,079
Basic earnings per share:
Earnings from continuing operations $ 11.03 8.05
Losses from discontinued operations (4.04) (0.29)
Net earnings $ 6.99 7.76
Diluted earnings per share:
Earnings from continuing operations $ 10.91 7.98
Losses from discontinued operations (4.00) (0.28)
Net earnings $ 6.91 7.70
<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 September 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net earnings $ 1,771 9,529
Other comprehensive income, net of
effects of deferred
policy acquisition costs and taxes:
Unrealized gains on securities:
Unrealized holding gains
arising during period 5,328 3,638
Less: reclassification adjustment
for gains included in net earnings (228) (268)
Amortization of net unrealized gains
related to transferred securities (67) (247)
Net unrealized gains on securities 5,033 3,123
Foreign currency translation adjustments - 331
Other comprehensive income 5,033 3,454
Comprehensive income $ 6,804 12,983
<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 Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net earnings $ 24,411 27,079
Other comprehensive income, net of effects of
deferred policy acquisition costs and taxes:
Unrealized gains on securities:
Unrealized holding gains
arising during period 6,930 3,881
Less: reclassification adjustment for
gains included in net earnings (645) (1,033)
Amortization of net unrealized gains
related to transferred securities (401) (786)
Net unrealized gains on securities 5,884 2,062
Foreign currency translation adjustments (35) 2,267
Other comprehensive income 5,849 4,329
Comprehensive income $ 30,260 31,408
<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 Nine Months Ended September 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 6 -
Common stock at end of period 3,498 3,491
Additional paid-in capital:
Balance at beginning of year 24,662 24,647
Shares exercised under stock option plan 237 -
Additional paid-in capital at end of period 24,899 24,647
Accumulated other comprehensive income:
Unrealized gains on securities:
Balance at beginning of year 13,782 9,853
Change in unrealized gains during period 5,884 2,062
Balance at end of period 19,666 11,915
Foreign currency translation adjustments:
Balance at beginning of year 2,486 -
Change in translation adjustments
during period (35) 2,267
Balance at end of period 2,451 2,267
Accumulated other comprehensive
income at end of period 22,117 14,182
Retained earnings:
Balance at beginning of year 356,441 314,869
Net earnings 24,411 27,079
Retained earnings at end of period 380,852 341,948
Total stockholders' equity $ 431,366 384,268
<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 Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 24,411 27,079
Adjustments to reconcile net earnings to
net cash from operating activities:
Universal life and investment
annuity contract interest 108,727 110,180
Surrender charges and other
policy revenues (30,884) (31,716)
Realized (gains) losses on investments (2,114) 2,371
Accrual and amortization of
investment income (6,397) (3,846)
Depreciation and amortization 737 746
Decrease in insurance receivables
and other assets 864 395
Increase in accrued investment income (1,553) (644)
Decrease (increase) in deferred
policy acquisition costs (15,008) 2,391
Decrease in liability for
future policy benefits (2,438) (2,096)
Increase (decrease) in other
policyholder liabilities (197) 1,146
Increase (decrease) in Federal
income taxes payable (7,160) 976
Increase in other liabilities 12,121 2,903
Decrease in value of index options 5,201 -
Other (245) -
Net cash provided by operating activities 86,065 109,885
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity 2,978 1,993
Securities available for sale - 48,170
Other investments 2,595 1,615
Proceeds from maturities and redemptions of:
Securities held to maturity 77,855 81,177
Securities available for sale 45,296 29,389
Purchases of:
Securities held to maturity (226,321) (78,914)
Securities available for sale (83,125) (167,569)
Other investments (13,252) (3,822)
Principal payments on mortgage loans 31,421 27,137
Cost of mortgage loans acquired (6,642) (19,395)
Decrease in policy loans 7,901 5,960
Decrease in assets of discontinued operations 283 365
Increase (decrease) in liabilities
of discontinued operations 13,842 (365)
Other (349) (179)
Net cash used in investing activities (147,518) (74,438)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Nine Months Ended September 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 $ 327,897 196,328
Return of account balances on universal life
and investment annuity contracts (263,385) (236,909)
Issuance of common stock under
stock option plan 243 -
Net cash provided by (used
in) financing activities 64,755 (40,581)
Net increase (decrease) in cash
and short-term investments 3,302 (5,134)
Cash and short-term investments
at beginning of year 7,870 11,358
Cash and short-term investments at end of period $ 11,172 6,224
<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 September 30, 1998, and the results of its
operations for the three months and nine months ended September 30, 1998 and
1997 and its cash flows for the nine months ended September 30, 1998 and 1997.
The results of operations for the three months and nine months ended
September 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 nine months
ended September 30, 1998 and 1997.
(3) DISCONTINUED BROKERAGE OPERATIONS
By order dated August 28, 1998, the United States Bankruptcy Court, Southern
District of Texas, Houston Division, confirmed and approved the Third Amended
Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation
and its wholly owned subsidiary Westcap Enterprises, Inc. (jointly Westcap).
Pursuant to the Plan, National Western will receive credit for $1,000,000
previously contributed to Westcap in bankruptcy in March, 1997, and will pay
an additional $14,125,000 to compromise and settle (i) all claims of Westcap
against National Western, and (ii) all claims and litigation of certain
settling creditors of Westcap who alleged federal or state securities law
"control person" violations by National Western relating to Westcap's
brokerage business, in exchange for full and complete releases from all of
such claims, litigation and alleged violations. Chicago City Colleges is
excluded from the compromise and settlement by National Western with the
settling creditors, but will participate with all creditors in the settlement
distribution from Westcap. National Western will retain 100% continuing
ownership of the reorganized Westcap. Westcap will no longer engage in
brokerage operations, but will operate as a real estate management company.
