UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: EXEMPT
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the common stock (based upon the closing price)
held by non-affiliates of the Registrant at March 15, 1999, was approximately
$230,494,000.
As of March 15, 1999, the number of shares of Registrant's common stock
outstanding was: Class A - 3,298,128 and Class B - 200,000.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Life Insurance and Annuity Operations
National Western Life Insurance Company (hereinafter referred to as "National
Western," "Company," or "Registrant") 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. National Western also accepts applications from and
issues policies to residents of various countries in Central and South
America, the Caribbean, and the Pacific Rim. Such policies are accepted and
issued in the United States. The Company's operations are generally segmented
as follows: domestic life insurance, international life insurance, and annuity
operations. During 1998, the Company recorded approximately $521 million in
premium revenues, universal life, and investment annuity contract deposits.
New life insurance issued during 1998 approximated $1.8 billion, and the total
amount in force at year-end 1998 was $9.4 billion. As of December 31, 1998,
the Company had total consolidated assets of $3.5 billion.
Competition: The life insurance business is highly competitive, and National
Western competes with approximately 1,600 stock and mutual companies. Best's
Agents Guide To Life Insurance Companies, an authoritative life insurance
publication, lists companies by total admitted assets and life insurance in
force. As of December 31, 1997, the most recent date for which information is
available, National Western ranked 151 in total admitted assets, 220 in net
premiums written, and 232 in life insurance in force among approximately 1,600
life insurance companies domiciled in the United States.
Life insurance companies compete not only on product design and price, but
increasingly on policyowner service and marketing and sales efforts. National
Western believes that its products, premium rates, policyowner service, and
marketing efforts are generally competitive with those of other life insurance
companies selling similar types of insurance. Mutual insurance companies may
have certain competitive advantages over stock companies in that the policies
written by them are participating policies and their profits inure to the
benefit of their policyholders. The Company no longer writes participating
policies, and such policies represent a minor portion of the Company's life
insurance in force at December 31, 1998.
There has been an ongoing consolidation of companies within the life insurance
industry in recent years. It appears this consolidation process will continue
as entities acquire other insurance companies, blocks of insurance business,
or even related businesses. The reasons for the consolidations are numerous
and include, among others, strengthening market share, diversifying into other
lines of insurance, improving marketing and distribution channels, and
economies of scale. For whatever reasons, this consolidation trend in the
insurance industry will likely continue to affect competition.
In addition to competition within the life insurance industry, National
Western and other insurance companies face competition from other industries.
Banks, brokerage firms, and other financial institutions also market insurance
products or other competing products such as mutual funds. The continued
growth and popularity of mutual funds has attracted large amounts of
investment funds, particularly during periods of declining or low market
interest rates. Many mutual funds also allow tax deferred features through
individual retirement accounts, 401(k) plans, and other qualified methods
which compete directly with the Company's tax deferred annuity products.
Financial strength ratings of insurance companies also directly affect
competitive positions within the industry. Most insurance companies obtain
one or more ratings from independent rating agencies. National Western is
rated "A- (excellent)" by A.M. Best Company. A.M. Best's ratings evaluate
factors affecting the overall performance of an insurance company in order to
provide an opinion of the Company's financial strength, operating performance,
and ability to meet its obligations to policyholders. Ratings range from A++
(superior) to F (in liquidation). The "A-" rating identifies companies which
have, on balance, demonstrated excellent financial strength, operating
performance, and market profile when compared to the standards established by
A.M. Best. These companies, in the opinion of A.M. Best, have a strong
ability to meet their ongoing obligations to policyholders. National Western
has also been assigned an "A+ (strong)" by Standard and Poor's Corporation. A
Standard & Poor's rating is an opinion of the financial security
characteristics of an insurance organization with respect to its ability to
pay under its insurance policies and contracts in accordance with their terms.
Ratings range from AAA (extremely strong) to CC (extremely weak) and R
(regulatory action regarding solvency).
In general, the above described ratings are developed and based on factors
that are of more importance to policyholders, agents, and marketing
organizations than to investors. In recent years, there has been increased
emphasis and use of these financial strength ratings in the marketing efforts
for insurance companies. While upgrades in ratings could be very positive for
marketing efforts, declines in ratings could adversely affect product sales
and persistency of policies currently in force.
Agents and Employees: National Western has 249 employees at its principal
executive office. Its insurance operations are conducted primarily through
broker-agents, which numbered 10,395 at December 31, 1998. The agency
operations are supervised by Senior Vice Presidents of domestic and
international marketing. The Company's agents are independent contractors who
are compensated on a commission basis. General agents receive overriding
first-year and renewal commissions on business written by agents under their
supervision.
Many of the domestic marketing agents are contracted through independent
marketing organizations. These organizations have well developed agent
networks and extensive experience, financial resources, and success in
marketing life insurance and annuity products. The international marketing
broker-agents are a significantly smaller group than the domestic force.
However, these broker-agents have been carefully selected and are proven
producers, many of whom have been with the Company for 20 or more years.
A significant portion of the Company's universal life and investment annuity
contracts were sold through three marketing agencies in recent years. Combined
business from these agencies accounted for approximately 30% of total direct
premium revenues and universal life and investment annuity contract deposits
for 1998. These same three marketing agencies accounted for 22% and 16% of
total direct premium revenues and universal life and investment annuity
contract deposits for 1997 and 1996, respectively.
Types of Insurance Written: National Western offers a broad portfolio of
individual whole life, universal life and term insurance plans, endowments,
and annuities, including standard supplementary riders. 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. Although the Company introduced an
equity-indexed annuity in 1997, no variable life or annuity products are
currently offered. Except for a small employee health plan and a small
number of existing individual accident and health policies, the Company does
not write any new policies in the accident and health markets. Distributions
of the Company's direct premium revenues and deposits by types of products are
provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Investment annuities:
Single premium deferred $ 131,716 195,752 234,335
Flexible premium deferred 278,605 32,702 35,813
Single premium immediate 20,682 12,533 3,054
Total annuities 431,003 240,987 273,202
Universal life insurance 69,647 65,862 67,438
Traditional life and other 20,237 21,506 23,135
Total direct premiums collected $ 520,887 328,355 363,775
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
First year and single premiums:
Investment annuities $ 412,443 218,203 243,686
Life insurance 22,145 19,045 20,509
Total first year and single 434,588 237,248 264,195
Renewal premiums:
Investment annuities 18,560 22,784 29,516
Life insurance 67,739 68,323 70,064
Total renewal 86,299 91,107 99,580
Total direct premiums collected $ 520,887 328,355 363,775
</TABLE>
The underwriting policy of the Company requires medical examination of
applicants for ordinary insurance in excess of certain prescribed limits.
These limits are graduated according to the age of the applicant and the
amount of insurance desired. The Company has no maximum for issuance of life
insurance on any one life. However, the Company's general policy is to
reinsure that portion of any risk in excess of $200,000 on the life of any one
individual. Also, following general industry practice, policies are issued on
substandard risks.
Geographical Distribution of Business: For the year 1998, insurance and
annuity policies held by residents of the State of Texas accounted for 13% of
premium revenues, universal life, and investment annuity contract deposits
from direct business, while policies held by residents of Michigan, Florida,
and California accounted for approximately 9%, 8%, and 7%, respectively. All
other states of the United States accounted for 51% of premium revenues and
deposits from direct business. The remaining 12% of premium revenues and
deposits were derived from the Company's policies issued to foreign nationals,
primarily in Central and South America, almost all of which was for individual
life insurance. A distribution of the Company's direct premium revenues and
deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
United States domestic market:
Investment annuities $ 429,309 239,338 273,057
Life insurance 30,878 31,248 34,029
Total domestic market 460,187 270,586 307,086
International market:
Investment annuities 1,694 1,649 145
Life insurance 59,006 56,120 56,544
Total international market 60,700 57,769 56,689
Total direct premiums collected $ 520,887 328,355 363,775
</TABLE>
Approximately 66% of the direct life insurance premiums collected during 1998
was sold through international insurance brokers acting as independent
contractors. Foreign business is solicited by various independent brokers,
primarily in Central and South America, and forwarded to the United States for
acceptance and issuance. The Company maintains strict controls on the business
it accepts from such foreign independent brokers, as well as its underwriting
procedures for such business. Except for a small block of business, a
currency clause is included in each foreign policy stating that premium and
claim "dollars" refer to lawful currency of the United States. Traditional
and universal life products are sold in the international market to
individuals in upper socioeconomic classes. By marketing exclusively to this
group, sales typically produce a higher average policy size, strong
persistency, and claims experience similar to that in the United States.
Investments: State insurance statutes prescribe the nature, quality, and
percentage of the various types of investments which may be made by insurance
companies and generally permit investments in qualified state, municipal,
federal, and foreign government obligations, corporate bonds, preferred and
common stock, real estate, and real estate first lien mortgages where the
value of the underlying real estate exceeds the amount of the mortgage lien by
certain required percentages.
The following table shows the distribution of the Company's investments:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Securities held to maturity 64.7% 65.2% 67.6% 62.6% 68.5%
Securities available for sale 23.4 22.6 19.0 22.9 15.1
Mortgage loans 5.6 6.3 7.0 7.3 8.1
Policy loans 4.0 4.7 5.1 5.6 6.5
Other investments 2.3 1.2 1.3 1.6 1.8
Totals 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
The following table shows investment results for the periods indicated:
<TABLE>
<CAPTION>
Net Realized Unrealized
Invested Investment Gains (Losses) Gains
Year Assets Income (A) On Investments (Losses) (B)
(In thousands)
<S> <C> <C> <C> <C>
1998 $ 3,138,084 233,844 2,384 2,218
1997 2,877,340 217,446 (1,588) 3,929
1996 2,770,931 214,302 1,612 (5,342)
1995 2,624,596 201,816 (2,415) 17,394
1994 2,343,827 190,021 1,626 (1,942)
<FN>
Notes to Table:
(A) Net investment income is after deduction of investment expenses, but
before realized gains (losses) on investments and Federal income taxes.
(B) Unrealized gains and losses, net of effects of deferred policy acquisition
costs and taxes, relate only to those investment securities classified as
available for sale.
</FN>
</TABLE>
Regulation: The Company is subject to regulation by the supervisory agency of
each state or other jurisdiction in which it is licensed to do business. These
agencies have broad administrative powers, including the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms, the form and content of mandatory financial
statements, capital, surplus, and reserve requirements, as well as the
previously mentioned regulation of the types of investments which may be made.
The Company is required to file detailed financial reports with each state or
jurisdiction in which it is licensed, and its books and records are subject to
examination by each. In accordance with the insurance laws of the various
states in which the Company is licensed and the rules and practices of the
National Association of Insurance Commissioners, examination of the Company's
records routinely takes place every three to five years. These examinations
are supervised by the Company's domiciliary state, with representatives from
other states participating. The most recent completed examination of National
Western was finalized in 1994 and covered the six-year period ended December
31, 1992. The states of Colorado and Delaware participated. A final report
disclosing the examination results was received by the Company in March, 1995.
The report contained no adjustments or issues which had a significant,
negative impact on the operations of the Company. The Company is currently
under routine examination for the five-year period ended December 31, 1997.
The examination has been substantially completed and the final report is
expected in 1999. No significant adjustments or issues have been communicated
to the Company as a result of the examination in progress.
Regulations that affect the Company and the insurance industry are often the
result of efforts by the National Association of Insurance Commissioners
(NAIC). The NAIC is an association of state insurance commissioners,
regulators, and support staff that acts as a coordinating body for the state
insurance regulatory process. The NAIC and state insurance regulators
periodically re-examine existing laws and regulations. The NAIC has recently
completed a comprehensive process of codifying statutory accounting practices
and procedures. Other than specific individual state laws, the codification
results will be the only source of prescribed statutory accounting practices.
Insurance companies must adopt these new statutory accounting practices in
2001, which may result in significant changes to existing practices used in
the preparation of statutory financial statements. Based on a preliminary
review, National Western does not currently anticipate a material impact to
its capital and surplus position as a result of implementation of the new
prescribed statutory accounting procedures.
Also of particular importance, the NAIC has established risk-based capital
(RBC) requirements to help state regulators monitor the financial strength and
stability of life insurers by identifying those companies that may be
inadequately capitalized. Under the NAIC's requirements, each insurer must
maintain its total capital above a calculated threshold or take corrective
measures to achieve the threshold. The threshold of adequate capital is based
on a formula that takes into account the amount of risk each company faces on
its products and investments. The RBC formula takes into consideration four
major areas of risk which are: (i) asset risk which primarily focuses on the
quality of investments; (ii) insurance risk which encompasses mortality and
morbidity risk; (iii) interest rate risk which involves asset/liability
matching issues; and (iv) other business risks. The Company has calculated
its RBC level and has determined that its capital and surplus is significantly
in excess of the threshold requirements.
In addition to RBC requirements, insurance companies are also monitored by the
NAIC through its Insurance Regulatory Information System (IRIS). IRIS
consists of two systems, the original IRIS system and the Financial Analysis
and Solvency Tracking System. The original IRIS consists of two phases. The
first is a statistical phase during which key financial ratio results are
generated from the NAIC data base, which contains financial information
obtained from insurers' statutory annual statements. The second, an
analytical phase, is a review of the annual statements and financial ratios by
experienced financial examiners. The ratios of companies are compared against
usual ranges to identify trends or areas requiring additional review or
analysis. All of the Company's ratios for 1998 were within usual ranges, with
one exception. National Western exceeded a ratio which measures the
percentage change in premiums collected from 1997 to 1998. Based on statutory
financial statements, the Company's 1998 change in premiums ratio reflected an
increase of 59%, which exceeded the upper IRIS threshold of 50%. Although this
ratio did exceed the IRIS ranges, the significant increase positively reflects
the Company's successful year for premium growth.
The RBC regulation and IRIS system developed by the NAIC are examples of its
involvement in the regulatory process. Additionally, new regulations are
routinely published by the NAIC as model acts or model laws. The NAIC
encourages adoption of these model acts by all states to provide uniformity
and consistency among state insurance regulations.
While the insurance industry is primarily regulated by state governments,
federal regulation also affects the industry in various areas such as pension
regulations, securities laws, and federal taxation. For example, annuity and
insurance products have certain income tax advantages for policyholders
compared to other savings investments such as certificates of deposits and
taxable bonds. Unlike many other investments, increases in the contract
values of annuity and life insurance products are not subject to income
taxation until these values are actually paid to and received by the
policyholder. At various times, the federal government has considered
revising or eliminating this income tax deferral. Such a change, if ever
enacted, could have an adverse effect on the Company's ability to sell certain
annuity and insurance products.
