UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ X ] No [ ]
As of May 10, 1999, the number of shares of Registrant's common stock
outstanding was: Class A - 3,298,928 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statements of Earnings
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
ASSETS
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,084,285 2,029,728
Securities available for sale,
at fair value 732,543 735,587
Mortgage loans, net of allowances
for possible
losses ($4,640 and $4,640) 169,675 174,921
Policy loans 121,286 124,441
Index options 28,464 23,900
Other long-term investments 28,020 24,999
Cash and short-term investments 6,692 24,508
Total cash and investments 3,170,965 3,138,084
Accrued investment income 44,441 44,777
Deferred policy acquisition costs 328,665 314,493
Other assets 15,614 20,601
Assets of discontinued operations - 48
$ 3,559,685 3,518,003
<FN>
Note: The balance sheet at December 31, 1998, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 167,007 167,248
Universal life and investment
annuity contracts 2,857,818 2,812,230
Other policyholder liabilities 23,482 23,955
Federal income taxes payable:
Current 5,880 5,221
Deferred 7,922 9,646
Other liabilities 51,727 61,290
Liabilities of discontinued operations - 48
Total liabilities 3,113,836 3,079,638
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,298,528
and 3,298,128 shares issued and
outstanding in 1999 and 1998 3,299 3,298
Class B - $1 par value; 200,000
shares authorized, issued,
and outstanding in 1999 and 1998 200 200
Additional paid-in capital 24,930 24,899
Accumulated other comprehensive income 11,983 18,634
Retained earnings 405,437 391,334
Total stockholders' equity 445,849 438,365
$ 3,559,685 3,518,003
<FN>
Note: The balance sheet at December 31, 1998, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands except per share amounts)
[CAPTION]
<TABLE>
1999 1998
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 2,411 3,110
Universal life and investment
annuity contract revenues 21,532 20,300
Net investment income 57,852 55,538
Other income 150 535
Realized gains on investments 4,805 662
Total premiums and other revenue 86,750 80,145
Benefits and expenses:
Life and other policy benefits 8,688 10,674
Decrease in liabilities for
future policy benefits (241) (957)
Amortization of deferred policy
acquisition costs 9,571 8,945
Universal life and investment
annuity contract interest 40,611 38,335
Other operating expenses 6,701 7,241
Total benefits and expenses 65,330 64,238
Earnings before Federal income taxes 21,420 15,907
Provision for Federal income taxes:
Current 5,460 5,217
Deferred 1,857 320
Total Federal income taxes 7,317 5,537
Net earnings $ 14,103 10,370
Basic Earnings Per Share:
Net earnings $ 4.03 2.97
Diluted Earnings Per Share:
Net earnings $ 3.99 2.94
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net earnings $ 14,103 10,370
Other comprehensive income, net of effects of
deferred policy acquisition costs and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (4,886) (346)
Less: reclassification
adjustment for gains
included in net earnings (1,671) -
Amortization of net unrealized gains
related to transferred securities (85) (323)
Net unrealized losses on securities (6,642) (669)
Foreign currency translation adjustments (9) 58
Other comprehensive loss (6,651) (611)
Comprehensive income $ 7,452 9,759
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,498 3,492
Shares exercised under stock option plan 1 -
Balance at end of period 3,499 3,492
Additional paid-in capital:
Balance at beginning of year 24,899 24,662
Shares exercised under stock option plan 31 -
Balance at end of period 24,930 24,662
Accumulated other comprehensive income:
Unrealized gains (losses) on securities:
Balance at beginning of year 16,000 13,782
Change in unrealized gains
(losses) during period (6,642) (669)
Balance at end of period 9,358 13,113
Foreign currency translation adjustments:
Balance at beginning of year 2,634 2,486
Change in translation
adjustments during period (9) 58
Balance at end of period 2,625 2,544
Accumulated other comprehensive
income at end of period 11,983 15,657
Retained earnings:
Balance at beginning of year 391,334 356,441
Net earnings 14,103 10,370
Balance at end of period 405,437 366,811
Total stockholders' equity $ 445,849 410,622
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 14,103 10,370
Adjustments to reconcile net earnings to
net cash from operating activities:
Universal life and investment
annuity contract interest 40,611 38,335
Surrender charges and other
policy revenues (11,066) (10,415)
Realized gains on investments (4,805) (662)
Accrual and amortization
of investment income (1,207) (1,870)
Depreciation and amortization 265 242
Decrease (increase) in insurance
receivables and other assets 4,925 (151)
Decrease in accrued investment income 336 330
Increase in deferred policy
acquisition costs (5,884) (1,714)
Decrease in liability for
future policy benefits (241) (957)
Decrease in other policyholder liabilities (473) (457)
Increase in Federal income taxes payable 2,516 4,026
Increase (decrease) in other liabilities (9,563) 5,919
Other (1,073) (1,270)
Net cash provided by operating activities 28,444 41,726
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 2,978
Securities available for sale 24,446 -
Other investments 5,585 391
Proceeds from maturities and
redemptions of:
Securities held to maturity 24,763 27,394
Securities available for sale 17,181 18,079
Purchases of:
Securities held to maturity (78,744) (49,476)
Securities available for sale (53,699) (41,263)
Other investments (10,370) (1,540)
Principal payments on mortgage loans 13,584 9,016
Cost of mortgage loans acquired (8,282) (3,211)
Decrease in policy loans 3,155 2,029
Decrease in assets of
discontinued operations 48 118
Decrease in liabilities of
discontinued operations (48) (118)
Other (50) (138)
Net cash used in investing activities (62,431) (35,741)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances
for universal life
and investment annuity contracts $ 109,827 74,784
Return of account balances on universal
life and investment annuity contracts (93,688) (86,143)
Issuance of common stock
under stock option plan 32 -
Net cash provided by (used in)
financing activities 16,171 (11,359)
Net decrease in cash and
short-term investments (17,816) (5,374)
Cash and short-term investments
at beginning of year 24,508 7,870
Cash and short-term investments
at end of period $ 6,692 2,496
<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
for 1998 and prior years. The bankruptcy reorganization was completed in
January, 1999 and National Western retained 100% continuing ownership of the
reorganized subsidiary. Westcap is now operating as a real estate management
company. All significant intercorporate transactions and accounts have been
eliminated in consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 1999, and the results of its
operations and its cash flows for the three months ended March 31, 1999 and
1998. The results of operations for the three months ended March 31, 1999
and 1998 are not necessarily indicative of the results to be expected for
the full year.