The $14,125,000 settlement was reflected as a loss from discontinued brokerage
operations for the quarter ended September 30, 1998. The settlement payment
is expected to be made in November, 1998. Any additional losses will depend
on the results of the Chicago City Colleges lawsuit filed against National
Western on March 28, 1994, for alleged federal or state securities law
"control person" violations relating to Westcap, and which is pending in the
United States District Court, Western District of Texas. National Western
believes it has reasonable and adequate defenses to this suit and,
accordingly, no amounts have been accrued in the accompanying consolidated
financial statements for potential losses relating to such suit.
(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>
Nine Months Ended September 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 6 -
Shares outstanding at end of period 3,498 3,491
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
On September 8, 1998, National Western Life Insurance Company (National
Western), National Annuity Programs, Inc. (NAP), and the policyholder
plaintiffs, interveners and class-representatives in the Diffie, et al. vs.
National Western Life Insurance Company and National Annuity Programs, Inc.
class action litigation pending in the District Court of Travis County, Texas,
filed with the Court a joint motion for preliminary approval of a Settlement
Agreement among the parties, and requested the Court to review the Settlement
Agreement and make a preliminary determination that it is fair, adequate and
reasonable to the members of the proposed classes, and that the proposed
classes are capable of being certified for settlement purposes, to approve the
form of the notices of the settlement to the classes, and to set a class
certification and fairness hearing on the settlement. As previously reported,
National Western and NAP, its independent marketing general agency, were sued
for alleged violations of Texas statutes and regulations of the Texas
Department of Insurance, alleged negligent misrepresentations, and other
allegations relating to breach of contract, common law fraud, good faith and
fair dealing and conspiracy. In exchange for a final order and judgment
dismissing with prejudice the claims asserted against National Western and NAP
by all members of the settlement classes, National Western will contribute
approximately $5 million to the proposed settlement and NAP will pay $750,000
to the settlement.
On September 9, 1998, the District Court entered an order temporarily
certifying a settlement class, preliminarily approved the Settlement Agreement
between the parties, determined that it is appropriate to send notice to the
proposed class members of the Settlement Agreement, approved the form and
content of the notices to the members of the class, authorized National
Western to retain an administrator to supervise the Settlement Agreement offer
to members of the class, set a "fairness hearing" on the Settlement Agreement
for January 20, 1999, and enjoined other actions.
Although National Western and NAP consider this is a fair and equitable
settlement offer, significant uncertainty still exists whether the Settlement
Agreement will be approved by an acceptable number of class members and by the
Court. Additionally, National Western may void the Settlement Agreement
should a specified number of class members reject the proposed settlement. As
a result of this considerable uncertainty, no amounts have been accrued in
National Western's financial statements for the potential settlement.
National Western will accrue the appropriate amount of the settlement offer if
and when it is probable that acceptance of the Settlement Agreement will be
achieved. National Western will proceed with notification of class members
and preliminary administration of the claims process during the remainder of
1998. It is this process which will determine whether ultimate settlement is
achieved. Accordingly, National Western has accrued approximately $250,000
for the estimated costs of the notification and administration process in the
quarter ended September 30, 1998.
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>
Nine Months Ended September 30,
1998 1997
<S> <C> <C>
United States domestic market:
Investment annuities 81.9 % 72.7 %
Life insurance 6.3 9.6
Total domestic market 88.2 82.3
International market:
Investment annuities 0.2 0.7
Life insurance 11.6 17.0
Total international market 11.8 17.7
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 an 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 September 30, 1998, approximately 25.1% 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 September 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
September 30, December 31,
1998 1997
<S> <C> <C>
Debt securities 88.8 % 87.3 %
Mortgage loans 5.2 6.3
Policy loans 4.1 4.7
Equity securities 0.5 0.5
Real estate 0.4 0.5
Other 1.0 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 collateralized
mortgage obligations (CMOs).
At September 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 $ 2,146,202 2,015,048 131,154
Securities available for sale:
Debt securities 704,020 657,430 46,590
Equity securities 14,296 10,769 3,527
Totals $ 2,864,518 2,683,247 181,271
</TABLE>
As detailed above, debt securities comprise almost the entire securities
portfolio, as equity securities represent only a small component. Gross
unrealized gains totaling $181,271,000 on the securities portfolio at
September 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 September 30, 1998 is detailed below:
<TABLE>
<CAPTION>
Change in
Gross Unrealized Gains Unrealized
At At Gains
September 30, June 30, During 3rd
1998 1998 Quarter 1998
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 131,154 85,692 45,462
Securities available for sale:
Debt securities 46,590 32,669 13,921
Equity securities 3,527 3,777 (250)
Totals $ 181,271 122,138 59,133
</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 September 30, 1998, increased over $59 million from June 30, 1998, as
market interest rates of the ten year U.S. Treasury bond declined
approximately 100 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 September 30, 1998, corporate and public utility securities
represented over 68% of the entire debt securities portfolio.
Mortgage-backed securities are also an important component of the Company's
debt securities portfolio, representing 24% of the portfolio at September 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 September 30, 1998, CMOs represent about 90% of the Company's mortgage-
backed securities. Furthermore, PAC I CMOs account for approximately 94% 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>
September 30, 1998 $ 44,985 47,003 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 September 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 $158,304,000 and
$181,878,000, or 5.2% and 6.3% of total invested assets, at September 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 September 30, 1998 and December
31, 1997, was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
West South Central 60.4% 54.9 %
Mountain 12.7 11.3
South Atlantic 5.3 11.4
Pacific 8.6 8.0
East South Central 5.8 5.2
East North Central 1.4 3.9
Other 5.8 5.3
Totals 100.0% 100.0 %
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Retail 56.4 % 62.2 %
Office 18.4 16.6
Hotel/Motel 8.8 7.9
Apartment 4.7 4.1
Land/Lots 4.9 3.3
Nursing Homes 3.4 3.2
Other 3.4 2.7
Totals 100.0 % 100.0 %
</TABLE>
As of September 30, 1998, the allowance for possible losses on mortgage loans
was $4,640,000. No additions were made to the allowance in the third 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 nine months ended September 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 $13,678,000 and $15,027,000 at
September 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
$167,000 and $124,000 for the three months ended September 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 September 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.