Additionally, tax legislation has reduced the individual capital gains tax
rate from 28% to 20%. Because many consumers purchase annuities and life
insurance for their tax deferral advantages over other investments or
retirement products, a reduction in the Federal income tax rate for capital
gains could increase the attractiveness of competing products. Although
National Western has not experienced any negative impact on its sales, changes
such as these have the potential to adversely impact Company and industry wide
sales.
There have also been numerous proposals in recent years to modify the existing
federal income tax laws. Some proposals outline measures to implement a "flat
tax" structure that would lower the marginal tax rates for many taxpayers.
Other proposals call for eliminating the existing income tax and implementing
a "consumption based tax." Adoption of any of these new methods, particularly
the consumption based tax, could have adverse effects on the insurance
industry, as the value of annuity and life insurance products with income tax
deferral advantages would be lessened or minimized. However, it is impossible
to predict what changes, if any, will be made to the existing federal income
tax structure and the timing of any such changes.
Discontinued Brokerage Operations
In addition to life insurance and annuity operations, 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. Declines in both sales
revenues and earnings were the principal reasons for ceasing brokerage
operations. The declines resulted primarily from adverse bond market
conditions and adverse publicity about litigation. 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 bankruptcy reorganization was completed in
January, 1999, National Western retained 100% continuing ownership of the
reorganized Westcap, and the subsidiary is now operating as a real estate
management company. The brokerage segment is reported as discontinued
operations throughout this report and in the accompanying financial
statements. The bankruptcy and ultimate settlement are more fully described
in Item 3, Legal Proceedings, and in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's industry segments
follows:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues,
excluding
realized gains
(losses):
1998 $ 51,257 62,578 214,049 3,346 331,230
1997 50,555 61,914 198,619 2,774 313,862
1996 52,648 58,152 199,447 (650) 309,597
Segment
earnings: (A)
1998 $ 6,395 6,397 27,508 2,224 42,524
1997 5,901 7,143 28,389 1,821 43,254
1996 8,710 7,150 29,550 (425) 44,985
Segment
assets: (B)
1998 $ 412,538 373,201 2,692,330 19,285 3,497,354
1997 405,427 359,986 2,429,998 14,058 3,209,469
1996 400,747 345,834 2,353,445 6,074 3,106,100
<FN>
Notes to Table:
(A) These amounts exclude realized gains and losses on investments and
losses from discontinued operations, net of taxes.
(B) These amounts exclude assets of discontinued operations and other
unallocated assets.
</FN>
</TABLE>
Additional information concerning these industry segments is included in Item
1.(a).
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Included in Item 1.(a).
ITEM 2. PROPERTIES
The Company leases approximately 72,000 square feet of office space in Austin,
Texas, for $477,600 per year plus taxes, insurance, maintenance, and other
operating costs. This lease expires in 2000. National Western is currently
negotiating to extend this existing lease. Lease costs and related operating
expenses for office facilities of the Company's subsidiaries are not
significant in relation to the Company's consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
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 received
credit for $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid 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. Of the
$14,125,000, amounts totaling $7,284,000 were paid and transmitted to a
Disbursing Trust Committee on behalf of Westcap for payment to holders of
allowed claims against the Westcap debtors, and National Western paid
$6,841,000 to settling Westcap creditors with allowed claims against the
Westcap debtors who also settled and released National Western from alleged
federal or state securities law "control person" violations relating to
Westcap. The settling creditors were:
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 retained 100% continuing ownership of
the reorganized Westcap. Westcap will no longer engage in brokerage
operations, but will operate as a real estate management company.
Community College District No. 508, County of Cook and State of Illinois (The
City Colleges), was excluded from the compromise and settlement by National
Western with the settling creditors, but participated with all creditors in
the distribution from Westcap. In addition to the amounts described above,
included in the distribution to the Disbursing Trust were $48,000 of Westcap
assets. The City Colleges had previously obtained a bankruptcy court judgment
for approximately $56 million against the Westcap debtors (which was
subsequently reduced to approximately $52 million). Under the Plan, The City
Colleges participated in the $7,332,000 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 bankruptcy
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 $7,332,000 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 was paid by National Western on January 13, 1999. However,
the settlement payment has been accrued in other liabilities as of December
31, 1998, and reflected as a 1998 loss from discontinued operations in the
accompanying financial statements. The $1,000,000 previously contributed to
Westcap in bankruptcy was also reflected as a loss from discontinued
operations in 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 financial statements for potential losses relating to such
suit.
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. The bankruptcy court on November 16, 1998, entered
an order allowing a claim of The City Colleges against the Westcap estate of
$51,738,868. Westcap will appeal the bankruptcy court's and 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 is 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. Accordingly, no provision for any liability that may result from this
suit has been recognized in the accompanying financial statements.
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court
of San Patricio County, Texas, against National Western Life Insurance Company
(the Company) and its chief executive officer, Robert L. Moody. The suit
arose from derivative investments purchased by San Patricio County from
Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of
The Westcap Corporation. The suit alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit was
settled effective March 9, 1998, with a payment of $200,000 by National
Western to San Patricio County and with no admission of liability. In
exchange for the payment, National Western and Robert L. Moody received a
general release of all claims asserted, including all claims that have been
asserted against Westcap Securities, L.P., or could have been asserted in
another court against Westcap Securities, L.P., and the lawsuit was dismissed.
The $200,000 settlement payment was recorded as other operating expenses in
1998.
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,
intervenors, 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.
National Western proceeded with notification of class members and preliminary
administration of the claims process during late 1998 and January, 1999.
Estimated costs for this process totaling $250,000 were accrued as other
operating expenses as of December 31, 1998, in the accompanying financial
statements. On January 20, 1999, the Court held a "fairness hearing" and
approved the Settlement Agreement. As a result, National Western also accrued
the estimated $5,000,000 settlement as other operating expenses as of December
31, 1998. The actual settlement payments are expected to be paid during 1999.
Other Pending Litigation
On December 31, 1997, National Western Life Insurance Company (National
Western) filed a declaratory judgment action against National Annuity
Programs, Inc. (NAP) and Robert L. Myer (Myer) for construction of a General
Agent Manager Contract and amendments thereto between National Western and
NAP, a declaration that the contract is enforceable, and for an award for
damages. The contract was entered into in 1983 and amended in 1994, by which
NAP was to market insurance and annuity products issued by National Western.
The suit alleges that during the course of the contract NAP violated its terms
and conditions, violated the insurance laws and regulations of the State of
Texas, misrepresented the terms and conditions of National Western's insurance
and annuity products, induced National Western's policyholders to relinquish
or terminate its policies of insurance or annuities, and failed to use
reasonable efforts to conserve its insurance and annuity products. National
Western seeks (i) to withhold, deduct, and/or terminate the payment of agency
commissions under the contract to NAP, which are based on future premiums
received and policies maintained in force; (ii) damages from breach of the
contract; (iii) recovery of damages from Robert L. Myer for tortious
interference with National Western's contractual relations with its
policyholders; (iv) recovery of damages from Robert L. Myer for conspiracy to
cause NAP to breach its contract with National Western and to induce its
policyholders to terminate their policies with National Western; and (v)
reasonable attorneys' fees, costs, and expenses. The parties have started
discovery proceedings.
National Western Life Insurance Company is also currently a defendant in
several other lawsuits, substantially all of which are in the normal course of
business. In the opinion of management, the liability, if any, which may arise
from these lawsuits would not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company is traded is The
Nasdaq Stock Market under the symbol NWLIA. The high and low sales prices for
the common stock for each quarter during the last two years are shown in the
following table:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1998: First Quarter $ 106-5/8 95-1/4
Second Quarter 118-7/8 101-5/8
Third Quarter 158-7/8 108
Fourth Quarter 125-1/8 108
1997: First Quarter $ 91-1/4 79
Second Quarter 91-1/2 81-1/2
Third Quarter 103 85-3/4
Fourth Quarter 107-1/2 93-3/4
</TABLE>
(b) Equity Security Holders
The number of stockholders of record on December 31, 1998, was as follows:
<TABLE>
<S> <C>
Class A Common Stock 6,146
Class B Common Stock 2
</TABLE>
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on factors such as earnings, capital requirements, and the
operating and financial condition of the Company. Presently, the Company's
capital requirements are such that it intends to follow a policy of retaining
any earnings in order to finance the development of business and to meet
regulatory requirements for capital. A strong capital position is important
not only for the protection of existing policyholders, but also in the
successful marketing of Company products to new customers.
ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken
from the audited financial statements.
Earnings Information:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Life and
annuity
premiums $ 13,165 15,812 16,611 17,390 18,938
Universal life
and investment
annuity contract
revenues 83,169 80,250 75,966 69,783 64,711
Net investment
income 233,844 217,446 214,302 201,816 190,021
Other income 1,052 354 2,718 661 1,462
Realized gains
(losses)
on investments 2,384 (1,588) 1,612 (2,415) 1,626
Total revenues 333,614 312,274 311,209 287,235 276,758
Expenses:
Policyholder
benefits 32,441 35,285 33,313 37,336 32,790
Amortization of
deferred policy
acquisition costs 40,415 39,934 30,361 33,675 32,131
Universal life
and investment
annuity contract
interest 158,889 145,200 151,475 142,940 129,064
Other operating
expenses 35,504 27,560 25,722 27,084 29,394
Total expenses 267,249 247,979 240,871 241,035 223,379
Earnings before
Federal income
taxes and
discontinued
operations 66,365 64,295 70,338 46,200 53,379
Federal income
taxes 17,347 21,723 24,123 10,566 16,207
Earnings from
continuing
operations 49,018 42,572 46,215 35,634 37,172
Losses from
discontinued
operations (14,125) (1,000) - (16,350) (2,936)
Net earnings $ 34,893 41,572 46,215 19,284 34,236
Diluted Earnings
Per Share: (A)
Earnings from
continuing
operations $ 13.87 12.09 13.17 10.20 10.66
Losses from
discontinued
operations (4.00) (0.28) - (4.68) (0.84)
Net earnings $ 9.87 11.81 13.17 5.52 9.82
Balance Sheet
Information:
Total assets $ 3,518,003 3,225,563 3,120,829 2,958,459 2,915,054
Total liabilities $ 3,079,638 2,824,700 2,767,969 2,646,472 2,639,920
Stockholders'
equity $ 438,365 400,863 352,860 311,987 275,134
<FN>
Note to Table:
(A) - Amounts have been restated in accordance with the implementation of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
</FN>
</TABLE>
ITEM 7. 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>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
United States domestic market:
Investment annuities 82.4% 72.9% 75.1%
Life insurance 5.9 9.5 9.3
Total domestic market 88.3 82.4 84.4
International market:
Investment annuities 0.3 0.5 0.1
Life insurance 11.4 17.1 15.5
Total international market 11.7 17.6 15.6
Total direct premiums collected 100.0% 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 managing agents. The Company
currently has over 80 IMOs contracted for sales of life and annuity products.
This represents a significant increase from 1997, as numerous organizations
were added in 1998 that should be able to meet the Company's minimum
production standards.
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 from countries in Central and South America, the
Caribbean, and the Pacific Rim. Marketing to 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.
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 bankruptcy reorganization was completed in
January, 1999, National Western retained 100% continuing ownership of the
reorganized Westcap, and the subsidiary is now operating as a real estate
management company. However, the brokerage segment is 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 December 31, 1998, approximately 26% 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 December 31, 1998
and 1997. The Company emphasizes investment grade debt securities, with
smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
1998 1997
<S> <C> <C>
Debt securities 87.6% 87.3%
Mortgage loans 5.6 6.3
Policy loans 4.0 4.7
Index options 0.8 -
Equity securities 0.5 0.5
Real estate 0.4 0.5
Other 1.1 0.7
Totals 100.0% 100.0%
</TABLE>
Portfolio Analysis
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include primarily U.S. government agency
pass-through securities and collateralized mortgage obligations (CMOs). As of
December 31, 1998, 1997, and 1996, the Company's debt securities portfolio
consisted of the following mix of securities based on amortized cost:
<TABLE>
<CAPTION>
Percent of Debt Securities
1998 1997 1996
<S> <C> <C> <C>
Corporate 53.9% 50.1% 45.5%
Mortgage-backed securities 22.5 27.9 33.5
Public utilities 13.3 13.3 15.1
Asset-backed securities 7.0 4.5 1.0
Foreign governments 1.9 2.0 2.2
States & political subdivisions 1.1 1.1 1.1
U.S. government 0.3 1.1 1.6
Totals 100.0% 100.0% 100.0%
</TABLE>
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1998, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ 7,005 6,995
Due after one year through five years 386,762 395,497
Due after five years through ten years 1,251,817 1,318,770
Due after ten years 267,880 291,256
1,913,464 2,012,518
Mortgage and asset-backed securities 800,579 832,072
Totals $ 2,714,043 2,844,590
</TABLE>
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 these
risks. The Company continues to reduce its exposure to prepayment and
extension risks by lowering its holdings of mortgage-backed securities. This
strategy began in 1994 when mortgage-backed securities totaled 47.6% of the
entire portfolio, but now total only 22.5% at December 31, 1998. The majority
of this reduction has been achieved by shifting investments into corporate
securities, as corporate holdings have increased from 32.5% in 1994 to 53.9%
in 1998. Also, most of these additions have been noncallable corporates which
help reduce prepayment and call risks.
As indicated above, the Company's holdings of mortgage-backed securities are
also subject to prepayment risk, as well as extension risk. Both of these
risks are addressed by specific portfolio management strategies. The Company
has substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations which have more predictable
cash flow patterns than pass-through securities. These securities, known as
planned amortization class I (PAC I) CMOs, are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
As of December 31, 1998, CMOs represent approximately 92% 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 examination 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 except percentages)
<S> <C> <C> <C>
December 31, 1998 $ 44,974 45,317 1.4%
December 31, 1997 $ 41,149 41,969 1.4%
December 31, 1996 $ 38,696 38,784 1.4%
</TABLE>
The Company's strong credit risk management and commitment to quality has
resulted in minimal defaults in the debt securities portfolio in recent years.
In fact, at December 31, 1998 and 1997, no securities were in default and on
nonaccrual status, and at December 31, 1996, securities totaling only
$2,945,000 were in such status.
The Company's commitment to high quality investments in debt securities is
also reflected in the portfolio's high average credit rating. In the table
below, investments in debt securities are classified according to credit
ratings by Standard and Poor's (S&P), a nationally recognized statistical
rating organization (NRSRO). If securities were not rated by S&P, the
equivalent rating of another NRSRO or the National Association of Insurance
Commissioners was used.