(2) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding are provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,498 3,492
Shares exercised under
stock option plan 1 -
Shares outstanding at end of peroid 3,499 3,492
</TABLE>
(B) Dividends
The Company paid no cash dividends on common stock during the three months
ended March 31, 1999 and 1998.
(3) DISCONTINUED BROKERAGE OPERATIONS
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation, was completed in the first quarter of
1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the first quarter of 1999 as the entire
$14,125,000 settlement payment was accrued and reported as a loss in the third
quarter of 1998. 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 financial statements for potential losses relating to such
suit.
(4) SEGMENT AND OTHER OPERATING INFORMATION
The Company's reportable operating segments include domestic life insurance,
international life insurance, and annuities. These segments are organized
based on product types and geographic marketing areas. A summary of segment
information for the quarters ended March 31, 1999 and 1998 is provided below.
Selected Segment Information:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
March 31, 1999:
Premiums and
contract revenues $ 5,791 10,228 7,924 - 23,943
Net investment
income 6,331 5,443 45,896 182 57,852
Other income 16 12 122 - 150
Universal life and
investment annuity
contract interest 2,449 3,433 34,729 - 40,611
Amortization of
deferred policy
acquisition costs 932 3,279 5,360 - 9,571
Federal income taxes 1,069 724 3,781 61 5,635
Segment earnings 2,082 1,410 7,367 121 10,980
Segment assets 408,548 372,867 2,730,023 32,634 3,544,072
March 31, 1998:
Premiums and
contract revenues $ 5,845 9,585 7,980 - 23,410
Net investment
income 6,506 5,377 43,709 (54) 55,538
Other income 454 8 73 - 535
Universal life and
investment annuity
contract interest 2,431 3,288 32,616 - 38,335
Amortization of
deferred policy
acquisition costs 464 2,842 5,639 - 8,945
Federal income taxes 1,268 485 3,571 (19) 5,305
Segment earnings 2,375 909 6,691 (35) 9,940
Segment assets 406,528 364,602 2,459,066 13,512 3,243,708
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Premiums and Other Revenue:
Premiums and contract revenues $ 23,943 23,410
Net investment income 57,852 55,538
Other income 150 535
Realized gains on investments 4,805 662
Total consolidated premiums and other revenue $ 86,750 80,145
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Federal Income Taxes:
Total segment Federal income taxes $ 5,635 5,305
Taxes on realized gains on investments 1,682 232
Total consolidated Federal income taxes $ 7,317 5,537
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Net Earnings:
Total segment earnings $ 10,980 9,940
Realized gains on investments,
net of taxes 3,123 430
Total consolidated net earnings $ 14,103 10,370
</TABLE>
<TABLE>
<CAPTION>
March 31,
1999 1998
(In thousands)
<S> <C> <C>
Assets:
Total segment assets $ 3,544,072 3,243,708
Assets of discontinued operations - 774
Other unallocated assets 15,613 15,433
Total consolidated assets $ 3,559,685 3,259,915
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. It also accepts applications from and issues
policies to residents of various Central and South American, Caribbean, and
Pacific Rim countries. A distribution of the Company's direct premium
revenues and deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
United States domestic market:
Investment annuities 82.5 % 77.3 %
Life insurance 5.7 8.6
Total domestic market 88.2 85.9
International market:
Investment annuities 1.1 -
Life insurance 10.7 14.1
Total international market 11.8 14.1
Total direct premiums collected 100.0 % 100.0 %
</TABLE>
Insurance Operations - Domestic
The Company's domestic operations concentrate 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 equity-indexed annuities. Most of these annuities
can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and supervising agents. The Company
currently has over 80 IMOs contracted for sales of life and annuity products.
These IMOs are expected to meet minimum production standards set by the
Company.
Insurance Operations - International
The Company's international operations focus marketing efforts on foreign
nationals in upper socioeconomic classes with substantial financial resources.
Insurance sales are on insureds from countries in Central and South America,
the Caribbean, and the Pacific Rim. Policy sales on insureds from 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 in this market.
International sales production is from broker-agents, many of whom have been
selling National Western products for 20 or more years. The Company continues
to expand its sales networks in specifically targeted South American and
Pacific Rim countries which have higher growth potential than other countries.