Although not a significant portion of the investment portfolio, the Company's
real estate joint ventures and partnerships continue to produce favorable
returns. In the third quarter of 1998, the Company's investment income was
enhanced once again from nonrecurring gains totaling $1,125,000 on investments
in real estate limited partnerships.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results for the three months and nine months ended
September 30, 1998 and 1997 is provided below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(In thousands except per (In thousands except per
share data) share data)
<S> <C> <C> <C> <C>
Revenues:
Insurance revenues
excluding realized
gains (losses) on
investments $ 75,969 75,686 236,737 232,305
Realized gains (losses)
on investments 606 408 2,114 (2,371)
Total revenues $ 76,575 76,094 238,851 229,934
Earnings:
Earnings from
insurance operations $ 15,502 9,264 37,162 29,620
Losses from discontinued
brokerage operations (14,125) - (14,125) (1,000)
Net realized gains
(losses)
on investments 394 265 1,374 (1,541)
Net earnings $ 1,771 9,529 24,411 27,079
Basic Earnings Per
Share:
Earnings from
insurance operations $ 4.44 2.66 10.64 8.49
Losses from discontinued
brokerage operations (4.04) - (4.04) (0.29)
Net realized gains
(losses)
on investments 0.11 0.07 0.39 (0.44)
Net earnings $ 0.51 2.73 6.99 7.76
Diluted Earnings Per
Share:
Earnings from
insurance operations $ 4.37 2.64 10.52 8.42
Losses from discontinued
brokerage operations (3.98) - (4.00) (0.28)
Net realized gains
(losses)
on investments 0.11 0.07 0.39 (0.44)
Net earnings $ 0.50 2.71 6.91 7.70
</TABLE>
Significant changes and fluctuations in income and expense items between the
three months ended September 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 September 30, 1998, were $15,502,000 compared to $9,264,000 for
the third quarter of 1997. However, third quarter 1998 earnings include a
$4.9 million tax benefit resulting from losses from the Westcap bankruptcy
settlement. The tax benefit was recognized in accordance with the Company's
tax allocation agreement with its subsidiaries. Excluding the tax benefit,
1998 third quarter earnings increased $1.3 million over the comparable 1997
quarter. Contributing to the increased earnings were universal life and
annuity contract revenues which were up 14.7% from the 1997 third quarter and
lower life insurance benefit claims. Additionally, increases in net
investment income totaling $730,000, net of taxes, were realized from
nonrecurring gains on investments in real estate limited partnerships.
Increases in earnings were offset somewhat by higher amortization of deferred
policy acquisition costs and other insurance operating expenses.
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
$19,303,000 for the quarter ended September 30, 1997, to $22,150,000 for the
same 1998 period. The higher revenues are primarily due to increases in
surrender charge revenues totaling $1,158,000 for single-tier annuities and
universal life insurance and increases in cost of insurance revenues totaling
$1,002,000. Policy surrenders were 37.9% and 2.7% higher for single-tier
annuities and universal life, respectively, for the third quarter of 1998
compared to the same period of 1997. The increase in cost of insurance
revenues continues as sales of universal life products in both the domestic
and international markets increase, resulting in growth of the Company's block
of universal life insurance in force.
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
September 30,
1998 1997
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 5,104 4,803
Universal life insurance 2,391 1,922
Single-tier annuities 1,916 1,227
Total surrender charges 9,411 7,952
Cost of insurance revenues 9,761 8,759
Policy fees and other revenues 2,978 2,592
Totals $ 22,150 19,303
</TABLE>
Actual universal life and investment annuity deposits collected for the
quarters ended September 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 September 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment annuities:
First year and single premiums $ 122,212 56,071
Renewal premiums 3,989 4,981
Total annuities 126,201 61,052
Universal life insurance:
First year and single premiums 5,316 5,001
Renewal premiums 12,767 12,863
Total universal life insurance 18,083 17,864
Totals $ 144,284 78,916
</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 is again experiencing significant growth in annuity production in
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 107% from $61,052,000 for the third quarter of 1997 to $126,201,000
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. Initial sales of $158 million in the first nine 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.
First year and single universal life insurance premiums showed moderate growth
in the third quarter of 1998. These premiums totaled $5,316,000 for the
quarter ended September 30, 1998, compared to $5,001,000 for the same period
of 1997, reflecting an increase of 6.3%. The Company has experienced growth
in this area throughout 1998 from both international and domestic life
insurance sales as the Company's increased marketing efforts and additional
personnel are producing positive results.
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 have reflected significant growth in 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 has been consistently strong for
National Western over the years, 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
introduced two new equity-indexed investment products in 1998 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 continues to modify its current
portfolio of products to better meet the needs of policyholders in expanded
market niches.
Net Investment Income: Net investment income decreased 4.2% from the third
quarter of 1997, due to declines in fair values of index options used to hedge
the equity return component of the Company's equity-indexed annuity product.
The index options, which act as hedges to match closely the returns on the S&P
500 Composite Stock Price Index, are reported at fair value in the
accompanying financial statements. Because the index options are used as
hedges, the changes in the values of the index options and the changes in the
policyholder liabilities for equity-indexed annuities are both reflected in
the statement of earnings. The decline in value of the index options totaled
$6.6 million for the third quarter of 1998. This significant decline is
directly attributable to the decline in the S&P 500 Composite Stock Price
Index over the same period. While net investment was lower due to these
options, the Company also incurred corresponding lower annuity contract
interest expense as the credited return on the Company's equity-indexed
annuities are also based on the same S&P 500 Composite Stock Price Index.
Net investment income from debt securities continues to increase primarily due
to increases in invested assets as a result of strong annuity production in
1998. But as market interest rates continue to decline in 1998, this has also
lowered the Company's portfolio yield on its debt securities. As a result of
these factors, net investment income from debt securities for the third
quarter of 1998 reflects an increase of $3,522,000, or 7.7%, over the same
period for 1997. However, net investment income for the third quarter of 1997
also was lower than anticipated due to yield and amortization adjustments on
mortgage-backed securities totaling $1.4 million.