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
AAA and U.S. government 29.7% 33.3%
AA 8.0 6.5
A 34.4 33.1
BBB 26.2 25.4
BB and other below investment grade 1.7 1.7
100.0% 100.0%
</TABLE>
At December 31, 1998, unrealized gains in the Company's debt and equity
securities portfolios were as follows:
<TABLE>
<CAPTION>
Fair Amortized Unrealized
Value Cost Gains
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,124,715 2,029,728 94,987
Securities available for sale:
Debt securities 719,875 684,315 35,560
Equity securities 15,712 12,018 3,694
Totals $ 2,860,302 2,726,061 134,241
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities
continue to be a small component of the portfolio. Unrealized gains
totaling $134,241,000 on the securities portfolio at December 31, 1998, is a
reflection of market interest rates at year-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. This
correlation between market values and interest rates is reflected in the
tables below.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands except percentages)
<S> <C> <C> <C>
Fair value $ 2,844,590 2,588,326 2,406,855
Amortized cost $ 2,714,043 2,482,806 2,365,111
Fair value as a
percentage of amortized cost 104.8 % 104.3 % 101.8 %
Unrealized gains
at year-end $ 130,547 105,520 41,744
Ten-year U.S. Treasury
bond - change in
yield for the year (1.0)% (0.7)% 0.9 %
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gains Increase in
At At Unrealized
December 31, December 31, Gains
1998 1997 During 1998
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 94,987 75,233 19,754
Securities available for sale:
Debt securities 35,560 30,287 5,273
Equity securities 3,694 3,175 519
Totals $ 134,241 108,695 25,546
</TABLE>
As reflected above, changes in interest rates of 100 basis points or even less
can have a significant impact on the market values of the Company's debt
securities. The Company would expect similar results in the future from any
significant upward or downward movement in market rates. However, because the
majority of the Company's debt securities are classified as held to maturity,
the changes in market values have had relatively small effects on the
Company's financial statements.
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 apredictable 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 following
table illustrates the market risk sensitivity of the Company's interest rate-
sensitive assets. The table measures the effect of a change in interest rates
on the fair value of the portfolio. The data is prepared using models that
measure the change in fair value arising from an immediate and sustained
change in interest rates in increments of 100 basis points.
<TABLE>
<CAPTION>
Fair Values
Changes in Interest Rates in Basis Points
- 100 0 + 100 + 200
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Debt and equity
securities $ 2,990,901 2,860,302 2,724,249 2,589,637
Mortgage loans 193,126 186,161 179,632 173,480
Policy loans 161,890 150,583 140,517 131,519
Index options 23,613 23,900 24,185 24,467
</TABLE>
The debt securities portfolio includes primarily noncallable corporate bonds,
mortgage-backed securities, and asset-backed securities. Expected maturities
of debt securities may differ from contractual maturities due to call or
prepayment provisions. The model assumes that prepayments on mortgage-backed
securities are influenced by agency and pool types, the level of interest
rates, loan age, refinancing incentive, month of the year, and underlying
coupon. During periods of declining interest rates, principal payments on
mortgage-backed securities and collateralized mortgage obligations increase as
the underlying mortgages are prepaid. Conversely, during periods of rising
interest rates, the rate of prepayment slows. Both of these situations can
expose the Company to the possibility of asset/liability cash flow and yield
mismatch. The model uses a proprietary method of sampling interest rate paths
along with a mortgage prepayment model to derive future cash flows. The
initial interest rates used are based on the current U.S. Treasury yield curve
as well as current mortgage rates for the various types of collateral in the
portfolio.
Mortgage loans were modeled by discounting scheduled cash flows through the
scheduled maturities of the loans, starting with interest rates currently
being offered for similar loans to borrowers with similar credit ratings.
Policy loans were modeled by discounting estimated cash flows using U.S.
Treasury Bill interest rates as the base rates at December 31, 1998. The
estimated cash flows include assumptions as to whether such loans will be
repaid by the policyholders or settled upon payment of death or surrender
benefits on the underlying insurance contracts. As a result, these
assumptions incorporate both Company experience and mortality assumptions
associated with such contracts.
In addition to the securities analyzed 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 (S&P 500 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.
The above-described scenario produces estimated changes in cash flows as well
as cash flow reinvestment projections. Estimated cash flows in the Company's
model assume cash flow reinvestments which are representative of the Company's
current investment strategy. Calls and prepayments include scheduled
maturities and those expected to occur which would benefit the security
issuers. Assumed policy surrenders consider differences and relationships
between credited interest rates and market interest rates as well as surrender
charges on individual policies. The impact to earnings also includes the
expected effects on amortization of deferred policy acquisition costs. The
model considers only investment annuity and supplemental contracts in force at
December 31, 1998, and does not consider new product sales or the possible
impact of interest rate changes on sales.
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 proven to
result in higher quality mortgage loans with fewer defaults.
The Company's direct investments in real estate are not a significant portion
of its total investment portfolio, and the majority of real estate owned was
acquired through mortgage loan foreclosures. However, the Company also
participates in several real estate joint ventures and limited partnerships.
The joint ventures and partnerships invest primarily in income-producing
retail properties. While not a significant portion of the Company's
investment portfolio, these investments have produced favorable returns and
significantly increased investment income in 1996 as several of these
interests in real estate joint ventures were sold. The sales resulted in
additional investment income totaling approximately $2,300,000 in 1996. No
real estate joint ventures were sold in 1997 or 1998.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $174,921,000 and
$181,878,000, or 5.6% and 6.3% of total invested assets, at December 31, 1998
and 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 region of the
United States and by property type as of December 31, 1998 and 1997, was as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
West South Central 57.1% 54.9%
Mountain 19.4 11.3
Pacific 7.7 8.0
South Atlantic 4.8 11.4
East South Central 4.6 5.2
West North Central 3.0 2.9
All other 3.4 6.3
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Retail 56.7% 62.2%
Office 21.0 16.6
Hotel/Motel 7.9 7.9
Apartment 4.2 4.1
Land/Lots 4.1 3.3
Nursing homes 3.0 3.2
All other 3.1 2.7
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1998, the allowance for possible losses on mortgage loans
was $4,640,000. No additions were made to the allowance during 1998.
Additions to the allowance totaling $1,133,000 were recognized as realized
losses on investments in the Company's 1997 financial statements. Management
believes that the allowance for possible losses is adequate. However, while
management uses available information to recognize losses, future additions to
the allowance may be necessary based on changes in economic conditions,
particularly in the West South Central region which includes Texas, Louisiana,
Oklahoma, and Arkansas, as this area contains the highest concentrations of
the Company's mortgage loans.
The Company currently places all loans past due three months or more on
nonaccrual status, thus recognizing no interest income on the loans. At
December 31, 1998 and 1997, the Company had no mortage loan principal balances
on nonaccrual status. The Company had mortgage loan principal balances with
restructured terms totaling approximately $12,096,000 and $12,463,000 at
December 31, 1998 and 1997, respectively. For the years ended December 31,
1998 and 1997, the reductions in interest income due to nonaccrual and
restructured mortgage loans were not significant.
The contractual maturities of mortgage loan principal balances at December
31, 1998, are as follows:
<TABLE>
<CAPTION>
Principal
Due
(In thousands)
<S> <C>
Due in one year or less $ 13,233
Due after one year through five years 83,986
Due after five years through ten years 66,687
Due after ten years through fifteen years 17,067
Due after fifteen years 97
Total $ 181,070
</TABLE>
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling approximately $13,553,000 and $15,027,000 at
December 31, 1998 and 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 income on these properties of approximately $740,000 and $716,000
for the years ended December 31, 1998 and 1997, respectively. The Company
does not anticipate significant changes in these operating results in the near
future.
The Company monitors the conditions and market values of these properties on a
regular basis. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed. No
realized losses were recognized due to declines in values of properties during
1998. However, realized losses recognized due to declines in values of
properties totaled $46,000 for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results, net of taxes, for the years ended December 31,
1998, 1997, and 1996 is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands except per share data)
<S> <C> <C> <C>
Revenues:
Insurance revenues excluding
realized gains (losses)
on investments $ 331,230 313,862 309,597
Realized gains
(losses) on investments 2,384 (1,588) 1,612
Total revenues $ 333,614 312,274 311,209
Earnings:
Earnings from continuing
operations, excluding
realized gains(losses)
on investments $ 47,468 43,604 45,167
Losses from discontinued
brokerage operations (14,125) (1,000) -
Net realized gains
(losses) on investments 1,550 (1,032) 1,048
Net earnings $ 34,893 41,572 46,215
Basic Earnings Per Share:
Earnings from continuing
operations, excluding
realized gains (losses)
on investments $ 13.58 12.49 12.94
Losses from discontinued
brokerage operations (4.04) (0.29) -
Net realized gains
(losses) on investments 0.44 (0.29) 0.30
Net earnings $ 9.98 11.91 13.24
Diluted Earnings Per Share:
Earnings from continuing
operations, excluding
realized gains (losses)
on investments $ 13.43 12.38 12.87
Losses from discontinued
brokerage operations (4.00) (0.28) -
Net realized gains
(losses) on investments 0.44 (0.29) 0.30
Net earnings $ 9.87 11.81 13.17
</TABLE>
1998 Consolidated Operating Results: For the year ended December 31, 1998,
the Company recorded net earnings of $34,893,000 compared to net earnings of
$41,572,000 for 1997. Earnings were lower due to nonrecurring items, the most
significant of which was the bankruptcy settlement of the Company's wholly
owned subsidiary, The Westcap Corporation, totaling $14,125,000. This
settlement was reflected as a loss from discontinued brokerage operations in
1998. Losses on discontinued brokerage operations totaled $1,000,000 in 1997.
Net earnings for 1998 also include a lawsuit settlement as previously reported
by the Company on September 28, 1998. Parties involved in the Diffie, et al
vs. National Western Life Insurance Company and National Annuity Programs,
Inc. class action litigation filed a joint motion in District Court for
preliminary approval of a settlement agreement among the parties. This
settlement was approved by the Court in January, 1999, and, as a result, the
Company will pay $5,000,000 to settle the litigation. This amount was accrued
in the Company's financial statements in 1998, thereby reducing earnings
$3,250,000, after taxes.
Also during 1998, the Company transferred pension obligations and
administrative responsibilities of its nonqualified defined benefit plan to a
pension administration firm. The financial effects of the transaction
resulted in additional pension expense in 1998 totaling $1,653,000, net of
taxes, as the amount paid upon transfer exceeded the recorded pension
liabilities as required for financial reporting purposes. However, as a
result of the transfer, substantially all future pension and administrative
liabilities and expenses under the plan are now the responsibility of the new
firm.
Excluding the nonrecurring items and related tax effects described above, 1998
earnings actually exceeded comparable 1997 earnings by over 17%. The higher
earnings are due primarily to increases in universal life and annuity contract
revenues, increases in investment income over policy contract interest, and
decreases in life insurance benefit claims. Universal life and annuity
contract revenues increased almost $3,000,000 from $80,250,000 in 1997 to
$83,169,000 in 1998. This increase is almost entirely from increases in cost
of insurance revenues. Life insurance benefit claims were lower in 1998,
decreasing $2,480,000, or 10.2%, from 1997. The Company also recorded
realized gains on investments of $1,550,000 in 1998 compared to realized
losses of $1,032,000 in 1997, net of taxes.
1997 and 1996 Consolidated Operating Results: For the year ended December 31,
1997, the Company recognized net earnings totaling $41,572,000, a decrease of
10.0% from 1996 earnings. The lower earnings in 1997 compared to 1996 were
primarily due to higher life insurance benefit claims and amortization of
deferred policy acquisition costs. Deferred policy acquisition costs, which
are primarily capitalized agents' commissions, are amortized in direct
relation to anticipated future gross profits on applicable life and annuity
business. Increases in anticipated future gross profits resulted in
retrospective adjustments to deferred policy acquisition costs, which lowered
the amortization in 1996 relative to 1997 amounts. Additionally, other income
in 1997 declined $1.5 million, net of taxes, as 1996 included nonrecurring
income primarily due to litigation-related recoveries. Net earnings for 1997
also included losses from discontinued brokerage operations totaling
$1,000,000 and realized losses on investments, net of taxes, totaling
$1,032,000. No losses from discontinued brokerage operations were reported in
1996, but realized gains on investments totaling $1,048,000, net of taxes,
were recorded.
Net Investment Income: A detail of net investment income is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 195,425 184,870 176,825
Mortgage loans 16,943 18,659 19,851
Policy loans 9,252 9,764 10,645
Index options 8,057 18 -
Other investment income 7,783 6,742 10,082
Total investment income 237,460 220,053 217,403
Investment expenses 3,616 2,607 3,101
Net investment income $ 233,844 217,446 214,302
</TABLE>
As indicated by the table above, net investment income increased substantially
in 1998 from the prior two years. However, excluding index options, net
investment income during 1998 actually increased only 3.8% from 1997, while
invested assets rose 8.2%. The lower investment income growth is attributable
to several factors. As in previous years, market interest rates have
continued to decline, which has affected yields on purchases of new debt
securities. Mortgage loans have typically had significantly higher yields
than the Company's investments in debt securities. However, mortgage loans
continue to decline as a percentage of the investment portfolio and in actual
amounts from previous years. Also, matured or prepaid mortgage loans are
typically replaced with loans with lower interest rates.
As the Company is now selling equity-indexed annuities, net investment income
for 1998 includes income from index options which totaled $8,057,000. The
index options are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuity products. Any gains
or losses from the sale or expiration of the options, as well as period-to-
period changes in fair values, are reflected as net investment income. The
income from these options substantially offset the change in the related
policyholder liabilities for the equity-indexed annuity products during 1998.
Investment income from index options totaled only $18,000 in 1997, as the
Company introduced the new equity-indexed products in the fourth quarter of
1997 and sales were minimal.
Net investment income from 1996 reflects higher other investment income than
1997 and 1998. The higher income is primarily from gains from real estate
joint ventures. NWL Investments I, L.P. sold several real estate joint
venture interests during 1996, and the sales resulted in additional
investment income totaling $2,300,000.
An analysis of net investment income also involves a review of market interest
rates. Interest rates continued to decline in 1998 and 1997 from 1996 rates.