There are inherent risks of conducting international business that are not
present within the domestic market. The risks involved with international
business are reduced substantially by the Company in several ways. As
previously described, the Company focuses its marketing efforts on a specific
niche group, which is foreign nationals in upper socioeconomic classes who
have substantial financial resources. This targeted customer base coupled
with National Western's conservative, yet competitive, underwriting practices
have historically resulted in claims experience similar to that in the United
States. The Company also minimizes exposure to foreign currency risks, as
almost all foreign policies require payment of premiums and claims in United
States dollars. Finally, the Company's experience in the international market
and its strong broker-agent relationships, which in many cases exceed 20
years, help minimize risks and problems when selling products to foreign
nationals.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of
investment grade debt and equity securities that provide adequate liquidity to
meet policyholder obligations and other cash needs. The prevailing strategy
within this philosophy is the intent to hold investments in debt securities to
maturity. However, the Company manages its portfolio, which entails monitoring
and reacting to all components which affect changes in the price, value, or
credit rating of investments in debt and equity securities.
Investments in debt and equity securities are classified and reported as
either securities held to maturity or securities available for sale. The
Company does not maintain a portfolio of trading securities. The reporting
category chosen for the Company's securities investments depends on various
factors including the type and quality of the particular security and how it
will be incorporated into the Company's overall asset/liability management
strategy. At March 31, 1999, approximately 25.5% of the Company's total debt
and equity securities, based on fair values, were classified as securities
available for sale. These holdings provide flexibility to the Company to
react to market opportunities and conditions and to practice active management
within the portfolio to provide adequate liquidity to meet policyholder
obligations and other cash needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong cash
flows and matches expected maturities of assets and liabilities, the Company
has the ability to hold the securities, as it would be unlikely that forced
sales of securities would be required prior to maturity to cover payments of
liabilities. As a result, securities held to maturity are carried at amortized
cost less declines in value that are other than temporary. However, certain
situations may change the Company's intent to hold a particular security to
maturity, the most notable of which is a deterioration in the issuer's
creditworthiness. Accordingly, a security may be sold to avoid a further
decline in realizable value when there has been a significant change in the
credit risk of the issuer.
Securities that are not classified as held to maturity are reported as
securities available for sale. These securities may be sold if market or other
measurement factors change unexpectedly after the securities were acquired.
For example, opportunities arise that allow the Company to improve the
performance and credit quality of the investment portfolio by replacing an
existing security with an alternative security while still maintaining an
appropriate matching of expected maturities of assets and liabilities.
Examples of such improvements are as follows: improving the yield earned on
invested assets, improving the credit quality, changing the duration of the
portfolio, and selling securities in advance of anticipated calls or other
prepayments. Securities available for sale are reported in the Company's
financial statements at fair value. Any unrealized gains or losses resulting
from changes in the fair value of the securities are reflected in accumulated
other comprehensive income.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. Review procedures are also performed on securities that
have had significant declines in fair value. The Company's objective in these
circumstances is to determine if the decline in fair value is due to changing
market expectations regarding inflation and general interest rates or other
factors. Additionally, the Company closely monitors financial, economic, and
interest rate conditions to manage prepayment and extension risks in its
mortgage-backed securities portfolio.
The Company's overall conservative investment philosophy is reflected in the
allocation of its investments which is detailed below as of March 31, 1999 and
December 31, 1998. The Company emphasizes investment grade debt securities,
with smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
March 31, December 31,
1999 1998
<S> <C> <C>
Debt securities 88.3% 87.6%
Mortgage loans 5.4 5.6
Policy loans 3.8 4.0
Index options 0.9 0.8
Equity securities 0.5 0.5
Real estate 0.4 0.4
Other 0.7 1.1
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 primarily U.S. government agency
pass-through securities and collateralized mortgage obligations (CMOs).
At March 31, 1999, the Company's debt and equity securities were classified as
follows:
<TABLE>
<CAPTION>
Fair Amortized Unrealized
Value Cost Gains
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,143,302 2,084,285 59,017
Securities available for sale:
Debt securities 714,755 697,365 17,390
Equity securities 17,788 14,183 3,605
Totals $ 2,875,845 2,795,833 80,012
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities are a
small component of the portfolio. Unrealized gains totaling $80,012,000 on
the securities portfolio at March 31, 1999, is a reflection of market interest
rates at quarter-end. The fair values, or market values, of fixed income debt
securities correlate to external market interest rate conditions. Because the
interest rates are fixed on almost all of the Company's debt securities,
market values typically increase when market interest rates decline, and
decrease when market interest rates rise. An analysis of unrealized gains and
losses on the Company's securities portfolio for the quarter ended March 31,
1999, is detailed below:
<TABLE>
<CAPTION>
Change in
Unrealized
Unrealized Gains Gains
At At (Losses)
March 31, December 31, During 1st
1999 1998 Quarter 1999
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 59,017 94,987 (35,970)
Securities available for sale:
Debt securities 17,390 35,560 (18,170)
Equity securities 3,605 3,694 (89)
Totals $ 80,012 134,241 (54,229)
</TABLE>
Changes in interest rates typically have a significant impact on the market
values of the Company's debt securities. Unrealized gains at March 31, 1999,
decreased 40% from year-end 1998 as market interest rates of the ten year U.S.
Treasury bond increased approximately 60 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.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve a predictable spread between
what is earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest risk through surrender
charges that are imposed to discourage policy surrenders. Interest rate
changes can be anticipated and risk may be limited due to management actions
regarding asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest changes
will likely be different from actual changes experienced, and the differences
may be material.
Market risk-sensitive assets include debt securities, equity securities which
are almost entirely preferred stocks, mortgage loans, policy loans, and index
options. The Company does not maintain a securities trading portfolio.
Market risk- sensitive liabilities include policy liabilities for deferred and
immediate investment annuity contracts and supplemental contracts.