The Company continues to experience declines in investment income from
mortgage loans which is consistent with decreases in mortgage loans as
previously described. Also, in addition to the decline in value of index
options, other investment income includes nonrecurring gains on investments in
real estate limited partnerships totaling $1,125,000. A detail of net
investment income is provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 49,149 45,627
Mortgage loans 4,189 4,633
Policy loans 2,290 2,458
Other (4,364) 598
Total investment income 51,264 53,316
Investment expenses 575 408
Net investment income $ 50,689 52,908
</TABLE>
Realized Gains on Investments: The Company recorded realized gains of $606,000
in 1998 compared to realized gains of $408,000 in 1997. The gains in 1998
were primarily from calls of investments in debt securities. The 1997 gains
were primarily from sales of debt securities and mortgage loan prepayment
penalties.
Life and Other Policy Benefits: Expenses in 1998 and 1997 were relatively
comparable at $9.2 million and $9.4 million, respectively. Closer analysis
shows life insurance benefit claims were $1,276,000 lower in the third quarter
of 1998 than in 1997. Conversely, traditional life insurance surrenders
increased $1,164,000 in 1998 over the comparable 1997 period. However, much
of the increase in traditional 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 September 30,
1998 1997
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 5,397 6,673
Surrenders of traditional products 3,293 2,129
Other policy benefits 465 560
Totals $ 9,155 9,362
</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
significantly higher at $11,137,000 compared to $9,785,000 for 1997. The
increase in amortization correlates directly to higher policy surrenders.
Surrenders for the third quarter of 1998 were 25% higher than the comparable
1997 period.
Universal Life and Investment Annuity Contract Interest: Interest expense
decreased from $36,116,000 in 1997 to $33,177,000 in 1998. The decrease in
interest expense is due to reductions and reversals of interest credited to
equity-indexed annuities. The equity return component of the Company's
equity-indexed annuity is based on the performance of the S&P 500 Composite
Stock Price Index. This index rose in the first half of 1998, but declined
significantly in the third quarter, resulting in the decrease in interest
credited to equity-indexed annuities. As previously described, the Company
uses index options to hedge the equity component of these annuities and, as a
result, net investment income resulting from these option hedges also
decreased significantly in the third quarter of 1998.
Other Insurance Operating Expenses: Operating expenses for the third quarter
of 1998 were $7,501,000 compared to $6,378,000 for the comparable 1997 period.
Included in 1998 expenses is $250,000 for the estimated costs of the
notification and administration process for the class action lawsuit
settlement as previously described in Note 6 of the accompanying financial
statements. Also contributing to the higher expenses were increases in legal
fees and several other areas, most of which are related to increased marketing
efforts such as salaries and compensation, travel, and printing and
publication costs.
Federal Income Taxes: Federal income taxes for the quarter ended September 30,
1998, totaled $654,000, reflecting an effective tax rate of only 4.0%. The
low effective tax rate is due to a $4.9 million tax benefit resulting from
discontinued brokerage operations losses totaling $14,125,000. The 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 Part II, Item 1, Legal Proceedings of this Form 10-
Q, by order dated August 28, 1998, the United States Bankruptcy Court,
confirmed and approved the Third Amended Joint Consensual Plan of
Reorganization (the Plan) of The Westcap Corporation and its wholly owned
subsidiary Westcap Enterprises, Inc. (jointly Westcap). Pursuant to the Plan,
National Western will receive credit for $1,000,000 previously contributed to
Westcap in bankruptcy in March, 1997, and will pay an additional $14,125,000
to compromise and settle (i) all claims of Westcap against National Western,
and (ii) all claims and litigation of certain settling creditors of Westcap
who alleged federal or state securities law "control person" violations by
National Western relating to Westcap's brokerage business, in exchange for
full and complete releases from all of such claims, litigation and alleged
violations. The $14,125,000 settlement was reflected as a loss from
discontinued brokerage operations for the quarter ended September 30, 1998.
The settlement payment is expected to be made in November, 1998.
Significant changes and fluctuations in income and expense items between the
nine months ended September 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
nine months ended September 30, 1998, were $37,162,000 compared to $29,620,000
for the same period of 1997. As previously described, 1998 earnings include a
$4.9 million tax benefit resulting from losses from the Westcap bankruptcy
settlement. Excluding the tax benefit, year-to-date 1998 earnings increased
$2.6 million over the comparable 1997 period. Contributing to the higher
earnings were increased universal life and annuity contract revenues and lower
life insurance benefit claims. Increases in net investment income totaling
$730,000, net of taxes, were also realized in 1998 from nonrecurring gains on
investments in real estate limited partnerships. Additionally, increases in
net investment income due to yield and amortization adjustments on mortgage-
backed securities resulting from lower market interest rates were recognized
in the second quarter of 1998.
Universal Life and Investment Annuity Contract Revenues: These revenues
increased from $59,984,000 for the nine months ended September 30, 1997, to
$62,741,000 for the same 1998 period. Cost of insurance revenues account for
substantially all of this increase as the Company's universal life insurance
in force consistently grows. Universal life insurance premiums collected for
the nine months ended September 30, 1998, increased 7.6% over the comparable
1997 period. This growth in premiums, and resulting increased life insurance
in force, is consistent with the increase in cost of insurance revenues in
1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 14,368 15,161
Universal life insurance 6,252 6,849
Single-tier annuities 5,125 3,595
Total surrender charges 25,745 25,605
Cost of insurance revenues 28,294 25,757
Policy fees and other revenues 8,702 8,622
Totals $ 62,741 59,984
</TABLE>
Actual universal life and investment annuity deposits collected for the nine
months ended September 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>
Nine Months Ended September 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment annuities:
First year and single premiums $ 294,347 159,417
Renewal premiums 14,735 17,602
Total annuities 309,082 177,019
Universal life insurance:
First year and single premiums 15,422 12,040
Renewal premiums 36,704 36,404
Total universal life insurance 52,126 48,444
Totals $ 361,208 225,463
</TABLE>
Annuity sales increased $132,063,000, or 75%, for the nine months ended
September 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 over $3.6 million for the same period. This
reflects growth of 7.6% and is from increased sales in both the international
and domestic life insurance markets.