Detailed below is the Company's investment performance for 1998, 1997, and
1996, and the changes in the Company's yields reflect the changes in market
interest rates. However, changes in market rates affect the Company's
portfolio yield slowly because of the relatively small volume of new
investment purchases during a year in comparison to the size of the overall
investment portfolio. Yields in 1998 and 1997 were also somewhat affected by
the change in the mix of the investment portfolio and by lower returns
from real estate joint ventures as previously described above. The analysis
below excludes index options, as these derivative financial instruments are
used solely for hedging purposes for the Company's equity-indexed annuity
products. Income from the options directly offset interest credited to
policyholders for the equity return component on these products.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands except percentages)
<S> <C> <C> <C>
Net investment income,
excluding index options $ 225,787 217,428 214,302
Average invested assets,
at amortized cost $ 2,986,350 2,798,957 2,652,232
Yield on average invested assets 7.56% 7.77% 8.08%
</TABLE>
Realized Gains and Losses on Investments: The Company realized gains of $2.4
million in 1998 compared to realized losses of $1.6 million in 1997 and gains
of $1.6 million in 1996. The gains in 1998 were primarily from gains on debt
securities totaling $1.3 million, substantially all of which related to
securities that were called. Realized gains in 1998 also include a gain of
$300,000 related to a deficiency settlement agreement on a mortgage loan that
was foreclosed in 1994. The losses in 1997 were primarily from net losses on
debt securities totaling $1.2 million and writedowns on real estate and
mortgage loans totaling $1.2 million, primarily related to a single
foreclosure. The gains in 1996 were primarily from sales of investments in
debt securities and real estate. The 1996 gains are also net of writedowns on
real estate and mortgage loans totaling $1,026,000.
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. Although credited rates are lower, contract interest
increased significantly during 1998. Contract interest totaled $158.9
million, $145.2 million, and $151.5 million in 1998, 1997, and 1996,
respectively. The increase is primarily attributable to interest totaling
$12,980,000 for the Company's new 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. Because of this hedging program, the Company separately
analyzes average credited rates on its other products. Excluding the
Company's equity-indexed annuity products, average credited rates for 1998,
1997, and 1996 were 5.67%, 5.68%, and 6.15%, respectively. The declines in
average credited rates over the past three years is also consistent with the
Company's lower yields on average invested assets. The difference between
yields earned over credited rates, often referred to as the interest spread,
has remained relatively consistent at approximately 2% in 1998, 1997, and
1996.
Federal Income Taxes: Federal income taxes on earnings from continuing
operations for 1998, 1997, and 1996 reflect effective tax rates of 26.1%,
33.8%, and 34.3%, respectively, which are lower than the expected Federal rate
of 35%. The 1998 and 1997 effective tax rates are significantly lower due to
tax benefits totaling $4,944,000 and $350,000, respectively, resulting from
the Company's subsidiary brokerage losses. Correspondingly, losses on
discontinued operations for 1998 and 1997 totaling $14,125,000 and $1,000,000
do not include any tax benefits relating to the brokerage subsidiary. This
tax reporting treatment is in accordance with the Company's tax allocation
agreement with its subsidiaries. On a consolidated basis, Federal income
taxes reflect consistent effective tax rates of 33.2%, 34.3%, and 34.3% for
1998, 1997, and 1996, respectively.
Discontinued Brokerage Operations: On April 12, 1996, The Westcap Corporation
and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court, Southern District of Texas,
Houston Division. As a result of brokerage losses and the resulting
bankruptcy, National Western's investment in Westcap was completely written
off during 1995. However, a $1,000,000 cash infusion was made to Westcap on
March 18, 1997, for operational expenses incurred during its bankruptcy. This
contribution was reflected as a loss from discontinued operations in 1997.
Losses from the discontinued brokerage operations have been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements.
As more fully described in Item 3, Legal Proceedings, of this Form 10-K, 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 Westcap Enterprises, Inc. Pursuant to the Plan, National Western received
credit for the $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid 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. The
bankruptcy reorganization was completed in January, 1999, National Western
retained 100% continuing ownership of the reorganized Westcap, and the
subsidiary is now operating as a real estate management company.
Although the $14,125,000 settlement was paid by National Western on January
13, 1999, the settlement payment has been reflected in the accompanying 1998
financial statements as a loss from discontinued operations. 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.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings from continuing operations for the years ended
December 31, 1998, 1997, and 1996 is provided below. The segment earnings
exclude realized gains and losses on investments, net of taxes, and
discontinued brokerage operations.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment
earnings
(losses):
1998 $ 6,395 6,397 27,508 2,224 42,524
1997 5,901 7,143 28,389 1,821 43,254
1996 8,710 7,150 29,550 (425) 44,985
</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 managing 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 $6,395,000,
$5,901,000, and $8,710,000 for 1998, 1997, and 1996, respectively. The
decline in 1997 earnings is primarily attributable to higher other operating
expenses. The slight increase in earnings in 1998 is due to increases in
revenues and other income and lower amortization of deferred policy acquistion
costs. However, these items were offset substantially by increases in other
operating expenses and life insurance benefit claims. 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
Cost of insurance $ 10,684 9,519 9,057
Surrender charges 2,040 2,161 2,485
Policy fees and
other revenues 1,503 1,058 893
Traditional life
insurance premiums 10,069 10,901 12,072
Totals $ 24,296 23,639 24,507
</TABLE>
Actual universal life insurance deposits collected for the years ended
December 31, 1998, 1997, and 1996 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
First year and single premiums $ 6,944 5,929 7,416
Renewal premiums 14,014 14,198 14,383
Totals $ 20,958 20,127 21,799
</TABLE>
Other income for 1998, 1997, and 1996 totaled $750,000, $43,000, and $375,000,
respectively. The significant increase in 1998 was primarily due to proceeds
totaling $444,000 received from the U.S. government in 1998 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Life insurance benefit claims $ 15,321 14,356 14,369
Universal life insurance
contract interest 9,963 9,687 9,694
Amortization of deferred
policy acquisition costs 2,954 5,058 5,467
Other operating expenses 10,786 8,588 6,920
</TABLE>
Life insurance benefit claims were significantly higher in 1998 at $15.3
million compared to $14.4 million in 1997 and 1996. 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
$9.7 million in 1996 and 1997 and $10.0 million in 1998. Although credited
rates have declined somewhat over this time period, which is consistent with
declines in market interest rates, the small growth in this block of business
has resulted in relatively stable overall interest.
Amortization of deferred policy acquisition costs has decreased from $5.5
million in 1996 to $5.1 million and $3.0 million in 1997 and 1998,
respectively. 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.
Other operating expenses increased significantly in 1998, totaling $10.8
million compared to $8.6 million and $6.9 million in 1997 and 1996,
respectively. The increase in expenses is due to higher pension expenses from
the transfer of the Company's nonqualified defined benefit plan as previously
described and other increases primarily in salaries, agent conventions, and
marketing related expenses such as travel and printing costs.
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 in countries in Central and South
America, the Caribbean, and the Pacific Rim. Marketing to 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
$6,397,000, $7,143,000, and $7,150,000 for 1998, 1997, and 1996, respectively.
Earnings in 1998 were lower primarily due to higher operating expenses,
reinsurance costs, and amortization of deferred policy acquisition costs
offset significantly by lower life insurance benefit claims. 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. A comparative
detail of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
Cost of insurance $ 27,508 25,258 23,209
Surrender charges 6,359 6,661 6,318
Policy fees and other revenues 3,726 3,698 2,705
Traditional life insurance premiums 3,013 4,812 4,421
Totals $ 40,606 40,429 36,653
</TABLE>
Actual universal life insurance deposits collected for the years ended
December 31, 1998, 1997, and 1996 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
First year and single premiums $ 13,575 11,412 11,196
Renewal premiums 35,114 34,323 34,443
Totals $ 48,689 45,735 45,639
</TABLE>
Significant expenses for international life insurance operations are
summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Life insurance benefit claims $ 9,296 13,515 10,600
Universal life insurance
contract interest 13,432 12,575 11,853
Amortization of deferred
policy acquisition costs 15,836 13,608 10,264
Other operating expenses 9,573 7,749 7,541
</TABLE>
Life insurance benefit claims were abnormally high in 1997 at $13.5 million
compared to $10.6 million in 1996 and $9.3 million in 1998. 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 has increased steadily from $11.9
million in 1996 to $12.6 million and $13.4 million in 1997 and 1998,
respectively. The increases in contract interest are consistent with growth
in the universal life insurance business. The increases have been tempered
somewhat by declines in policyholder credited rates due to declines in market
interest rates, which also lower the Company's net investment income.
Amortization of deferred policy acquisition costs were significantly lower in
1996, totaling $10.3 million compared to $13.6 million and $15.8 million in
1997 and 1998, respectively. Increases in anticipated future gross profits
resulted in retrospective adjustments to deferred policy acquisition costs
which lowered amortization in 1996 relative to 1997 and 1998.
Other operating expenses totaled $9.6 million, $7.7 million, and $7.5 million
in 1998, 1997, and 1996, respectively, which reflects a significant increase
in 1998. The increase in expenses is attributable to the same reasons as
previously described for domestic life insurance operations.
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 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 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 are 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 $27,508,000, $28,389,000, and
$29,550,000 for 1998, 1997, and 1996, respectively. Earnings for 1998 were
down significantly from 1997 and 1996 primarily due to nonrecurring items,
which increased other operating expenses as more fully described below. Also,
over the past several years, sales in the annuity business have been
declining. However, during 1998 annuity deposits have increased substantially
primarily due to sales of the Company's equity-indexed annuity products. 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Surrender charges:
Two-tier annuities $ 17,898 19,940 22,679
Single-tier annuities 6,799 5,185 3,459
Total surrender charges 24,697 25,125 26,138
Payout annuity and other revenues 6,652 6,770 5,161
Traditional annuity premiums 83 99 118
Totals $ 31,432 31,994 31,417
</TABLE>
Actual annuity deposits collected for the years ended December 31, 1998, 1997,
and 1996 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>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Deferred annuities:
Equity-indexed $ 222,486 6,004 -
Other 187,835 222,450 270,148
Total deferred annuities 410,321 228,454 270,148
Immediate annuities 20,682 12,533 3,054
Totals $ 431,003 240,987 273,202
</TABLE>
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 annuities. In fact, the growth has been dramatic, as annuity
production increased 79% from $240,987,000 in 1997 to $431,003,000 in 1998.
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. Sales totaling $222 million in 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.
Net investment income for 1998, 1997, and 1996 totaled $182,347,000,
$166,348,000, and $165,943,000, respectively. Amounts for 1997 and 1996 were
consistent, as premiums were lower in 1997, impacting invested asset growth.
Market interest rates as well as investment yields have also decreased since
1996, tempering investment income increases. The large increase in net
investment income in 1998 is due to the substantial increase in premium
production, primarily from sales of the Company's new equity-indexed
annuities, which resulted in increases in invested assets. Net investment
income also includes $8,057,000 of income from index options. Investment
income from index options totaled only $18,000 in 1997, as sales of equity-
indexed annuities were minimal in 1997.
Other income was relatively insignificant in 1998 and 1997, totaling $270,000
and $277,000, respectively. However, other income for 1996 totaled
$2,087,000, which includes $1.3 million in income relating to litigation
involving an independent marketing organization. The litigation is more fully
described in Item 3, Legal Proceedings.
Significant expenses for annuity operations are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Annuity contract interest $ 135,494 122,938 129,928
Amortization of deferred
policy acquisition costs 21,625 21,268 14,630
Other operating expenses 15,145 11,223 11,261
</TABLE>
Annuity contract interest was $129.9 million in 1996 compared to $122.9
million in 1997. As previously described for consolidated operations, the
decrease is due to lower average credited rates on policies, which is
consistent with declines in market interest rates. While the lower market and
credited rates have continued into 1998, annuity contract interest has
increased substantially, totaling $135.5 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 $12,980,000 in 1998.
Amounts for 1997 were insignificant, as sales of these annuities were minimal
in 1997. Although contract interest is higher due to equity-indexed
annuities, net investment income also includes an additional $8,057,000 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 1998, 1997, and 1996 was $21.6 million, $21.3 million, and $14.6 million,
respectively. Increases in anticipated future gross profits resulted in
retrospective adjustments to deferred policy acquisition costs which lowered
the amortization in 1996 relative to 1997 and 1998 amounts. Additionally,
increases in policy surrenders since 1996 contributed to higher amortization
in 1997 and 1998.
Other operating expenses totaled $15,145,000, $11,223,000, and $11,261,000 for
1998, 1997, and 1996, respectively. Expenses for 1998 were unusually high
primarily due to two nonrecurring items as previously described in the summary
of consolidated operating results. Additional pension expenses were incurred
in 1998 related to the Company's transfer of its nonqualified defined benefit
plan to a pension administration firm. Also included in 1998 expenses is a
$5,000,000 lawsuit settlement for the Diffie, et al vs. National Western Life
Insurance Company and National Annuity Programs, Inc. class action litigation.
The litigation involved various issues regarding sales of the Company's
annuities.
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.
Earnings for these operations totaled $2,224,000 and $1,821,000 for 1998 and
1997, respectively. Operating results for 1996 reflected losses totaling
$425,000. The increase in earnings since 1996 is due to the transfer of an
asset from National Western to one of the subsidiaries as described in detail
below.
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. Gross income distributions from the Trust totaled $3,451,000,
$3,335,000, and $3,252,000 in 1998, 1997, and 1996, respectively. The
distributions for 1998 and 1997 were paid to NWL Services, Inc., and,
therefore, are included in other operations for these periods. The 1996
distribution was paid to National Western Life Insurance Company. As a
result, this income was allocated among the insurance segments, domestic life
insurance, international life insurance, and annuity operations, for 1996.
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 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 $131 million, $144 million, and $145 million in 1998, 1997, and 1996,
respectively. Net cash flows from the Company's deposit product operations,
which include universal life and investment annuity products, totaled $113
million in 1998 and $16 million in 1996. However, these operations incurred
net cash outflows in 1997 totaling $51 million. The cash outflows in 1997
were due to low annuity production along with increased policy surrenders.
Although surrenders increased again in 1998, strong equity-indexed annuity
production generated the strong positive cash flow in 1998.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $159 million, $144 million, and $117 million in 1998,
1997, and 1996, respectively. The Company again expects significant cash
flows from these sources in 1999 at levels similar to the past two years.
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 1999.
Stockholders' equity totaled $438 million at December 31, 1998, reflecting an
increase of $38 million from 1997. The increase in capital is primarily from
net earnings of $35 million. Net unrealized gains on investment securities
totaling $2.2 million also contributed to the rise in stockholders' equity.