Sensitivity analysis expresses the potential gain or loss in fair value, over
a selected time period, from one or more selected hypothetical changes in
interest rates which are reasonably possible in the near term. The Company
performed detailed sensitivity analysis at December 31, 1998, for its interest
rate-sensitive assets. Based on the recent increase in market interest rates
as previously described above, the changes in market values of the Company's
assets are within the expected range of results of this analysis.
In addition to the securities described above, the Company invests in index
options which are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuities. The values of
these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500 Composite Stock
Price Index. However, increases or decreases in investment returns from these
options are directly offset by corresponding increases or decreases in amounts
paid to equity-indexed annuity policyholders.
The Company's market risk liabilities, which include policy liabilities for
investment annuity and supplemental contracts, are managed for interest rate
risk through cash flow testing as previously described. As part of this cash
flow testing, the Company has analyzed the potential impact on net earnings of
a 100 basis point decline in the U.S. Treasury yield curve as of December 31,
1998. This interest rate decline would reduce net earnings for 1999 by less
than $200,000 based on the Company's projections. This estimated earnings
decline is net of tax benefits determined at a tax rate of 35%.
The Company has modeled this scenario, as a decline in market interest rates
could pose potential risks to the current profitability levels of this
business. A downward movement in interest rates is also a reasonably possible
near-term scenario. The risks from such a change are primarily due to
possible lower interest rate spreads which are the differences between
investment income earned and credited interest paid to policyholders.
However, the relatively small projected impact to earnings of the interest
rate change is a reflection on the effectiveness of the Company's
asset/liability and interest risk management.
Another important aspect of the Company's investment philosophy is managing
the cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments,
extensions, and calls, the Company takes steps to manage and minimize such
risks. The Company continues to invest primarily in corporate debt
securities, many of which are noncallable, which helps reduce prepayment and
call risks. At March 31, 1999, corporate and public utility securities
represented over 67% of the entire debt securities portfolio.
Mortgage-backed securities are also an important component of the Company's
debt securities portfolio, representing 22% of the portfolio at March 31,
1999. Although holdings of mortgage-backed securities are subject to
prepayment and extension risks, both of these risks are addressed by specific
portfolio management strategies which add stability to the Company's cash flow
management. The Company substantially reduces both prepayment and extension
risks of mortgage-backed securities by investing primarily in collateralized
mortgage obligations which have more predictable cash flow patterns than
pass-through securities. These securities, known as planned amortization
class I (PAC I) CMOs, are designed to amortize in a more predictable manner
than other CMO classes or pass-throughs. Using this strategy, the Company can
more effectively manage and reduce prepayment and extension risks, thereby
helping to maintain the appropriate matching of the Company's assets and
liabilities.
As of March 31, 1999, CMOs represent about 93% of the Company's mortgage-
backed securities. 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 Fair Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
March 31, 1999 $ 55,003 53,709 1.7%
December 31, 1998 $ 44,974 45,317 1.4%
December 31, 1997 $ 41,149 41,969 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 March 31, 1999, and December 31, 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 invest primarily in income-producing
retail properties.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $169,675,000 and
$174,921,000, or 5.4% and 5.6% of total invested assets, at March 31, 1999,
and December 31, 1998, respectively. The loans are real estate mortgages,
substantially all of which are related to commercial properties and
developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic regions of
the United States and by property type as of March 31, 1999, and December 31,
1998, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
West South Central 58.8% 57.1%
Mountain 20.4 19.4
Pacific 7.8 7.7
South Atlantic 5.5 4.8
East South Central 4.7 4.6
Middle Atlantic 2.3 2.2
Other 0.5 4.2
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Retail 56.8% 56.7%
Office 22.3 21.0
Hotel/Motel 8.0 7.9
Land/Lots 3.6 4.1
Apartment 3.2 4.2
Nursing Homes 3.0 3.0
Other 3.1 3.1
Totals 100.0% 100.0%
</TABLE>
As of March 31, 1999, the allowance for possible losses on mortgage loans was
$4,640,000. No additions were made to the allowance in the first quarter of
1999. Although management believes that the current balance is adequate,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in the West South Central region which
includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the
highest concentrations of the Company's mortgage loans.
The Company currently places all loans past due three months or more on
nonaccrual status, thus recognizing no interest income on the loans. Also,
the Company will at times restructure mortgage loans under certain conditions
which may involve changes in interest rates, payment terms, or other
modifications. For the three months ended March 31, 1999 and 1998, 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 $11,547,000 and $13,553,000 at March
31, 1999, and December 31, 1998, 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 income on these properties of approximately $283,000 and $122,000
for the three months ended March 31, 1999 and 1998. The Company does not
anticipate significant changes in these operating results in the near future.
Also during the first quarter of 1999, the Company sold a real estate property
resulting in a realized gain on investments totaling $1,419,000.
The Company monitors the conditions and market values of these properties on a
regular basis. No significant realized losses were recognized due to declines
in values of properties for the three months ended March 31, 1999 and 1998,
respectively. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed.
RESULTS OF OPERATIONS
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the three months ended March 31, 1999 and
1998 is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
gains on investments $ 81,945 79,483
Realized gains on investments 4,805 662
Total revenues $ 86,750 80,145
Earnings:
Earnings from operations $ 10,980 9,940
Net realized gains on investments 3,123 430
Net earnings $ 14,103 10,370
Basic Earnings Per Share:
Earnings from operations $ 3.14 2.85
Net realized gains on investments 0.89 0.12
Net earnings $ 4.03 2.97
Diluted Earnings Per Share:
Earnings from operations $ 3.11 2.82
Net realized gains on investments 0.88 0.12
Net earnings $ 3.99 2.94
</TABLE>
Consolidated Operating Results: Earnings from operations, excluding net
realized gains on investments, were $10,980,000 for the quarter ended March
31, 1999, compared to $9,940,000 for the first quarter of 1998. This reflects
an increase of $1,040,000, or 10.5%, over 1998 first quarter earnings.