Net Investment Income: Net investment income from debt securities continues to
increase primarily due to increases in invested assets. These increases are
attributable to significantly higher annuity production in 1998 than in recent
years. Net investment income was also higher in 1998 due to yield and
amortization adjustments on mortgage-backed securities resulting from lower
market interest rates. These adjustments totaling $985,000 were recorded in
the second quarter of 1998. Also affecting comparability between periods were
third quarter 1997 yield and amortization adjustments totaling $1.4 million
which lowered 1997 investment income.
Decreases in investment income from mortgage loans and policy loans continue
in correlation to decreases in investments in such loans. Other investment
income decreased significantly due to declines in fair values of index
options. These options are used to hedge the equity return component of the
Company's equity-indexed annuity product, as more fully described for the
three months ended September 30, 1998. The decline in value of the index
options totaled $5.2 million for the nine months ended September 30, 1998.
Also included in other investment income for 1998 are nonrecurring gains on
investments in real estate limited partnerships totaling $1,125,000, which are
partially offsetting the declines from the index options. A detail of
investment income is provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 145,313 137,473
Mortgage loans 12,988 14,144
Policy loans 7,015 7,306
Other 149 3,461
Total investment income 165,465 162,384
Investment expenses 1,977 1,965
Net investment income $ 163,488 160,419
</TABLE>
Other Income: Other income increased significantly from $220,000 in 1997 to
$891,000 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 $2,114,000 in 1998 compared to realized losses of $2,371,000 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
$1.7 million. The Company also incurred net losses totaling $485,000 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 $28.3 million
and $29.4 million, respectively. The significant decrease in expenses is due
primarily to lower life insurance benefit claims as previously described for
the three months ended September 30, 1998.
Universal Life and Investment Annuity Contract Interest: Interest expense was
down from $110.2 million in 1997 to $108.7 million in 1998. As previously
described for the three months ended September 30, 1998, the decrease in
interest expense is due to reductions and reversals of interest credited to
equity-indexed annuities.
Other Insurance Operating Expenses: Operating expenses for the nine months
ended September 30, 1998, increased 10.5% over the comparable 1997 period.
Included in 1998 expenses is a $200,000 lawsuit settlement payment by National
Western 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 received a general release of all
claims asserted with no admission of liability. Also included in 1998
expenses is $250,000 for the estimated costs of the notification and
administration process for the class action lawsuit settlement as previously
described in Note 6 of the accompanying financial statements. Other factors
contributing to higher operating expenses are in specific areas, most of which
are related to increased marketing efforts such as salaries and compensation,
travel, and printing and publication costs.
Federal Income Taxes: Federal income taxes for 1998 and 1997 reflect
effective tax rates of 24.3% and 33.2%, respectively, which are lower than the
current Federal tax rate of 35%. Federal income taxes for the nine months
ended September 30, 1998 and 1997, include tax benefits totaling $4,900,000
and $350,000, respectively, resulting from the Company's subsidiary brokerage
operations losses. These tax benefits were 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 previously described, The Westcap Corporation bankruptcy settlement
totaling $14,125,000 was recorded in the third quarter of 1998. Also, 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 a loss 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 $86.1 million and $109.9 million for the nine months ended September 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 $64.5 million for the first nine months of 1998, but
reflected a net cash outflow totaling $40.6 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 $123.2 million and $110.6 million for the nine months
ended September 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 $431.4 million at September 30, 1998, reflecting
an increase of $30.5 million from December 31, 1997. The increase in capital
is primarily from net earnings of $24.4 million and an increase in net
unrealized gains on investment securities totaling $5.9 million during the
first nine months of 1998. Book value per share at September 30, 1998, was
$123.31.
YEAR 2000 ISSUES
The Year 2000 problem, also known as Y2K, is the result of concerns that many
computer software systems today cannot distinguish the year 2000 from the year
1900. 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. National Western has been cognizant of these
problems for many years as life insurance and annuity products can have very
long life spans. Thus, many of our systems have been developed to process and
administer our insurance products into the next century. National Western has
been working to alleviate or eliminate Year 2000 problems for many years and
has assigned the responsibility for the analysis of the problem, to its Senior
Vice President-Information Services who deemed the most complete and cost
effective approach to the problem was to use existing staff and facilities.
Accordingly, the Company's Year 2000 plan includes staff review and analysis
of internal systems, embedded chip technology, and external vendor interfaces
as described below.
National Western's primary internal software systems include its policy
administration system and investment accounting system. The policy
administration system is an important software system for National Western as
it is a comprehensive system involving the following functions: policy
issuance, maintenance and accounting, cash receipts, cash disbursements,
general ledger, agent commissions, and various other accounting functions.
While this policy administration system was not developed by National Western,
several key employees of the National Western Information Services department
were involved in the system's original development process. As a result,
National Western does not maintain a service agreement with the original
developer but, rather, maintains and services the system internally. National
Western has performed an assessment of this system regarding Year 2000 issues
which revealed that there is some exposure to insufficient date processing
that must be corrected. However, the assessment also revealed that much of
the date sensitive data is already in four digit format which avoids the Year
2000 processing problems. Accordingly, National Western commenced a project
to perform a comprehensive review of the entire policy administration system.
This project has been substantially completed and changes are currently being
made to correct any software coding problems. The Company plans to test and
validate the system changes in the fourth quarter of 1998 with continuing
testing throughout 1999. Final implementation of the system changes is
currently planned for mid-year 1999 based on anticipated favorable results of
testing.