Book value per share at December 31, 1998, was $125.31, reflecting a 9.2%
increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
Insurance Related Assessments
In December, 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, which provides guidance on accounting
by insurance and other enterprises for assessments related to insurance
activities. The SOP provides: (1) guidance for determining when an entity
should recognize a liability for guaranty fund and other insurance related
assessments, (2) guidance on how to measure the liability, including
discounting of the liability if the amount and timing of the cash payments are
fixed or reliably determinable, (3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges, and
(4) requirements for disclosure of certain information. The Company
anticipates that this SOP will not have a significant effect on its reporting
of liabilities for guaranty fund assessments, as the Company is currently
applying accounting procedures similar to those in the new statement. SOP 97-
3 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company currently expects to implement the SOP in the
first quarter of 1999.
Deposit Accounting
In October, 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
The SOP specifies classifications for insurance and reinsurance contracts for
which deposit accounting is appropriate and specifies accounting methods for
each. For each insurance and reinsurance contract accounted for under deposit
accounting, a deposit asset or liability should be recognized at inception and
should be measured based on consideration paid or received, less any premiums
or fees to be retained by the insurer or reinsurer, irrespective of the
experience of the contract. The Company anticipates that this SOP will not
have a significant effect on its financial statements, as the Company's
current insurance and reinsurance contracts all transfer insurance risk. SOP
98-7 is effective for all fiscal years beginning after June 15, 1999. The
Company currently plans to implement the SOP in the first quarter of 2000.
Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 defines several designations of
derivatives based on the instrument's intended use and specifies the
appropriate accounting treatment for changes in the fair value of the
derivative based on its resulting designation. The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company currently sells equity-indexed annuities that contain an equity
return component for policyholders which is an embedded derivative instrument.
The Company purchases index options, which are also derivative instruments, to
hedge this equity return component. The index options are reported at fair
value in the Company's financial statements, which is in accordance with SFAS
No. 133 requirements. The Company also uses a fair value approach in
recording policy liabilities for the equity-indexed annuities. However, there
is currently no specific, authoritative interpretation of SFAS No. 133 with
respect to accounting for equity-indexed annuity liabilities. Additional
guidance in 1999 regarding this issue may result in a definitive method
significantly different from that currently used by the Company. As a result,
the ultimate implementation of SFAS No. 133 could have a significant effect on
the Company's results of operations. The Company expects to implement the new
statement in the first quarter of 2000.
REGULATORY AND OTHER ISSUES
Statutory Accounting Practices
Regulations that affect the Company and the insurance industry are often the
result of efforts by the National Association of Insurance Commissioners
(NAIC). The NAIC is an association of state insurance commissioners,
regulators, and support staff that acts as a coordinating body for the state
insurance regulatory process. The NAIC has recently completed a comprehensive
process of codifying statutory accounting practices and procedures. Other
than specific individual state laws, the codification results will be the only
source of prescribed statutory accounting practices. Insurance companies must
adopt these new statutory accounting practices in 2001, which may result in
significant changes to existing practices used in the preparation of statutory
financial statements. Based on a preliminary review, National Western does
not currently anticipate a material impact to its capital and surplus position
as a result of implementation of the new prescribed statutory accounting
procedures.
Risk-Based Capital Requirements
The NAIC established risk-based capital (RBC) requirements to help state
regulators monitor the financial strength and stability of life insurers by
identifying those companies that may be inadequately capitalized. Under the
NAIC's requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the threshold.
The threshold of adequate capital is based on a formula that takes into
account the amount of risk each company faces on its products and investments.
The RBC formula takes into consideration four major areas of risk which are:
(i) asset risk which primarily focuses on the quality of investments; (ii)
insurance risk which encompasses mortality and morbidity risk; (iii) interest
rate risk which involves asset/liability matching issues; and (iv) other
business risks.
Due to statutory laws prohibiting public dissemination of certain RBC
information, the Company has chosen not to publish its RBC ratios or levels.
However, the Company's current statutory capital and surplus is significantly
in excess of the threshold RBC requirements.
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 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 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 $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 December 31, 1998, related to the Year 2000 plan total approximately
$150,000.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
This information is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Investments in Debt
and Equity Securities section.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is reported in Attachment A beginning on
page __. See Index to Financial Statements and Schedules on page __ for a
list of financial information included in Attachment A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors which
are reportable pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The following information as of January 31, 1999, is furnished with respect to
each director. All terms expire in June of 1999.
<TABLE>
<CAPTION>
Principal Occupation During Last Five First
Name of Director Years and Directorships Elected Age
<S> <S> <C> <C>
Robert L. Moody Chairman of the Board and
(1) (3) (4) (5) Chief Executive 1963 63
Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating
(1) (3) Officer of the 1981 36
Company, Austin, Texas
Arthur O. Dummer President, The Donner Company, 1980 65
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President and Chief 1969 77
Operating Officer of the Company,
Austin, Texas
E. Douglas McLeod Director of Development, The Moody 1979 57
(4) Foundation, Galveston, Texas
Charles D. Milos, Jr. Senior Vice President of the Company, 1981 53
(1) (3) Galveston, Texas
Frances A. Moody Executive Director, 1990 29
The Moody Foundation,
Dallas, Texas, 1997 - present;
Investments, Dallas, Texas, 1992 -
1997
Russell S. Moody Investments, Austin, Texas 1988 37
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 63
(2) Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 51
(2) The University of Texas
Medical Branch, Galveston, Texas
<FN>
(1) Member of Executive Committee; (2) Member of Audit Committee; (3) Member
of Investment Committee; (4) Director of American National Insurance Company
of Galveston, Texas; (5) Director of The Moody National Bank of Galveston,
Texas.
</FN>
</TABLE>
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod
are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody,
Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and
their positions and offices as of January 31, 1999.
<TABLE>
<CAPTION>
Name of Officer Age Position (Year elected to position)
<S> <C> <S>
Robert L. Moody 63 Chairman of the Board and Chief Executive
Officer (1963-1968, 1971-1980, 1981), Director
Ross R. Moody 36 President and Chief Operating Officer (1992),
Director
Robert L. Busby, III 61 Senior Vice President - Chief
Administrative Officer,
Chief Financial Officer and Treasurer (1992)
Charles P. Baley 60 Senior Vice President - Information Services
(1990)
Richard M. Edwards 46 Senior Vice President - International Marketing
(1990)
Paul D. Facey 47 Senior Vice President - Chief Actuary (1992)
Charles D. Milos, Jr. 53 Senior Vice President - Investment Analyst
(1990), Director
James P. Payne 54 Senior Vice President - Secretary (1998)
Arthur W. Pickering 57 Senior Vice President - Domestic Marketing (1994)
Patricia L. Scheuer 47 Senior Vice President - Chief Investment Officer
(1992)
Robert J. Antonowich 52 Vice President - Marketing (1995)
Scott E. Arendale 54 Vice President - International Sales Development
(1998)
Mark K. Fisher 46 Vice President - Marketing (1998)
Carol Jackson 63 Vice President - Human Resources (1990)
Vincent L. Kasch 37 Vice President - Controller and Assistant
Treasurer (1992)
Doris Kruse 53 Vice President - Policy Benefits (1990)
Paul G. McGillivray 45 Vice President - Marketing (1998)
James R. Naiser 56 Vice President - Systems Development (1984)
Al R. Steger 56 Vice President - Risk Selection (1992)
B. Ben Taylor 56 Vice President - Actuarial Services (1990)
Larry D. White 53 Vice President - Policyowner Services (1990)
</TABLE>
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr.
Robert Moody is the father of Mr. Ross Moody. There are no arrangements or
understandings pursuant to which any officer was elected. All officers hold
office for one year and until their successors are elected and qualified,
unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive
capacities with the Company for more than five years, with the exception of
the following:
Mr. Payne was staff attorney with the Kansas Insurance Department from 1972 to
1975. From 1975-1983, he was Vice President, Secretary & General Counsel for
Lone Star Life Insurance Company; from 1983-1990, he was Vice President,
Secretary and General Counsel for Reserve Life Insurance Company; from
1990-1991 he was President and CEO of Great Republic Insurance Company; and
from 1991-1993 he was Vice President - Government Relations for United
American Insurance Company. From 1993 until October, 1994, he was in private
practice in Dallas, Texas.
Mr. Pickering was Agency Vice President of the Western Division with Integon
Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as
Regional Vice President of United Pacific Life Insurance Company. In 1990, he
began work for Conseco/Western National Life Insurance Company as Vice
President Marketing until May, 1994.
Mr. Antonowich was Regional Vice President of Security Life of Denver
Insurance Company from 1982 to 1991. From 1991 to December, 1993, he was Vice
President, Marketing, of Guarantee Mutual Life Company, and from 1994 to June,
1995, he was Senior Vice President, Sales, of Lamar Life Insurance Company.
Mr. Arendale was Division Manager of Seguros Pan American, S.A., in Caracas,
Venezuela, from January, 1971, to October, 1992. From October, 1992, to June,
1993, he was General Manager of International SOS Assistance in Caracas; and
in July, 1993, he joined National Western as an Assistant Vice President and
was promoted to Vice President in May, 1998.
Mr. Fisher served as an agent, Sales Manager, and Associate Agency Manager of
Jefferson-Pilot Life from 1983 to 1993. From January, 1991 to December, 1993,
he was Vice President - Marketing of First Life Insurance Company, Arlington,
Texas; from January, 1994, to September, 1994, he was a Regional Director of
Life Insurance Company of Georgia; and from February, 1995, to February, 1998,
he was Vice President - Marketing of Texas Life Insurance Company, Waco,
Texas.
Mr. McGillivray was employed as an attorney in 1979. He was a special agent
for Northwestern Mutual Life from 1980-1982, and he was Vice President -
Marketing of Allied Life Insurance Co. from 1982-1997.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any
bankruptcy act, criminal proceedings, judgments, or injunctions material to
the evaluation of the ability and integrity of any director or executive
officer except as described below:
In January, 1994, a United States District Court Judge vacated and withdrew
the judgment which had been entered in Case No. H-86-4269, W. Steve Smith,
Trustee vs. Shearn Moody, Jr., et al, United States District Court for the
Southern District of Texas. The Judge also dismissed the case with prejudice.
The judgment had been entered against Robert L. Moody and The Moody National
Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody is
also Chairman of the Board of National Western Life Insurance Company. The
case arose out of complex bankruptcy and related proceedings involving Robert
L. Moody's brother, Shearn Moody, Jr. Subsequently, a global settlement of
Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and
executed. As part of the global settlement, the Bankruptcy Trustee
recommended, and other interested parties agreed not to oppose or object to,
the Judge's vacating and withdrawing the judgment and dismissing the case with
prejudice. This case and settlement did not involve the Company and had no
effect on its financial statements.
ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
No. of
Securities
Annual Compensation Underlying All Other
Name and Salary Bonus Options Compensation
Principal Position Year (A) (B) (C) (D)
<S> <C> <C> <C> <C> <C>
1Robert L. Moody 1998 $1,124,174 $ - 13,000 $ 254,333
Chairman of the Board 1997 1,077,350 - 10,000 194,684
and Chief Executive 1996 1,026,964 - 14,400 160,064
Officer
2Ross R. Moody 1998 422,496 25,000 12,500 64,457
President and Chief 1997 411,198 - 500 50,683
Operating Officer 1996 400,334 - 5,500 32,366
3Arthur W. Pickering 1998 124,735 126,526 2,500 15,049
Senior Vice President 1997 124,445 105,687 1,500 13,781
Domestic Marketing 1996 119,137 117,888 2,000 15,516
4Robert L. Busby, III 1998 193,889 - 1,500 11,576
Senior Vice President 1997 178,518 - 1,000 10,654
Chief Administrative 1996 168,579 - 1,000 11,050
Officer, Chief
Financial Officer
and Treasurer
5Robert J. Antonowich 1998 78,792 100,229 500 6,400
Vice President- 1997 79,566 27,916 250 4,288
Marketing 1996 79,566 30,000 - 3,345
<FN>
Notes to Summary Compensation Table:
(A) Salary includes directors' fees from National Western Life Insurance
Company and its subsidiaries.
(B) Bonuses include employment and performance related bonuses which are
occasionally granted.
(C) Represents stock options granted under the National Western Life
Insurance Company 1995 Stock and Incentive Plan.
(D) All other compensation includes primarily employer contributions made to
the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on
behalf of the employee. However, this item also includes taxable income for
Robert L. Moody, related to his assignment of excess insurance on the Libbie
Shearn Moody Trust of approximately $232,000, $173,000, and $138,000 in 1998,
1997, and 1996, respectively. This item also includes various expense
allowances for Ross R. Moody in 1998, 1997, and 1996 of approximately $42,000,
$34,000, and $6,000, respectively.
</FN>
</TABLE>
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan). The purpose of the Plan is to align
the personal financial incentives of key personnel with the long-term growth
of the Company and the interests of the Company's stockholders through the
ownership and performance of the Company's Class A, $1.00 par value, common
stock, to enhance the Company's ability to retain key personnel, and to
attract outstanding prospective employees and directors. The Plan is
effective as of April 21, 1995, and will terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The number of shares of Class
A, $1.00 par value, common stock which may be issued under the Plan, or as to
which stock appreciation rights or other awards may be granted, may not exceed
300,000. These shares may be authorized and unissued shares or treasury
shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Company directors,
including members of the Compensation and Stock Option Committee, are eligible
for nondiscretionary stock options.
The Committee approved the issuance of nonqualified stock options to selected
officers of the Company during 1998, 1997, and 1996 totaling 48,500, 21,900,
and 33,000, respectively. Additionally, during 1998 the Committee granted
10,000 nonqualified, nondiscretionary stock options to Company directors. The
directors' stock options vest 20% annually following one full year of service
to the Company from the date of grant. The officers' stock options vest 20%
annually following three full years of service to the Company from the date of
grant. The exercise prices of the stock options were set at the fair market
values of the common stock on the dates of grant.