Several factors contributed to the increase in earnings. Universal life and
annuity contract revenues increased 6.1% from the first quarter of 1998 and
life insurance benefit claims were significantly lower. Life insurance
benefit claims were 27.1% lower in the first quarter of 1999 compared to the
1998 first quarter in which claims were higher than historical averages.
The Company recorded realized gains on investments, net of taxes, totaling
$3,123,000 for the quarter ended March 31, 1999, compared to gains of $430,000
for the first quarter of 1998. The 1999 gains were primarily from sales and
calls of investments in debt securities totaling $1,687,000, net of taxes.
Also included in 1999 was a net gain totaling $922,000 from the sale of
investment real estate owned by one of National Western's subsidiaries, NWL
806 Main, Inc.
As previously reported, the bankruptcy reorganization of the Company's wholly
owned subsidiary, The Westcap Corporation, was completed in the first quarter
of 1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the first quarter of 1999 as the entire
$14,125,000 settlement payment was accrued and reported as a loss in the third
quarter of 1998.
Net Investment Income: Net investment income increased 4.2% from the first
quarter of 1998, due primarily to corresponding increases in invested assets
for the same period and due to other investment income from index options used
to hedge the equity return component of the Company's equity-indexed annuity
products. The increase in invested assets was primarily from debt securities.
The Company experienced declines in investment income from mortgage loans
which is consistent with decreases in mortgage loans as previously described.
A detail of net investment income is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 50,379 47,336
Mortgage loans 4,248 4,488
Policy loans 2,111 2,425
Index options 1,575 1,270
Other investment income 832 607
Total investment income 59,145 56,126
Investment expenses 1,293 588
Net investment income $ 57,852 55,538
</TABLE>
Other Income: Other income decreased significantly from $535,000 in 1998 to
$150,000 in 1999. The higher income in 1998 was due to proceeds received from
the U.S. government 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 $4,805,000 and $662,000 in the first quarters of 1999 and 1998,
respectively. As previously described, the 1999 gains were primarily from
sales and calls of investments in debt securities totaling $2,595,000 and a
gain of $1,419,000 from the sale of investment real estate. The gains in 1998
were primarily from debt securities that were called.
Life and Other Policy Benefits: Expenses in 1999 and 1998 were $8.7 million
and $10.7 million, respectively. The significant decrease in expenses is due
to lower life insurance benefit claims. Mortality claims experience
fluctuates from period to period, and such deviations are not uncommon in the
life insurance industry. Over extended periods of time, higher claims
experience tends to be offset by periods of lower claims experience. The
Company utilizes reinsurance to help minimize its exposure to adverse
mortality experience. The Company's general policy is to reinsure amounts in
excess of $200,000 on the life of any one individual. A comparative detail of
life and other policy benefits is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 5,524 7,578
Surrenders of traditional products 2,460 2,642
Other policy benefits 704 454
Totals $ 8,688 10,674
</TABLE>
Universal Life and Investment Annuity Contract Interest: The Company closely
monitors its credited interest rates, taking into consideration such factors
as profitability goals, policyholder benefits, product marketability, and
economic market conditions. Rates are established or adjusted after careful
consideration and evaluation of these factors against established objectives.
Average credited rates, calculated based on policy reserves for the Company's
universal life and investment annuity business, have declined since 1996,
which is consistent with declines in market interest rates. As market
interest rates fluctuate, the Company's credited interest rates are often
adjusted accordingly, while also taking into consideration other factors as
described above. Contract interest totaled $40.6 million and $38.3 million
for the quarters ended March 31, 1999 and 1998, respectively. The increase is
primarily attributable to interest totaling $4.7 million for the Company's
equity-indexed annuity products. As previously described, the Company
purchases index options to provide the potential higher interest to be
credited on these products. The income provided by the index options
substantially offsets the interest credited to the policyholders.
Other Insurance Operating Expenses: These expenses totaled $6,701,000 and
$7,241,000 for the quarters ended March 31, 1999 and 1998, respectively.
Included in 1998 expenses is a $200,000 lawsuit settlement payment by National
Western to San Patricio County, Texas. 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.
Federal Income Taxes: Federal income taxes include no unusual items as
effective tax rates for the quarters ended March 31, 1999 and 1998 were 34.2%
and 34.8%, respectively.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the quarters ended March 31, 1999 and 1998
is provided below. The segment earnings exclude realized gains and losses on
investments, net of taxes.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment earnings
(losses):
March 31, 1999 $ 2,082 1,410 7,367 121 10,980
March 31, 1998 2,375 909 6,691 (35) 9,940
</TABLE>
Domestic Life Insurance Operations
The Company's domestic life insurance operations concentrate marketing efforts
on federal employees, seniors, and specific employee groups in private
industry, as well as individual sales. The products marketed are universal
life insurance and traditional life insurance, which includes both term and
whole life products. National Western markets and distributes its domestic
products primarily through independent agents and brokers and independent
marketing organizations (IMOs). The IMOs also assist the Company in
recruiting, contracting, and supervising agents as well as providing
additional financial resources for product marketing. Geographically, the
domestic life insurance operations market products in most of the United
States, which encompasses 43 states and the District of Columbia. The states
in which the Company does not conduct business are primarily in the northeast
and include Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey,
New York, and Vermont.