The Company's investment accounting system is also a critical system as it
provides accounting, analysis, and transaction processing for the Company's
bond and stock securities which comprise most of its investments. Like the
Company's policy administration system, this system was developed by a third
party software vendor. However, National Western does maintain a product
support agreement with the original vendor. Maintenance and changes to this
investment system are the responsibility of the vendor in accordance with this
support agreement. National Western has addressed Year 2000 issues with the
vendor and the vendor has provided assurance that their system has been
subjected to significant review for any problems. The review included
assessment, correction, and testing of date sensitive problems and the vender
has provided us written acknowledgment that we should encounter no significant
Year 2000 related problems. National Western will also independently test the
investment system in the fourth quarter of 1998 and through the beginning of
1999. The Company is already using the vendor's Year 2000 modified software
release for current processing.
National Western does have some exposure to date sensitive embedded technology
such as microcontrollers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive such as manufacturing,
National Western is a financial services company providing insurance and
annuities to its customers. As such, the primary equipment and electronic
devices used are computers and telephone related equipment. This type of
hardware can have date sensitive embedded technology which could be subject to
Year 2000 problems. Because of this exposure, National Western has reviewed
its computer hardware and telephone systems, with assistance from the
applicable vendors, and has replaced, or is in the process of replacing any
items that will not properly process date sensitive data in the Year 2000 or
beyond. This project will be substantially completed by year-end 1998.
The final area of concern is the Company's use of third party systems or
interfaces with vendor systems. National Western's most significant
interfaces and uses of third party vendor systems are in the bank and trust
services area. The Company utilizes various banks to handle numerous types of
financial transactions. Several of these banks also provide trustee and
custodial services for National Western's investment holdings and
transactions. These services are critical to a financial service company such
as National Western as its business centers around cash receipts and
disbursements to policyholders and the investment of policyholder funds. As a
result, National Western has received written confirmation from its vendor
banks regarding their status on Year 2000 issues. The banks indicate their
dedication to resolving any Year 2000 issues related to their systems and
services prior to the critical date. These banks have completed assessments
of their exposure to Year 2000 issues and are in problem resolution and
testing phases of their Y2K projects.
In reviewing the Year 2000 issue, National Western has identified various
risks to the Company that could impact daily operations and its ability to
satisfactorily transact business with its primary customers and vendors.
Risks related to servicing our customers are inabilities to process
policyholder and agent commission related transactions timely which could lead
to some loss of business. The accuracy of policyholder transactions should
not be affected as the Company's policy administration system already uses
four digit year data for policy calculations. Risks in the investment
accounting area center around accuracy of accounting for investments but
should not actually impact cash receipt and disbursement transactions.
However, the Company has various controls which should identify and enable
correction of such issues should they arise. Risks in interfaces with third
party systems, which are primarily banking systems for National Western,
include the inability to timely and accurately receive and disburse cash and
process investment related transactions. This could affect the Company's
service to its policyholders if cash flow issues arise due to delays in bank
processing. Based on information from the Company's banks, National Western
does not anticipate significant Year 2000 issues relating to bank processing.
Based on its analysis, the Company believes it is on schedule with its Year
2000 plan so that any disruptions by Year 2000 will be minimal. National
Western recognizes, however, that it is virtually impossible to assure that
the Company will be 100% Year 2000 compliant until Year 2000 is here. We
anticipate there will be problems that will have to be resolved in the
ordinary course of business on and after Year 2000. However, the Company does
not believe that the problems will have a material affect on the Company's
operations or financial condition. Under a worst case scenario, where systems
do not function adequately on or after Year 2000, the Company intends to place
all available resources it can to remedy any problems as soon as possible.
The resources include National Western staff as well as outside consulting
services.
The Company has reviewed Year 2000 related costs incurred to date and is
monitoring potential future costs to complete its Year 2000 plan. Such costs
are not expected to exceed $200,000. A significant amount of these costs have
not and will not be incremental costs to the Company, as internal 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. Costs already incurred
as of September 30, 1998, related to the Year 2000 plan total approximately
$120,000.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained herein or in
other written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries are or may be viewed a forward-looking.
Although the Company has used appropriate care in developing any such
information, forward-looking information involves risks and uncertainties that
could significantly impact actual results. These risk and uncertainties
include, but are not limited to, matters described in the Company's SEC
filings such as exposure to market risks, anticipated cash flows, future
capital needs, and Year 2000 issues. However, National Western, as a matter
of policy, does not make any specific projections as to future earnings nor
does it endorse any projections regarding future performance that may be made
by others. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments. Also, the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future developments, or otherwise.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PENDING LITIGATION
Class Action Litigation
National Western Life Insurance Company (the Company or National Western) and
National Annuity Programs, Inc. (NAP) have been sued in the District Court of
Travis County, Texas, by a former agent of the Company, eight plaintiffs, and
fourteen intervenors, being present and past annuity policyholders of the
Company, and on behalf of an asserted class of annuity policyholders of the
Company, and alleged that in the sale of certain Company annuities to the
plaintiffs and intervenors the Company and NAP (i) had violated the Texas
Deceptive Trade Practices-Consumer Protection Act, statutes in the Texas
Insurance Code, and certain rules and regulations of the Texas Department of
Insurance; (ii) committed common law fraud; (iii) were negligent; (iv) had
breached a duty of good faith and fair dealing; (v) made negligent
misrepresentations; (vi) committed a civil conspiracy to commit fraud; and
(vii) breached policy contracts. The plaintiffs seek (i) certification of one
or more classes; and (ii) recovery of unspecified actual damages, monies paid
by plaintiffs, attorneys' fees, prejudgment and postjudgment interests and
costs, increased or treble damages, punitive damages, and general relief as
awarded by the Court. NAP was an independent marketing general agency under
contract with the Company that hired and supervised the agents marketing the
annuity products on behalf of the Company.
On September 8, 1998, National Western, NAP, and the policyholder plaintiffs,
interveners and class-representatives in this class action litigation filed
with the Court a joint motion for preliminary approval of a Settlement
Agreement among the parties. The parties requested the Court to review the
Settlement Agreement and make a preliminary determination that it is fair,
adequate and reasonable to the members of the proposed classes, and that the
proposed classes are capable of being certified for settlement purposes, to
approve the form of the notices of the settlement to the classes, and to set a
class certification and fairness hearing on the settlement.