Stock options granted to the named executive officers during 1998 are as
follows:
<TABLE>
<CAPTION>
Potential
% of Realizable
Total Value at Assumed
Options Annual
Granted Rates of
Number to Stock Price
of Employees Appreciation
Securities and for
Under- Directors Option Term
lying in
Options Fiscal Exercise Expiration
Name Granted Year Price Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
1 Robert L.
Moody 12,000 20.5% $105.250 4-16-08 $794,294 $2,012,897
1,000 1.7 112.375 6-19-08 70,672 179,097
2 Ross R.
Moody 11,500 19.7 105.250 4-16-08 761,198 1,929,026
1,000 1.7 112.375 6-19-08 70,672 179,097
3 Arthur W.
Pickering 2,500 4.3 105.250 4-16-08 165,478 419,353
4 Robert L.
Busby, III 1,500 2.6 105.250 4-16-08 99,286 251,612
5 Robert J.
Antonowich 500 0.9 105.250 4-16-08 33,096 83,871
</TABLE>
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired
On Value Exercis- Unexerci- Exercis- Unexercis-
Name Exercise Realized able able able able
<S> <C> <C> <C> <C> <C> <C>
1 Robert L.
Moody - $ - 5,000 57,400 $396,875 $2,819,375
2 Ross R.
Moody 1,800 128,458 - 25,700 - 1,022,438
3 Arthur W.
Pickering 500 36,158 - 8,000 - 342,938
4 Robert L.
Busby, III 800 81,253 - 6,700 - 357,250
5 Robert J.
Antonowich - - - 750 - 14,219
</TABLE>
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the benefit
of its employees and officers. A brief description and formulas by which
benefits are determined for each of the plans are detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees and
officers of the Company and provides benefits based on the participant's years
of service and compensation. The Company makes annual contributions to the
plan that comply with the minimum funding provisions of the Employee
Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants
prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at
December 31, 1990, less 50% of their primary social security benefit
determined at December 31, 1990; this net amount is then prorated for less
than 15 years of benefit service at normal retirement date. This result is
multiplied by a fraction which is the participant's years of benefit service
at December 31, 1990, divided by the participant's years of benefit service at
normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of benefit
service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants
on or subsequent to January 1, 1991, are calculated as 1.5% of their
compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers who were
in the position of senior vice president or above prior to 1991 and other
employees who have been designated by the President of the Company as being in
the class of persons who are eligible to participate in the plan. This plan
also provides benefits based on the participant's years of service and
compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at
his normal retirement date shall be equal to (a) minus (b) minus (c) where:
(a) is the benefit which would have been payable at the participant's normal
retirement date under the terms of the Qualified Defined Benefit Plan as of
December 31, 1990, as if that Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms of the
Qualified Defined Benefit Plan at the participant's normal retirement date,
and,
(c) is the actuarially equivalent life annuity which may be provided by an
accumulation of 2% of the participant's compensation for each year of service
on or after January 1, 1991, accumulated at an assumed interest rate of 8.5%
to his normal retirement date.
In no event will the benefit be greater than the benefit which would have been
payable at normal retirement date under the terms of the Qualified Defined
Benefit Plan as of December 31, 1990, as if that plan had continued without
change.
The estimated annual benefits payable to the named executive officers upon
retirement, at normal retirement age, for the Company's defined benefit plans
are as follows:
<TABLE>
<CAPTION>
Estimated Annual Benefits
Qualified Non-Qualified
Defined Defined
Name Benefit Plan Benefit Plan Totals
<S> <C> <C> <C>
1 Robert L. Moody $ 125,335 367,155 492,490
2 Ross R. Moody 87,868 - 87,868
3 Arthur W. Pickering 28,305 - 28,305
4 Robert L. Busby, III 47,907 32,004 79,911
5 Robert J. Antonowich 36,707 - 36,707
</TABLE>
During 1998 the Company transferred the pension obligations and administrative
responsibilities of the non-qualified defined benefit plan to a pension
administration firm. Upon transfer, the Company made a payment to the firm to
cover current and future liabilities and administration of the plan. However,
as more fully described in Note 7, Pension Plans, of the accompanying
financial statements, National Western retains certain contingent liabilities
with respect to the plan.
(g) Compensation of Directors
All directors of the Company currently receive $15,000 a year and $500 for
each board meeting attended. They are also reimbursed for actual travel
expenses incurred in performing services as directors. An additional $500 is
paid for each committee meeting attended. However, a director attending
multiple meetings on the same day receives only one meeting fee. The amounts
paid pursuant to these arrangements are included in the summary compensation
table under Item 11(b). The directors and their dependents are also insured
under the Company's group insurance program.
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan), as more fully described in Item
11(c). Directors of the Company, other than Compensation and Stock Option
Committee members, are eligible for restricted stock awards, incentive awards,
and performance awards. Nonemployee directors, including members of the
Compensation and Stock Option Committee, are eligible for nondiscretionary
stock options. On May 19, 1995, the Committee approved the issuance of 7,000
nonqualified, nondiscretionary stock options to nonemployee Company directors,
with each such director receiving 1,000 stock options. On June 19, 1998, the
stockholders approved the issuance of 10,000 nonqualified, nondiscretionary
stock options to Company directors, with each such director receiving 1,000
stock options. Directors who are also employees of the Company were granted
additional stock options as disclosed in the table in Item 11(c).
Directors of the Company's subsidiary, NWL Investments, Inc., receive $250
annually. Nonemployee directors of the Company's subsidiary, NWL Services,
Inc., receive $1,000 per board meeting attended.
(h) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
None.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determines and approves executive
compensation. No compensation committee interlocks exist with other
unaffiliated companies.
Mr. Robert Moody, Mr. Ross Moody, and Mr. Charles Milos serve as directors and
also serve as officers and employees of National Western Life Insurance
Company. Mr. Ross Moody serves as an officer and director and Mr. Charles
Milos serves as an officer of the Company's wholly owned subsidiaries, The
Westcap Corporation, NWL 806 Main, Inc., NWL Investments, Inc., NWL
Properties, Inc., NWL Financial, Inc., and NWL Services, Inc. Additionally,
Mr. Robert Moody is an officer and Mr. Arthur Dummer is an officer and
director of NWL Services, Inc. Mr. Harry Edwards was formerly an officer of
National Western Life Insurance Company.
The Donner Company, 100% owned by Mr. Dummer, who is a director of National
Western Life Insurance Company and an officer and director of NWL Services,
Inc., was paid $84,895 in 1998 pursuant to an agreement between The Donner
Company and a reinsurance intermediary relating to a reinsurance contract
between the Company and certain life insurance reinsurers.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors performs the functions of an executive
compensation committee. The Board is responsible for developing and
administering the policies that determine executive compensation.
Executive compensation, including that of the chief executive officer, is
comprised primarily of a base salary. The salary is adjusted annually based on
a performance review of the individual as well as the performance of the
Company as a whole. The president and chief executive officer make
recommendations annually to the Board of Directors regarding such salary
adjustments. The review encompasses the following factors: (1) contributions
to the Company's short and long-term strategic goals, including financial
goals such as Company revenues and earnings, (2) achievement of specific goals
within the individual's realm of responsibility, (3) development of management
and employees within the Company, and (4) performance of leadership within the
industry. These policies are reviewed periodically by the Board of Directors
to ensure the support of the Company's overall business strategy and to
attract and retain key executives.
A separate Compensation and Stock Option Committee, comprised of outside,
independent directors, determines compensation for the three highest-paid
Company executives. The committee also performs various projects relating to
executive compensation at the request of the Board of Directors. Those
directors serving on the committee include the following:
Arthur O. Dummer
Harry L. Edwards
E. J. Pederson
The policies used by the Compensation and Stock Option Committee in
determining compensation are similar to those described above for all other
Company executives.
(1) Performance Graph
The following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the Nasdaq - U.S. Companies Index
and the Nasdaq Insurance Stock Index. The graph assumes that the value of the
Company's common stock and each index was $100 at December 31, 1993, and that
all dividends were reinvested.
For the purpose of this electronic filing, the coordinates of the graph have
been provided below:
<TABLE>
<CAPTION>
December 31
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
National
Western
Life $100 78.1 125.8 195.5 228.1 264.0
NASDAQ - US
Companies 100 97.8 138.3 170.0 208.6 293.2
NASDAQ -
Insurance
Stock Index 100 94.1 133.7 152.4 223.6 198.8
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain financial information concerning persons who are
known by the Company to own beneficially more than 5% of any class of the
Company's common stock on December 31, 1998:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Title Beneficial Ownership Percent
of of Record and of
Beneficial Owners Class Beneficially Class
<S> <S> <C> <C>
Robert L. Moody Class A Common 1,160,896 35.20%
2302 PostOffice Street, Class B Common 198,074 99.04%
Suite 702
Galveston, Texas
Westport Asset Class A Common 352,400 10.68%
Management, Inc.
253 Riverside Avenue
Westport, Connecticut
Tweedy Browne Company Class A Common 288,128 8.74%
52 Vanderbilt Avenue
New York, New York
FMR Corp. Class A Common 170,000 5.15%
82 Devonshire Street
Boston, Massachusetts
</TABLE>
(b) Security Ownership of Management
The following table sets forth as of December 31, 1998, information concerning
the beneficial ownership of the Company's common stock by all directors, named
officers, and all directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Title Amount and Nature of Percent
Directors of Beneficial Ownership of
and Officers Class Record and Beneficially Class
<S> <S> <C> <C>
Directors and
Named Officers:
Robert L. Moody Class A Common 1,160,896 35.20%
Class B Common 198,074 99.04%
Ross R. Moody Class A Common 625 .02%
Class B Common 482 .24%
Directors:
Arthur O. Dummer Class A Common 15 -
Class B Common - -
Harry L. Edwards Class A Common 20 -
Class B Common - -
E. Douglas McLeod Class A Common 10 -
Class B Common - -
Charles D. Milos, Jr. Class A Common 528 .02%
Class B Common - -
Frances A. Moody Class A Common 2,475 .08%
Class B Common 482 .24%
Russell S. Moody Class A Common 2,475 .08%
Class B Common 482 .24%
Louis E. Pauls, Jr. Class A Common 10 -
Class B Common - -
E. J. Pederson Class A Common 100 -
Class B Common - -
Named Officers:
Robert J. Antonowich Class A Common - -
Class B Common - -
Robert L. Busby, III Class A Common 4 -
Class B Common - -
Arthur W. Pickering Class A Common - -
Class B Common - -
Directors and Class A Common 1,168,293 35.42%
Officers as a Group Class B Common 199,520 99.76%
</TABLE>
(c) Changes in Control
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of
National Western Life Insurance Company, was paid $84,895 in 1998 pursuant to
an agreement between The Donner Company and a reinsurance intermediary
relating to a reinsurance contract between the Company and certain life
insurance reinsurers.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
The Company holds three mortgage loans issued to Gal-Tex Hotel Corporation,
which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody
Foundation. The first mortgage loan in the amount of $2,254,000 was issued in
1988 and originally matured in May of 1998. It was extended during 1998 to
May of 2003 and pays interest of 8%. The loan is secured by property
consisting of a hotel located in Kingsport, Tennessee. The second mortgage
loan in the amount of $8,164,000 was issued in 1994, will mature in October of
2004, and pays interest of 8.75%. The loan is secured by property consisting
of a hotel located in Houston, Texas. The third mortgage loan in the amount
of $1,789,000 was issued in 1995, will mature in January of 2006, and pays
interest of 9%. The loan is secured by property consisting of a hotel located
in Woodstock, Virginia.
The Company's wholly owned subsidiary, NWL Services, Inc., is the beneficial
owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody,
in the trust estate of Libbie Shearn Moody. The trustee of this estate is The
Moody National Bank of Galveston. The Moody Foundation is a private
charitable foundation governed by a Board of Trustees of three members. Mr.
Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not required,
or because the information required by the schedule is included elsewhere in
the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit 2 - Order Confirming Third Amended Joint Consensual Plan Of
Reorganization Proposed By The Debtors And The Official
Committee Of Unsecured Creditors (As Modified As Of August
28, 1998) (incorporated by reference to Exhibit 2 to the
Company's Form 8-K dated August 28, 1998).
Exhibit 3(a) - Restated Articles of Incorporation of National Western Life
Insurance Company dated April 10, 1968 (incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit 3(b) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated July 29, 1971
(incorporated by reference to Exhibit 3(b) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(c) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 10, 1976
(incorporated by reference to Exhibit 3(c) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(d) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated April 28, 1978
(incorporated by reference to Exhibit 3(d) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(e) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 1, 1979
(incorporated by reference to Exhibit 3(e) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(f) - Bylaws of National Western Life Insurance Company as amended
through April 24, 1987 (incorporated by reference to Exhibit
3(f) to the Company's Form 10-K for the year ended December
31, 1995).
Exhibit 10(a) - National Western Life Insurance Company Non-Qualified Defined
Benefit Plan dated July 26, 1991 (incorporated by reference
to Exhibit 10(a) to the Company's Form 10-K for the year
ended December 31, 1995).
Exhibit 10(b) - National Western Life Insurance Company Officers' Stock Bonus
Plan effective December 31, 1992 (incorporated by reference
to the Company's Form S-8 registration dated January 27,
1994).
Exhibit 10(c) - National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan, as amended and restated, dated
March 27, 1995 (incorporated by reference to Exhibit 10(c) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(d) - First Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
July 1, 1995 (incorporated by reference to Exhibit 10(d) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and
Incentive Plan (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(f) - First Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(f) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(g) - Second Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(g) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(h) - Second Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
December 17, 1996 (incorporated by reference to Exhibit 10(h)
to the Company's Form 10-K for the year ended December 31,
1996).
Exhibit 10(i) - Third Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
December 17, 1996 (incorporated by reference to Exhibit 10(i)
to the Company's Form 10-K for the year ended December 31,
1996).
Exhibit 10(j) Fourth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
June 20, 1997 (incorporated by reference to Exhibit 10(j) to
the Company's Form 10-K for the year ended December 31,
1997).
Exhibit 10(k) - First Amendment to the National Western Life Insurance
Company 1995 Stock and Incentive Plan effective June 19, 1998
(incorporated by reference to Exhibit 10(k) to the Company's
Form 10-Q for the quarter ended June 30, 1998).
Exhibit 10(l) - Joint Motion For Preliminary Approval Of Settlement
Agreement, To Authorize Class Notice, To Enjoin Other Actions
And To Schedule Fairness Hearing (incorporated by reference
to Exhibit 10(l) to the Company's Form 8-K dated September 8,
1998).
Exhibit 10(m) - Fifth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
July 1, 1998 (incorporated by reference to Exhibit 10(l) to
the Company's Form 10-Q for the quarter ended September 30,
1998).
Exhibit 10(n) - Sixth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
August 7, 1998 (filed on page __ of this report).
Exhibit 10(o) - Third Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective August
7, 1998 (filed on page __ of this report).
Exhibit 10(p) - Exchange Agreement by and among National Western Life
Insurance Company, NWL Services, Inc., Alternative Benefit
Management, Inc., and American National Insurance Company
effective November 23, 1998 (filed on page __ of this
report).
Exhibit 21 - Subsidiaries of the Registrant (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 December 31, 1998.