Earnings for the domestic life insurance operating segment were $2,082,000 and
$2,375,000 for the three months ended March 31, 1999 and 1998, respectively.
The slight decrease in earnings in 1999 is primarily due to higher
amortization of deferred policy acquisition costs and lower other income.
However, these fluctuations were substantially offset by lower life insurance
benefit claims and other operating expenses during the first quarter of 1999.
A detailed analysis of significant revenues and expenses for this segment is
provided below.
Revenues from domestic life insurance operations include life insurance
premiums on traditional type products and revenues from universal life
insurance. The Company's current marketing efforts focus more on universal
life insurance, and, as a result, revenues from these products continue to
increase over traditional products. Revenues from traditional products are
simply premiums collected, while revenues from universal life insurance
consist of policy charges for the cost of insurance, policy administration
fees, and surrender charges assessed during the period. A comparative detail
of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 2,837 2,547
Surrender charges 406 480
Policy fees and other revenues 308 336
Traditional life insurance premiums 2,240 2,482
Totals $ 5,791 5,845
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
March 31, 1999 and 1998 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 1,105 1,730
Renewal premiums 3,769 3,569
Totals $ 4,874 5,299
</TABLE>
Other income for the quarters ended March 31, 1999 and 1998 totaled $16,000
and $454,000, respectively. Other income was higher in 1998 primarily due to
proceeds totaling $444,000 received from the U.S. government related to
previous litigation involving a failed savings and loan institution. The
litigation involved the Company's previous investment in bonds of the
financial institution and subsequent losses incurred upon its failure. The
financial institution had also purchased life insurance from National Western,
the cash values of which served as collateral for the bonds.
Significant expenses for domestic life insurance operations are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 2,838 4,319
Universal life insurance contract interest 2,449 2,431
Amortization of deferred policy
acquisition costs 932 464
Other operating expenses 2,062 2,392
</TABLE>
Life insurance benefit claims were significantly lower in 1999 at $2,838,000
compared to $4,319,000 in 1998. The 1998 benefit claims were higher than
historical averages. Mortality claims experience fluctuates from period to
period, and such deviations are not uncommon in the life insurance industry.
Over extended periods of time, higher claims experience tends to be offset by
periods of lower claims experience. Additionally, the Company utilizes
reinsurance to help minimize its exposure to adverse mortality experience.
The Company's general policy is to reinsure amounts in excess of $200,000 on
the life of any one individual.
Universal life insurance contract interest has remained relatively constant at
$2,449,000 in 1999 compared to $2,431,000 in 1998. The small growth in the
domestic block of business has resulted in relatively stable overall interest.
Amortization of deferred policy acquisition costs has increased from $464,000
in 1998 to $932,000 in 1999. These expenses represent 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 of policy surrenders.
International Life Insurance Operations
The Company's international life insurance operations focus marketing efforts
on foreign nationals in upper socioeconomic classes with substantial financial
resources. Insurance sales are primarily on insureds from countries in
Central and South America, the Caribbean, and the Pacific Rim. Policy sales
on insureds from 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. Historically, the top three countries in
insurance sales have often been Argentina, Chile, and Peru. Products sold in
the international market include both universal life and traditional life
insurance products. The Company minimizes exposure to foreign currency risks,
as almost all foreign policies require payment of premiums and claims in
United States dollars. Sales production from the international market is from
independent broker-agents, many of whom have been selling National Western
products for 20 or more years.
Earnings for the international life insurance operating segment were
$1,410,000 and $909,000 for the quarters ended March 31, 1999 and 1998,
respectively. Earnings in 1999 were higher primarily due to increases in
universal life insurance revenues and lower life insurance benefit claims.
The higher earnings were somewhat tempered by higher amortization of deferred
policy acquisition costs and other operating expenses. A detailed analysis of
significant revenues and expenses for this segment is provided below.
As with domestic operations, revenues from the international life insurance
segment include both premiums on traditional type products and revenues from
universal life insurance. The international operations' marketing efforts are
also focused more on universal life insurance, and, as a result, revenues from
these products continue to increase over traditional products. Cost of
insurance revenues continue to increase as the international block of business
grows. Surrender charge revenues were also higher in 1999 as international
surrenders increased during the first quarter of 1999. A comparative detail
of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 7,221 6,651
Surrender charges 1,956 1,487
Policy fees and other revenues 898 839
Traditional life insurance premiums 153 608
Totals $ 10,228 9,585
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
March 31, 1999 and 1998 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 2,569 2,588
Renewal premiums 8,486 7,728
Totals $ 11,055 10,316
</TABLE>
Significant expenses for international life insurance operations are
summarized below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 2,686 3,259
Universal life insurance
contract interest 3,433 3,288
Amortization of deferred
policy acquisition costs 3,279 2,842
Other operating expenses 2,135 1,722
</TABLE>
Life insurance benefit claims were abnormally high in 1998 at $3,259,000
compared to $2,686,000 in 1999. As previously described for domestic life
insurance operations, mortality claims fluctuate from period to period. These
deviations, which can at times be significant, are not uncommon in the life
insurance industry.
Universal life insurance contract interest increased slightly from $3,288,000
in 1998 to $3,433,000 in 1999. The increase in contract interest is
consistent with growth in the universal life insurance business.