In exchange for a final order and judgment dismissing with prejudice the
claims asserted against National Western and NAP by all members of the
settlement classes, National Western will contribute approximately $5 million
to the proposed settlement and NAP will pay $750,000 to the settlement.
Approximately $3,850,000 will be made available for the members of the various
classes that qualify for payments, and $1,900,000 will be paid for attorneys'
fees and expenses. There is a possibility that National Western's total
payment to members of the classes could increase, but it is believed that the
amount would not be material. In the settlement, National Western guarantees
that at least $900,000 will be paid out to approved claims by members of the
classes, and any unclaimed amounts are to be returned to National Western.
Additionally, National Western has agreed to pay the costs of notice to the
class and administration of the settlement claims process, estimated to be
approximately $250,000. National Western has also agreed to guarantee minimum
interest rates of 3% and 5% in the future on certain settlement options under
specified annuity policies which are the subject matter of the litigation, and
to provide additional incidental settlement benefits, all as detailed in the
motion and Settlement Agreement. The plaintiffs estimate that the aggregate
value of all of the settlement benefits, including the $5,750,000 settlement
payments and potential future benefits to be derived by policyholders under
certain policy settlement elections, is approximately $10 million.
On September 9, 1998, the District Court entered an order temporarily
certifying a settlement class, preliminarily approved the Settlement Agreement
between the parties, determined that it is appropriate to send notice to the
proposed class members of the Settlement Agreement, approved the form and
content of the notices to the members of the class, authorized National
Western to retain an administrator to supervise the Settlement Agreement offer
to members of the class, set a "fairness hearing" on the Settlement Agreement
for January 20, 1999, and enjoined other actions.
The Settlement Agreement is subject to Court review and initial approval as to
fairness, certification of appropriate classes, approval of form of notice to
class members, as well as notice to class members, claim application by class
members for payment, and final Court approval of the settlement.
Although National Western and NAP consider this is a fair and equitable
settlement offer, significant uncertainty still exists whether the Settlement
Agreement will be approved by an acceptable number of class members and by the
Court. Additionally, National Western may void the Settlement Agreement
should a specified number of class members reject the proposed settlement. As
a result of this considerable uncertainty, no amounts have been accrued in
National Western's financial statements for the potential settlement.
National Western will accrue the appropriate amount of the settlement offer if
and when it is probable that acceptance of the Settlement Agreement will be
achieved. National Western will proceed with notification of class members
and preliminary administration of the claims process during the remainder of
1998. It is this process which will determine whether ultimate settlement is
achieved. Accordingly, National Western has accrued approximately $250,000
for estimated costs of the notification and administration process in the
quarter ended September 30, 1998.
Westcap Related 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
By order dated August 28, 1998, the United States Bankruptcy Court, Southern
District of Texas, Houston Division, confirmed and approved the Third Amended
Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation
and its wholly owned subsidiary Westcap Enterprises, Inc. (jointly Westcap).
Westcap is a wholly owned subsidiary of National Western Life Insurance
Company (National Western). Pursuant to the Plan, National Western will
receive credit for $1,000,000 previously contributed to Westcap in bankruptcy
in March, 1997, and will pay an additional $14,125,000 to compromise and
settle (i) all claims of Westcap against National Western, and (ii) all claims
and litigation of certain settling creditors of Westcap who have alleged
federal or state securities law "control person" violations by National
Western relating to Westcap's brokerage business, in exchange for full and
complete releases from all of such claims, litigation and alleged violations.
Approximately $7,979,000 will be paid and transmitted to a Disbursing Trust
Committee on behalf of Westcap for payment to holders of allowed claims
against the Westcap debtors. Included in this amount are Westcap assets
totaling approximately $568,000 which remain primarily from National Western's
$1,000,000 contribution as described above. National Western will also pay a
total of approximately $6,714,000 to other settling Westcap creditors with
allowed claims against the Westcap debtors who are also settling with and
releasing National Western from alleged federal or state securities law
"control person" violations relating to Westcap. The settling creditors are:
City of Tracy, California; Michigan South Central Power Agency; Covafer,
S.A. and Sergio Covarrubias; Sheriff of Palm Beach County, Florida; San
Antonio River Authority; Tom Green County, Texas; Eduardo and Antonietta
Saad; City of La Mesa; Darlington County, South Carolina; Greenwood County,
South Carolina; Bernice and Sarah Finger; Winston-Salem State University
Foundation; Mary Robin Christison; Mason Tenders; Clerk of the Circuit Court
of St. Lucie County, Florida.
Pursuant to the Plan, National Western will retain 100% continuing ownership
of the reorganized Westcap. Westcap will no longer engage in brokerage
operations, but will operate as a real estate management company.
The City Colleges is excluded from the compromise and settlement by National
Western with the settling creditors, but will participate with all creditors
in the distribution from Westcap. The City Colleges previously obtained a
bankruptcy court judgment for approximately $56 million against the Westcap
debtors. Under the Plan, The City Colleges will participate in the $7,979,000
creditor distribution relating to an allowed $30 million claim, with any
distribution relating to the remaining $26 million claim in dispute pending an
appeal by Westcap of the $56 million judgment. Should Westcap prevail in the
appeal, National Western will be entitled to recover 23.1% of the reduced
amount of The City Colleges judgment, but not to exceed $600,000. Should
Westcap lose the appeal, The City Colleges will receive a higher prorata
percentage of the $7,979,000 creditor distribution. However, pursuant to the
Plan, National Western will have no additional liability for settlement
payments in excess of the $14,125,000 as described above. Under the Plan,
National Western will pay all of the attorneys' fees and court costs incurred
by Westcap in the appeal of The City Colleges' judgment.