(c) Exhibits
Exhibits required by Regulation S-K are listed as to location in the Listing
of Exhibits in Item 14(a)3 above. Exhibits not referred to have been omitted
as inapplicable or not required.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are listed as to
location in Attachment A, Index to Financial Statements and Schedules, on page
__ of this report.
ATTACHMENT A
Index to Financial Statements and Schedules
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Earnings for the years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related
Parties, December 31, 1998
Schedule V - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997, and 1996
All other schedules are omitted because they are not applicable, not required,
or because the information required by the schedule is included elsewhere in
the financial statements or notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Western Life Insurance Company
Austin, Texas
We have audited the consolidated financial statements of National Western Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Western Life Insurance Company and subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG LLP
Austin, Texas
March 5, 1999
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost
(fair value: $2,124,715 and $1,949,876) $ 2,029,728 1,874,643
Securities available for sale, at fair
value (cost: $696,333 and $618,274) 735,587 651,736
Mortgage loans, net of allowance for
possible losses ($4,640 and $4,640) 174,921 181,878
Policy loans 124,441 133,826
Index options 23,900 420
Other long-term investments 24,999 26,967
Cash and short-term investments 24,508 7,870
Total cash and investments 3,138,084 2,877,340
Accrued investment income 44,777 41,050
Deferred policy acquisition costs 314,493 291,079
Other assets 20,601 15,202
Assets of discontinued operations 48 892
$ 3,518,003 3,225,563
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands except per share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
LIABILITIES:
<S> <C> <C>
Future policy benefits:
Traditional life and annuity products $ 167,248 170,423
Universal life and investment
annuity contracts 2,812,230 2,580,867
Other policyholder liabilities 23,955 25,001
Federal income taxes payable:
Current 5,221 2,470
Deferred 9,646 13,153
Other liabilities 61,290 31,894
Liabilities of discontinued operations 48 892
Total liabilities 3,079,638 2,824,700
COMMITMENTS AND CONTINGENCIES (Notes 4,
7, 9, and 16)
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 18,634 16,268
Retained earnings 391,334 356,441
Total stockholders' equity 438,365 400,863
$ 3,518,003 3,225,563
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 13,165 15,812 16,611
Universal life and
investment annuity
contract revenues 83,169 80,250 75,966
Net investment income 233,844 217,446 214,302
Other income 1,052 354 2,718
Realized gains
(losses) on investments 2,384 (1,588) 1,612
Total premiums and other revenue 333,614 312,274 311,209
Benefits and expenses:
Life and other policy benefits 35,646 37,361 35,354
Decrease in liabilities
for future policy benefits (3,205) (2,076) (2,041)
Amortization of deferred
policy acquisition costs 40,415 39,934 30,361
Universal life and investment
annuity contract interest 158,889 145,200 151,475
Other operating expenses 35,504 27,560 25,722
Total benefits and expenses 267,249 247,979 240,871
Earnings before Federal
income taxes and
discontinued operations 66,365 64,295 70,338
Federal income taxes 17,347 21,723 24,123
Earnings from
continuing operations 49,018 42,572 46,215
Losses from discontinued
operations (14,125) (1,000) -
Net earnings $ 34,893 41,572 46,215
Basic Earnings Per Share:
Earnings from
continuing operations $ 14.02 12.20 13.24
Losses from
discontinued operations (4.04) (0.29) -
Net earnings $ 9.98 11.91 13.24
Diluted Earnings Per Share:
Earnings from
continuing operations $ 13.87 12.09 13.17
Losses from
discontinued operations (4.00) (0.28) -
Net earnings $ 9.87 11.81 13.17
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings $ 34,893 41,572 46,215
Other comprehensive income,
net of effects of
deferred policy acquisition
costs and taxes:
Unrealized gains
(losses) on securities:
Unrealized holding
gains (losses)
arising during period 3,315 5,675 (4,620)
Less: reclassification
adjustment for gains
included in net earnings (581) (690) (154)
Amortization of net
unrealized gains
related to
transferred securities (516) (1,056) (568)
Net unrealized gains
(losses) on securities 2,218 3,929 (5,342)
Foreign currency
translation adjustments 148 2,486 -
Other comprehensive income 2,366 6,415 (5,342)
Comprehensive income $ 37,259 47,987 40,873
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 3,492 3,491 3,491
Shares exercised under
stock option plan 6 1 -
Balance at end of year 3,498 3,492 3,491
Additional paid-in capital:
Balance at beginning of year 24,662 24,647 24,647
Shares exercised under
stock option plan 237 15 -
Balance at end of year 24,899 24,662 24,647
Accumulated other comprehensive
income:
Unrealized gains (losses)
on securities:
Balance at beginning
of year 13,782 9,853 15,195
Change in unrealized gains
(losses) during period 2,218 3,929 (5,342)
Balance at end of period 16,000 13,782 9,853
Foreign currency translation
adjustments:
Balance at beginning
of year 2,486 - -
Change in translation
adjustments during period 148 2,486 -
Balance at end of period 2,634 2,486 -
Accumulated other comprehensive
income at end of period 18,634 16,268 9,853
Retained earnings:
Balance at beginning of year 356,441 314,869 268,654
Net earnings 34,893 41,572 46,215
Balance at end of year 391,334 356,441 314,869
Total stockholders' equity $ 438,365 400,863 352,860
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings $ 34,893 41,572 46,215
Adjustments to reconcile
net earnings
to net cash provided by
operating activities:
Universal life and investment
annuity contract interest 158,889 145,200 151,475
Surrender charges and
other policy revenues (40,267) (42,149) (39,562)
Realized (gains) losses
on investments (2,384) 1,588 (1,612)
Accrual and amortization
of investment income (7,763) (6,256) (6,880)
Depreciation and amortization 997 900 708
Decrease (increase) in
other assets 71 (11) (988)
Increase in accrued
investment income (3,727) (1,547) (3,376)
Decrease (increase) in deferred
policy acquisition costs (24,438) 989 (11,320)
Decrease in liabilities for
future policy benefits (3,205) (2,076) (2,041)
Increase (decrease) in other
policyholder liabilities (1,046) 598 1,570
Increase (decrease) in
Federal income taxes payable (2,189) 2,195 10,645
Increase (decrease) in
other liabilities 29,396 3,367 (191)
Increase in value of
index options (7,682) (18) -
Other (730) - -
Net cash provided by
operating activities 130,815 144,352 144,643
Cash flows from investing
activities:
Proceeds from sales of:
Securities held to maturity 2,978 1,993 -
Securities available
for sale - 50,706 41,276
Other investments 5,043 2,109 3,126
Proceeds from maturities and
redemptions of:
Securities held to maturity 99,495 105,162 72,138
Securities available
for sale 59,035 38,529 44,662
Purchases of:
Securities held to maturity (266,580) (115,095) (301,239)
Securities available
for sale (124,142) (191,168) (27,838)
Other investments (20,071) (5,950) (4,014)
Principal payments on
mortgage loans 37,805 40,987 32,995
Cost of mortgage loans acquired (29,572) (31,654) (26,220)
Decrease in policy loans 9,385 8,251 5,846
Decrease in assets of
discontinued operations 844 365 4,920
Decrease in liabilities of
discontinued operations (844) (365) (4,920)
Other (892) (234) (337)
Net cash used in
investing activities (227,516) (96,364) (159,605)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing
activities:
Deposits to account balances
for universal life and
investment annuity contracts $ 455,709 267,515 304,236
Return of account balances on
universal life and
investment annuity contracts (342,613) (319,007) (287,940)
Issuance of common stock under
stock option plan 243 16 -
Net cash provided by (used
in) financing activities 113,339 (51,476) 16,296
Net increase (decrease) in cash
and short-term investments 16,638 (3,488) 1,334
Cash and short-term investments
at beginning of year 7,870 11,358 10,024
Cash and short-term investments
at end of year $ 24,508 7,870 11,358
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 340 326 251
Income taxes 19,085 19,203 13,466
Noncash investing activities:
Foreclosed mortgage loan s $ - 2,320 -
Mortgage loans originated
to facilitate
the sale of real estate 1,032 1,556 4,145
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of National Western Life Insurance Company and
its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL
Investments, Inc., NWL Properties, Inc., 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.
The bankruptcy reorganization was completed in January, 1999, National
Western retained 100% continuing ownership of the reorganized Westcap, and the
subsidiary is now operating as a real estate management company. All
significant intercorporate transactions and accounts have been eliminated in
consolidation.
(B) Basis of Presentation - The accompanying consolidated financial statements
have been prepared in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets
and liabilities, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant estimates included in the accompanying financial statements
include (1) contingent liabilities related to litigation, (2) recoverability
of deferred policy acquisition costs, (3) estimated losses related to
discontinued operations, and (4) valuation allowances for mortgage loans.
National Western Life Insurance Company also files financial statements with
insurance regulatory authorities which are prepared on the basis of statutory
accounting practices which are significantly different from financial
statements prepared in accordance with generally accepted accounting
principles. These differences are described in detail in the statutory
information section of this note.
(C) Investments - Investments in debt securities the Company purchases with
the intent to hold to maturity are classified as securities held to maturity.
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.
Investments in debt and equity securities that are not classified as
securities held to maturity are reported as securities available for sale.
Securities available for sale are reported in the accompanying financial
statements at individual fair value. Any valuation changes resulting from
changes in the fair value of the securities are reflected as a component of
stockholders' equity. These unrealized gains or losses in stockholders'
equity are reported net of taxes and adjustments to deferred policy
acquisition costs.
Transfers of securities between categories are recorded at fair value at the
date of transfer. The unrealized holding gains or losses for securities
transferred from available for sale to held to maturity are included in
accumulated other comprehensive income and amortized into earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
Realized gains and losses for securities available for sale and securities
held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold. A decline
in the fair value below cost that is deemed other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
Mortgage loans and other long-term investments are stated at cost, less
unamortized discounts and allowances for possible losses. Policy loans are
stated at their aggregate unpaid balances. Real estate is stated at the lower
of cost or fair value less estimated costs to sell.
(D) Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
(E) Derivative Financial Instruments - The Company purchases over-the-counter
index options, which are derivative financial instruments, to hedge the equity
return component of its equity-indexed annuity products. The index options
act as hedges to match closely the returns on the S&P 500 Composite Stock
Price Index which may be paid to policyholders. As a result, changes to
policyholders' liabilities are substantially offset by changes in the value of
the options. Cash is exchanged upon purchase of the index options, and no
principal or interest payments are made by either party during the option
periods. Upon maturity or expiration of the options, cash is paid to the
Company based on the S&P 500 performance and terms of the contract.
The index options are reported at fair value in the accompanying financial
statements. The changes in the values of the index options and the changes in
the policyholder liabilities are both reflected in the statement of earnings.
Any gains or losses from the sale or expiration of the options, as well as
period-to-period changes in values, are reflected as net investment income in
the statement of earnings.
Although there is credit risk in the event of nonperformance by counterparties
to the index options, the Company does not expect any counterparties to fail
to meet their obligations, given their high credit ratings. In addition,
credit support agreements are in place with certain counterparties, which
further reduces the Company's credit exposure. At December 31, 1998 and 1997,
the fair values of index options owned by the Company totaled $23,900,000 and
$420,000, respectively.
(F) Insurance Revenues and Expenses - Premiums on traditional life insurance
products are recognized as revenues as they become due or, for short duration
contracts, over the contract periods. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over the
lives of the policies and by amortizing acquisition costs over the
premium-paying periods of the policies. For universal life and investment
annuity contracts, revenues consist of policy charges for the cost of
insurance, policy administration, and surrender charges assessed during the
period. Expenses for these policies include interest credited to policy
account balances and benefit claims incurred in excess of policy account
balances. The related deferred policy acquisition costs are amortized in
relation to the present value of expected gross profits on the policies.
(G) Federal Income Taxes - Federal income taxes are accounted for under the
asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance for deferred tax assets is provided
if all or some portion of the deferred tax asset may not be realized. An
increase or decrease in a valuation allowance that results from a change in
circumstances that affects the realizability of the related deferred tax asset
is included in income.
(H) Depreciation of Property, Equipment, and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
(I) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1998.
(J) Statutory Information - National Western Life Insurance Company, domiciled
in Colorado, prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Colorado Division of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Such practices may differ from state to state and may even differ
from company to company within a state. However, the NAIC has recently
completed a comprehensive process of codifying statutory accounting practices
and procedures. Other than specific individual state laws, the codification
results will be the only source of prescribed statutory accounting practices.
Insurance companies must adopt these new statutory accounting practices in
2001, which may result in significant changes to existing practices used in
the preparation of statutory financial statements. Based on a preliminary
review, National Western does not currently anticipate a material impact
to its capital and surplus position as a result of implementation of the
new prescribed statutory accounting procedures.
The following are major differences between generally accepted accounting
principles and current prescribed or permitted statutory accounting practices.
1. The Company accounts for universal life and investment annuity contracts
based on the provisions of Statement of Financial Accounting Standards (SFAS)
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." The basic effect of the statement with respect to certain
long-duration contracts is that deposits for universal life and investment
annuity contracts are not reflected as revenues, and surrenders and certain
other benefit payments are not reflected as expenses. However, statutory
accounting practices do reflect such items as revenues and expenses.
A summary of direct premiums and deposits collected is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Direct premiums and deposits
collected:
Investment annuity deposits $ 431,003 240,987 273,202
Universal life
insurance deposits 69,647 65,862 67,438
Traditional life
and other premiums 20,237 21,506 23,135
Totals $ 520,887 328,355 363,775
</TABLE>
2. Any gains or losses from the sale or expiration of index options, as well
as period-to-period changes in values, are reflected as net investment income
in the statement of earnings under generally accepted accounting principles.
For statutory accounting purposes, period-to-period changes in values of index
options are recorded directly to capital and surplus, and gains or losses from
sales or expirations are reported in income as realized gains or losses on
investments.
3. For statutory accounting purposes, litigation settlements are often
recorded as direct reductions of capital and surplus. However, litigation
settlements are recorded in the statement of earnings for generally accepted
accounting principles.
4. Under generally accepted accounting principles, commissions and certain
expenses related to policy issuance and underwriting, all of which generally
vary with and are related to the production of new business, are deferred. For
traditional products, these costs are amortized over the premium-paying period
of the related policies in proportion to the ratio of the premium earned to
the total premium revenue anticipated, using the same assumptions as to
interest, mortality, and withdrawals as were used in calculating the liability
for future policy benefits. For universal life and investment annuity
contracts, these costs are amortized in relation to the present value of
expected gross profits on these policies. The Company evaluates the
recoverability of deferred policy acquisition costs on an annual basis. In
this evaluation, the Company considers estimated future gross profits or
future premiums, as applicable for the type of contract. The Company also
considers expected mortality, interest earned and credited rates, persistency,
and expenses. Statutory accounting practices require commissions and related
costs to be expensed as incurred.