Amortization of deferred policy acquisition costs was significantly higher in
1999, totaling $3,279,000 compared to $2,842,000 in 1998. This increase is
consistent with the increase in policy surrenders for the first quarter of
1999 as previously described.
Annuity Operations
The Company's annuity operations are almost exclusively in the United States.
Like the Company's domestic life insurance operations, annuities are marketed
in 43 states and the District of Columbia using independent agents, brokers,
and independent marketing organizations (IMOs). In fact, many of the agents,
brokers, and IMOs that sell life insurance also sell annuities for National
Western. For most of these organizations, annuity sales are much more
significant and are the primary focus of their business operations. Although
some of the Company's annuities are available in the international market,
current sales are insignificant to total annuity sales.
Annuities sold include single and flexible premium deferred annuities, single
premium immediate annuities, and equity-indexed annuities. These products can
be tax qualified or nonqualified annuities. In recent years the majority of
annuities sold have been nonqualified 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 is flexible premium annuities
on which renewal premiums continue to be collected. However, the Company has
not sold two-tier annuities since 1992.
Earnings for the annuity operating segment were $7,367,000 and $6,691,000 for
the quarters ended March 31, 1999 and 1998, respectively. Earnings for 1999
were up from 1998 primarily due to lower amortization of deferred policy
acquisition costs and other operating expenses. A detailed analysis of
significant revenues and expenses for this segment is provided below.
Revenues from annuity operations include primarily surrender charges and
recognition of deferred revenues relating to immediate or payout annuities.
Annuitizations result in transfers of policies from deferred to immediate or
payout status. The deferred revenues related to these annuities are amortized
into income during the payout period. A comparative detail of the components
of premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 4,643 4,830
Single-tier annuities 1,829 1,491
Total surrender charges 6,472 6,321
Payout annuity and other revenues 1,434 1,639
Traditional annuity premiums 18 20
Totals $ 7,924 7,980
</TABLE>
Actual annuity deposits collected for the quarters ended March 31, 1999 and
1998 are detailed below. Deposits collected on these nontraditional products
are not reflected as revenues in the Company's statements of earnings, as they
are recorded directly to policyholder liabilities upon receipt, in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 45,630 21,732
Other 51,818 43,243
Total deferred annuities 97,448 64,975
Immediate annuities 7,624 4,499
Totals $ 105,072 69,474
</TABLE>
The growth in annuity deposits as reflected in the table above is primarily
attributable to the Company's equity-indexed annuities. The Company
diversified its annuity products offered to customers by introducing an
equity-indexed annuity in late 1997. As this product was still very new,
sales continued to grow throughout the first quarter of 1998. Sales then
began to level off in the second quarter of 1998. The equity-indexed annuity
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 annuity is a long-term contract designed as a planning vehicle
for retirement security. It 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 product provides a key
equity-based alternative to the Company's existing fixed annuity products.
The Company 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.
Net investment income for the first quarters of 1999 and 1998 totaled
$45,896,000 and $43,709,000, respectively. The increase in net investment
income in 1999 is due primarily to the increase in premium production from
sales of the Company's equity-indexed annuities, which resulted in increases
in invested assets. Net investment income also includes $1,575,000 and
$1,270,000 of income from index options for the quarters ended March 31, 1999
and 1998, respectively.
Significant expenses for annuity operations are summarized below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(In thousands)
<S> <C> <C>
Annuity contract interest $ 34,729 32,616
Amortization of deferred policy
acquisition costs 5,360 5,639
Other operating expenses 2,504 3,127
</TABLE>
Annuity contract interest was $34.7 million in 1999 compared to $32.6 million
in 1998. The increase is largely due to increases in annuities in force from
sales of equity-indexed annuities and higher credited rates that can be paid
on these policies. Contract interest on equity-indexed annuities totaled
$4,726,000 in 1999. Amounts for 1998 were relatively insignificant, as total
equity-indexed annuities in force were small as of March 31, 1998. Although
1999 contract interest is higher due to equity-indexed annuities, net
investment income for 1999 also includes an additional $1,575,000 from index
options which are used to hedge the equity return component of these products.
Differences between income from index options and contract interest credited
to policyholders will occur for several reasons. The most significant reason
is the costs of the index options are essentially amortized against net
investment income as the options are marked to fair value each reporting
period. The costs of options are covered by additional income earned on debt
securities purchased with equity-indexed annuity premiums. Other differences
are due to asset fees charged against policyholder contract interest,
surrenders and death benefits on annuities within the annual hedging period,
and inherent differences between index option fair values and policy liability
reserving requirements such as minimum guaranteed interest rates.
Amortization of deferred policy acquisition costs represents the amortization
of the costs of acquiring or producing new business, primarily agents'
commissions, the majority of which are amortized in direct relation to the
anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level of policy surrenders. Amortization
for 1999 and 1998 was $5,360,000 and $5,639,000, respectively.
Other operating expenses totaled $2,504,000 for the first quarter of 1999
compared to $3,127,000 for the comparable 1998 period. Expenses for 1998 were
higher primarily due to the previously mentioned San Patricio County lawsuit
settlement.
Other Operations
National Western's primary business encompasses its domestic and international
life insurance operations and its annuity operations. However, National
Western also has small real estate and other investment operations through the
following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties,
Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. Also,
during January, 1999, the Company's wholly owned subsidiary, The Westcap
Corporation, completed its Chapter 11 bankruptcy reorganization. With the
reorganization complete, National Western transferred its investment real
estate holdings totaling approximately $11,589,000 to Westcap and the
subsidiary is now operating as a real estate management company. Earnings for
these other operations totaled $121,000 for the first quarter of 1999.