The $14,125,000 settlement payment was reflected as a loss from discontinued
brokerage operations in the consolidated financial statements of National
Western for the quarter ended September 30, 1998. The settlement payment is
expected to be made in November, 1998. The $1,000,000 previously contributed
to Westcap in bankruptcy was reflected as a loss from discontinued brokerage
operations in the first quarter of 1997. Any additional losses will depend on
the results of The City Colleges lawsuit filed against National Western on
March 28, 1994, for alleged federal or state securities law "control person"
violations relating to Westcap, and which is pending in the United States
District Court, Western District of Texas. National Western believes it has
reasonable and adequate defenses to this suit and, accordingly, no amounts
have been accrued in National Western's consolidated financial statements for
potential losses relating to such suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(l) -Fifth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan
Exhibit 11 -Computation of Earnings Per Share (filed on pages __ and __
of this report).
Exhibit 27 -Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
A report on Form 8-K dated August 28, 1998, was filed by the Company
disclosing the confirmation and approval by the United States Bankruptcy Court
of the Third Amended Joint Consensual Plan of Reorganization of The Westcap
Corporation and its wholly owned subsidiary Westcap Enterprises, Inc.
A report on Form 8-K dated September 8, 1998, was filed by the Company
disclosing the filing of a joint motion with the District Court of Travis
County, Texas, for preliminary approval of a settlement agreement among
parties involved in class action litigation. This litigation involves
National Western Life Insurance Company, National Annuity Programs, Inc., and
the policyholder plaintiffs, interveners and class representatives in the
Diffie, et al. vs. National Western Life Insurance Company and National
Annuity Programs, Inc. lawsuit.
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: November 11, 1998 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: November 11, 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: November 11, 1998 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 10(l) - MATERIAL CONTRACTS
FIFTH AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFERRED COMPENSATION PLAN
This Fifth Amendment to the National Western Life Insurance Company
Pension Plan (the Plan) is hereby made and entered into this 1st day of July,
1998, by National Western Life Insurance Company (the Company).
WITNESSETH:
WHEREAS, the Plan was originally established effective January 1, 1991,
and amended and restated effective April 1, 1995; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at
any time; and
WHEREAS, the Company desires to change certain provisions of the Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. Section 3.1., Participant Contribution, is hereby amended, effective July
1, 1998, to read as follows:
"Each Employee who becomes a Participant in accordance with Article II hereof
may elect to make contibutions to the Plan on a pre-tax basis in increments of
one-quarter percent (1/4% or 0.25%) of his Compensation, from one-quarter
percent (1/4% or 0.25%) to fifty percent (50%).
Each Participant's pre-tax salary deferral agreement shall be made in writing
on such forms as the Committee shall prescribe, and shall be effective on a
Plan Year basis, or until changed in accordance with subsequent provisions of
this Section 3.1. A Participant's election hereunder may be completely
discontinued at any time, and may be changed on any periodic basis defined and
approved by the Committee, or as of any Valuation Date, provided that notice
of such change is received at least thirty (30) days prior to such Valuation
Date for Compensation to be earned for services rendered following such date,
or within such time frame as is approved by the Committee. If, as of any
Valuation Date, or as of the last day of any time period defined and approved
by the Committee in accordance with the provisions of this Section 3.1, a
Participant does not submit a new election, his previous election shall be
deemed to continue."
IN WITNESS WHEREOF, the National Western Life Insurance Company has
executed this Second Amendment.
ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY
By:
Its:
Approved by National Western Executive Committee
on July 24, 1998
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended September 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 $ 15,896 9,529
Losses from discontinued operations (14,125) -
Net earnings $ 1,771 9,529
Denominator:
Basic earnings per share -
weighted-average shares 3,498 3,491
Effect of dilutive stock options 46 30
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,544 3,521
Basic earnings per share:
Earnings from continuing operations $ 4.55 2.73
Losses from discontinued operations (4.04) -
Net earnings $ 0.51 2.73
Diluted earnings per share:
Earnings from continuing operations $ 4.48 2.71
Losses from discontinued operations (3.98) -
Net earnings $ 0.50 2.71
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Nine Months Ended September 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 $ 38,536 28,079
Losses from discontinued operations (14,125) (1,000)
Net earnings $ 24,411 27,079
Denominator:
Basic earnings per share -
weighted-average shares 3,495 3,491
Effect of dilutive stock options 38 28
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,533 3,519
Basic earnings per share:
Earnings from continuing operations $ 11.03 8.05
Losses from discontinued operations (4.04) (0.29)
Net earnings $ 6.99 7.76
Diluted earnings per share:
Earnings from continuing operations $ 10.91 7.98
Losses from discontinued operations (4.00) (0.28)
Net earnings $ 6.91 7.70
</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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 704,020
<DEBT-CARRYING-VALUE> 2,015,048
<DEBT-MARKET-VALUE> 2,146,202
<EQUITIES> 14,296
<MORTGAGE> 158,304
<REAL-ESTATE> 13,678
<TOTAL-INVEST> 3,060,406
<CASH> 11,172
<RECOVER-REINSURE> 4,572
<DEFERRED-ACQUISITION> 300,712
<TOTAL-ASSETS> 3,423,136
<POLICY-LOSSES> 2,892,156
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,117
<POLICY-HOLDER-FUNDS> 9,687
<NOTES-PAYABLE> 2,590
0
0
<COMMON> 3,498
<OTHER-SE> 427,868
<TOTAL-LIABILITY-AND-EQUITY> 3,423,136
72,358<F1>
<INVESTMENT-INCOME> 163,488
<INVESTMENT-GAINS> 2,114
<OTHER-INCOME> 891
<BENEFITS> 134,572<F2>
<UNDERWRITING-AMORTIZATION> 31,537
<UNDERWRITING-OTHER> 21,829
<INCOME-PRETAX> 50,913
<INCOME-TAX> 12,377
<INCOME-CONTINUING> 38,536
<DISCONTINUED> (14,125)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,411
<EPS-PRIMARY> 6.99
<EPS-DILUTED> 6.91
<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 $9,617 revenues from traditional contracts subject to FAS 60
accounting treatment, and $62,741 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $28,283 benefits paid to policyholders, $(2,438) decrease in
reserves on traditional contracts and $108,727 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