Operating results for the comparable 1998 period reflected losses totaling
$35,000.
Most of the income from the Company's subsidiaries is from a life interest in
the Libbie Shearn Moody Trust. This asset was owned by National Western Life
Insurance Company during 1996 but was transferred to NWL Services, Inc., in
1997. Dividend distributions from the Trust are declared semi-annually in
June and December each year. Because the asset is a life interest, these
distributions are only accrued in the Company's financial statements when
declared. Semi-annual distributions in recent years typically exceed $1.6
million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds provided
from operations. Premium deposits and revenues, investment income, and
investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary sources
of liquidity to meet cash needs are the Company's securities available for
sale portfolio, net cash provided by operations, and a bank line of credit.
The Company's investments consist primarily of marketable debt securities that
could be readily converted to cash for liquidity needs. The Company may also
borrow up to $60 million on its bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is the
risk of early policyholder withdrawals. Consequently, the Company closely
evaluates and manages the risk of early surrenders or withdrawals. The
Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests under
various market interest rate scenarios to assist in evaluating liquidity needs
and adequacy. The Company currently expects available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
In the past, cash flows from the Company's insurance operations have been more
than adequate to meet current needs. Cash flows from operating activities
were $28.4 million and $41.7 million for the three months ended March 31, 1999
and 1998, respectively. Net cash flows from the Company's deposit product
operations, which includes universal life and investment annuity products,
totaled $16.1 million in the first quarter of 1999, and reflected cash
outflows of $11.4 million for the comparable period of 1998. The net cash
outflows in 1998 from the deposit product operations were due primarily to
higher policy surrenders, offset significantly by higher annuity production
from the Company's equity-indexed annuity product.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $41.9 million and $45.5 million for the quarters
ended March 31, 1999 and 1998, respectively. The Company again expects
significant cash flows from these sources throughout the remainder of 1999.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1999 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 1999.
Stockholders' equity totaled $445.8 million at March 31, 1999, reflecting an
increase of $7.5 million from December 31, 1998. The increase in capital is
primarily from net earnings of $14.1 million, offset by a decline in net
unrealized gains on investment securities totaling $6.6 million during the
first quarter of 1999. Book value per share at March 31, 1999, was $127.44.
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. All changes that were made as
of December 31, 1998, have been tested and implemented. Testing will continue
throughout 1999. Final implementation of any additional necessary 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 vendor
has provided us written acknowledgment that we should encounter no significant
Year 2000 related problems. The Company is using the vendor's Year 2000
modified software release for current processing and has not encountered any
problems.
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 items that would not properly process
date-sensitive data in the Year 2000 or beyond. This project was
substantially completed as of December 31, 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% 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 effect 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 $250,000. 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 March 31, 1999, related to the Year 2000 plan total approximately
$170,000.
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 as 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 risks 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
This information is included in Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Investments in Debt
and Equity Securities section.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Westcap Corporation Bankruptcy Proceedings
As previously reported in the Company's 1998 Form 10-K, the bankruptcy
reorganization of the Company's wholly owned subsidiary, The Westcap
Corporation, was completed in the first quarter of 1999. Pursuant to the
reorganization plan, National Western retained 100% continuing ownership of
the reorganized Westcap and the subsidiary is now operating as a real estate
management company. No losses were reported for discontinued brokerage
operations in the first quarter of 1999 as the entire $14,125,000 settlement
payment was accrued and reported as a loss in the third quarter of 1998.
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
financial statements for potential losses relating to such suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share (filed on page __ of this
report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
Date: May 14, 1999 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: May 14, 1999 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: May 14, 1999 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Numerator for basic and diluted earnings per
share:
Earnings available to common stockholders
before and after assumed conversions:
Net earnings $ 14,103 10,370
Denominator:
Basic earnings per share -
weighted-average shares 3,498 3,492
Effect of dilutive stock options 37 33
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,535 3,525
Basic earnings per share:
Net earnings $ 4.03 2.97
Diluted earnings per share:
Net earnings $ 3.99 2.94
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 714,755
<DEBT-CARRYING-VALUE> 2,084,285
<DEBT-MARKET-VALUE> 2,143,302
<EQUITIES> 17,788
<MORTGAGE> 169,675
<REAL-ESTATE> 11,547
<TOTAL-INVEST> 3,170,965
<CASH> 6,692
<RECOVER-REINSURE> 893
<DEFERRED-ACQUISITION> 328,665
<TOTAL-ASSETS> 3,559,685
<POLICY-LOSSES> 3,024,825
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 13,432
<POLICY-HOLDER-FUNDS> 10,050
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,499
<OTHER-SE> 442,350
<TOTAL-LIABILITY-AND-EQUITY> 3,559,685
23,943<F1>
<INVESTMENT-INCOME> 57,852
<INVESTMENT-GAINS> 4,805
<OTHER-INCOME> 150
<BENEFITS> 49,058<F2>
<UNDERWRITING-AMORTIZATION> 9,571
<UNDERWRITING-OTHER> 6,701
<INCOME-PRETAX> 21,420
<INCOME-TAX> 7,317
<INCOME-CONTINUING> 14,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,103
<EPS-PRIMARY> 4.03
<EPS-DILUTED> 3.99
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 00
<FN>
<F1>Consists of $2,411 revenues from traditional contracts subject to FAS 60
accounting treatment and $21,532 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $8,688 benefits paid to policyholders, $(241) decrease in
reserves on traditional contracts and $40,611 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