A summary of information relative to deferred policy acquisition costs is
provided in the table below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Deferred policy acquisition
costs, beginning of year $ 291,079 295,666 270,167
Policy acquisition costs deferred:
Agents' commissions 62,717 37,069 39,218
Other 2,136 1,876 2,463
Total costs deferred 64,853 38,945 41,681
Amortization of deferred
policy acquisition costs (40,415) (39,934) (30,361)
Adjustments for unrealized
gains and losses
on investment securities (1,024) (3,598) 14,179
Deferred policy acquisition
costs, end of year $ 314,493 291,079 295,666
</TABLE>
5. Under generally accepted accounting principles, the liability for future
policy benefits on traditional products has been calculated by the net level
method using assumptions as to future mortality (based on the 1965-1970 and
1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to
8%, and withdrawals based on Company experience. For universal life and
investment annuity contracts, the liability for future policy benefits
represents the account balance. For statutory accounting purposes,
liabilities for future policy benefits for life insurance policies are
calculated by the net level premium method or the commissioners reserve
valuation method. Future policy benefit liabilities for annuities are
calculated based on the continuous commissioners annuity reserve valuation
method and provisions of Actuarial Guideline 33.
6. Deferred Federal income taxes are provided for temporary differences which
are recognized in the financial statements in a different period than for
Federal income tax purposes. Deferred taxes are not recognized in statutory
accounting practices. Also, for statutory accounting purposes, the Company
has recorded Federal income tax receivables as permitted by the Colorado
Division of Insurance. The Federal income tax receivables related to
subsidiary losses have been recorded directly to surplus and were not recorded
in results of operations.
7. For statutory accounting purposes, debt securities are recorded at
amortized cost, except for securities in or near default which are reported at
market value.
8. Investments in subsidiaries are recorded at admitted asset value for
statutory purposes, whereas the financial statements of the subsidiaries have
been consolidated with those of the Company under generally accepted
accounting principles.
9. The asset valuation reserve and interest maintenance reserve, which are
investment valuation reserves prescribed by statutory accounting practices,
have been eliminated, as they are not required under generally accepted
accounting principles.
10. The recorded value of the life interest in the Libbie Shearn Moody Trust
(the Trust) is reported at its initial valuation, net of accumulated
amortization, under generally accepted accounting principles. The initial
valuation was based on the assumption that the Trust would provide certain
income to the Company at an assumed interest rate and is being amortized over
53 years, the life expectancy of Mr. Robert L. Moody at the date he
contributed the life interest to the Company. For statutory accounting
purposes, the life interest has been valued at $26,400,000, which was computed
as the present value of the estimated future income to be received from the
Trust. However, this amount is being amortized to a valuation of $12,774,000
over a seven-year period in accordance with Colorado Division of Insurance
permitted accounting requirements. Prescribed statutory accounting practices
provide no accounting guidance for such asset. The statutory admitted value
of this life interest at December 31, 1998, is $14,721,000 in comparison to a
carrying value of $4,347,000 in the accompanying consolidated financial
statements.
11. Reconciliations of statutory stockholders' equity, as included in the
annual statements filed with the Colorado Division of Insurance, to the
respective amounts as reported in the accompanying consolidated financial
statements prepared under generally accepted accounting principles are as
follows:
<TABLE>
<CAPTION>
Stockholders' Equity
as of December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Statutory equity $ 310,991 300,589 265,289
Adjustments:
Difference in valuation of
investment in
the Libbie Shearn Moody Trust (10,374) (12,032) (13,692)
Deferral of policy
acquisition costs 314,493 291,079 295,666
Adjustment of future
policy benefits (232,919) (217,040) (220,510)
Deferred Federal
income taxes payable (9,646) (13,153) (11,910)
Adjustment of securities
available for sale
to fair value 38,840 34,957 26,116
Reversal of asset
valuation reserve 19,756 11,654 10,403
Reversal of interest
maintenance reserve 10,140 9,630 7,837
Reinstatement of
nonadmitted assets 3,257 2,535 3,088
Valuation allowances
on investments (5,458) (6,571) (10,052)
Other, net (715) (785) 625
Generally accepted
accounting principles equity $ 438,365 400,863 352,860
</TABLE>
12. Reconciliations of statutory net earnings, as included in the annual
statements filed with the Colorado Division of Insurance, to the respective
amounts as reported in the accompanying consolidated financial statements
prepared under generally accepted accounting principles are as follows:
<TABLE>
<CAPTION>
Net Earnings for the
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Statutory net earnings $ 23,973 33,771 35,644
Adjustments:
Subsidiary earnings (losses)
before deferred
Federal income taxes (11,346) 2,372 (656)
Deferral of policy
acquisition costs 24,438 (989) 11,320
Adjustment of future
policy benefits (15,879) 3,470 (2,158)
Amortization of investment in
the Libbie Shearn Moody Trust (289) (286) (284)
Benefit (provision) for
deferred Federal income taxes 4,781 2,211 (2,499)
Valuation allowances and
permanent impairment
writedowns on investments 1,253 1,816 954
Unrealized gains (losses)
on index options recorded
in statutory surplus 7,682 18 -
Lawsuit settlements
recorded in statutory surplus (4,756) (90) 850
Tax benefit (expense)
recorded in surplus 5,320 (1,685) 1,637
Increase in interest
maintenance reserve 510 1,793 1,846
Other, net (794) (829) (439)
Generally accepted accounting
principles net earnings $ 34,893 41,572 46,215
</TABLE>
(2) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory
authorities as required by law at the end of each year:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Debt securities $ 17,912 18,127
Certificates of deposit 260 260
Totals $ 18,172 18,387
</TABLE>
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 195,425 184,870 176,825
Mortgage loans 16,943 18,659 19,851
Policy loans 9,252 9,764 10,645
Index options 8,057 18 -
Other investment income 7,783 6,742 10,082
Total investment income 237,460 220,053 217,403
Investment expenses 3,616 2,607 3,101
Net investment income $ 233,844 217,446 214,302
</TABLE>
Investments of the following amounts were not income producing for the
preceding twelve months:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Equity securities $ 3,127 2,706
Real estate 319 488
Totals $ 3,446 3,194
</TABLE>
The Company had no investments in debt securities or mortgage loans that were
on nonaccrual status during 1998 or 1997. As of December 31, 1996, $2,981,000
of securities and mortgage loans were on nonaccrual status. Reductions in
interest income associated with nonperforming investments in debt securities
and mortgage loans were not significant during 1998, 1997, and 1996.
(B) Mortgage Loans and Real Estate
Concentrations of credit risk arising from mortgage loans exist in relation to
certain groups of customers. A group concentration arises when a number of
counterparties have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions. The Company does not have a significant
exposure to any individual customer or counterparty. The major concentrations
of mortgage loan credit risk for the Company arise by geographic location in
the United States and by property type as detailed below.
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
West South Central 57.1% 54.9%
Mountain 19.4 11.3
Pacific 7.7 8.0
South Atlantic 4.8 11.4
All other 11.0 14.4
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Retail 56.7% 62.2%
Office 21.0 16.6
Hotel/Motel 7.9 7.9
Apartment 4.2 4.1
All other 10.2 9.2
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1998 and 1997, no mortgage loans were considered impaired.
For the years ended December 31, 1997, and 1996 average investments in
impaired mortgage loans were $676,000, and $232,000, respectively. There were
no investments in impaired mortgage loans for the year ended December 31,
1998. Interest income recognized on impaired loans during the years ended
December 31, 1997 and 1996, was not significant. Impaired loans are typically
placed on nonaccrual status and no interest income is recognized. However, if
cash is received on the impaired loan, it is applied to principal and interest
on past due payments, beginning with the most delinquent payment.
Detailed below are changes in the allowance for mortgage loan losses for
1998, 1997, and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 4,640 5,988 5,668
Net additions charged to realized
investment gains and losses - 1,133 500
Releases due primarily to
foreclosures
and loan payoffs - (2,481) (180)
Balance at end of year $ 4,640 4,640 5,988
</TABLE>
At December 31, 1998 and 1997, the Company owned investment real estate
totaling $13,553,000 and $15,027,000 which is reflected in other long-term
investments in the accompanying financial statements. The Company records
real estate at the lower of cost or fair value less estimated costs to sell.
Real estate values are monitored and evaluated at least annually by the use of
independent appraisals or internal valuations. Decreases in market values
affecting carrying values are recorded in a valuation allowance which is
reflected in realized gains or losses on investments. For the year ended
December 31, 1998, there were no impairment losses on real estate due to
decreases in market value. For the years ended December 31, 1997 and 1996,
impairment losses on real estate due to decreases in market values totaled
$46,000 and $526,000, respectively.
(C) Investment Gains and Losses
The table below presents realized gains and losses and changes in unrealized
gains and losses on investments for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Changes in
Realized Unrealized
Investment Investment
Gains Gains (Losses)
(Losses) From Prior Year
(In thousands)
<S> <C> <C>
Year Ended December 31, 1998:
Securities held to maturity $ 797 19,754
Securities available for sale 893 2,218
Other 694 -
Totals $ 2,384 21,972
Year Ended December 31, 1997:
Securities held to maturity $ 1,791 51,947
Securities available for sale 1,061 3,929
Other (4,440) -
Totals $ (1,588) 55,876
Year Ended December 31, 1996:
Securities held to maturity $ 936 (59,972)
Securities available for sale 237 (5,342)
Other 439 -
Totals $ 1,612 (65,314)
</TABLE>
(D) Debt and Equity Securities
The tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 1998:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,706 359 - 4,065
States and political
subdivisions 27,001 2,322 - 29,323
Foreign governments 51,389 4,254 - 55,643
Public utilities 302,484 20,197 3,346 319,335
Corporate 1,159,758 61,252 6,364 1,214,646
Mortgage-backed 410,818 16,287 28 427,077
Asset-backed 74,572 392 338 74,626
Totals $2,029,728 105,063 10,076 2,124,715
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,231 233 - 3,464
States and political
subdivisions 3,000 11 - 3,011
Public utilities 59,699 4,771 72 64,398
Corporate 303,196 18,341 2,904 318,633
Mortgage-backed 199,985 11,322 1,019 210,288
Asset-backed 115,204 5,480 603 120,081
Equity securities 12,018 3,799 105 15,712
Totals $ 696,333 43,957 4,703 735,587
</TABLE>
The tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 1997:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 23,867 331 - 24,198
States and political
subdivisions 26,996 2,549 - 29,545
Foreign governments 51,331 2,357 - 53,688
Public utilities 271,478 10,902 1,322 281,058
Corporate 1,024,104 43,525 1,074 1,066,555
Mortgage-backed 451,515 17,995 108 469,402
Asset-backed 25,352 274 196 25,430
Totals $ 1,874,643 77,933 2,700 1,949,876
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,219 223 - 3,442
Public utilities 58,567 3,224 283 61,508
Corporate 220,458 13,313 1,479 232,292
Mortgage-backed 240,479 14,138 960 253,657
Asset-backed 85,440 2,130 19 87,551
Equity securities 10,111 3,269 94 13,286
Totals $ 618,274 36,297 2,835 651,736
</TABLE>
The amortized cost and fair values of investments in debt securities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Due in 1 year or less $ - - 7,005 6,995
Due after 1 year
through 5 years 33,122 33,289 353,640 362,208
Due after 5 years
through 10 years 275,511 286,672 976,306 1,032,098
Due after 10 years 60,493 69,545 207,387 221,711
369,126 389,506 1,544,338 1,623,012
Mortgage and
asset-backed
securities 315,189 330,369 485,390 501,703
Totals $ 684,315 719,875 2,029,728 2,124,715
</TABLE>
The Company uses the specific identification method in computing realized
gains and losses. There were no sales of securities available for sale during
1998. Proceeds from sales of securities available for sale during 1997 and
1996 totaled $50,706,000 and $41,276,000, respectively. Gross gains and gross
losses realized on those sales are detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Gross realized gains $ - 1,029 575
Gross realized losses - - (402)
Net realized gains (losses) $ - 1,029 173
</TABLE>
In 1998, the Company sold one held to maturity bond due to significant credit
deterioration of the issuing company. Amortized cost of the security totaled
$2,981,000, and a realized loss of $3,000 was recognized on the sale. In
1997, the Company sold one held to maturity bond due to significant credit
deterioration of the issuing company. Amortized cost of the security totaled
$1,987,000, and a realized gain of $6,000 was recognized on the sale. The
Company did not sell any held to maturity securities during 1996.
The Company held in its investment portfolio below investment grade debt
securities totaling $44,974,000, $41,149,000, and $38,696,000 at December 31,
1998, 1997, and 1996, respectively. These amounts represent approximately 1.4%
of total invested assets in 1998, 1997, and 1996. Below investment grade
securities generally have greater default risk than higher rated corporate
debt. The issuers of these securities are usually more sensitive to adverse
industry or economic conditions than are investment grade issuers.
The Company had investments totaling $58,765,000 in Citigroup, Inc. or its
affiliates at December 31, 1998. Except for U.S. government agency mortgage-
backed securities, the Company had no other investments in any entity in
excess of 10% of stockholders' equity at December 31, 1998.
(E) Transfers of Securities
At July 31, 1994, the Company transferred debt securities with fair values
totaling $805 million from securities available for sale to securities held to
maturity. On December 29, 1995, the Company made additional transfers
totaling $156 million to the held to maturity category from securities
available for sale. Lower holdings of securities available for sale
significantly reduce the Company's exposure to equity volatility while still
providing securities for liquidity and asset/liability management purposes.
The transfers of securities were recorded at fair values in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement requires
that the unrealized holding gain or loss at the date of the transfer continue
to be reported in a separate component of stockholders' equity but shall be
amortized over the remaining life of the security as an adjustment of yield in
a manner consistent with the amortization of any premium or discount. The
amortization of an unrealized holding gain or loss reported in equity will
offset or mitigate the effect on interest income of the amortization of the
premium or discount for the held to maturity securities. The transfer of
securities from available for sale to held to maturity had no effect on net
earnings of the Company. However, stockholders' equity was adjusted as
follows:
<TABLE>
<CAPTION>
Net Unrealized Gains (Losses)
as of December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Beginning unamortized
gains from transfers $ 1,545 2,601 3,169
Amortization of net
unrealized gains related
to transferred securities,
net of effects of
deferred policy acquisition
costs and taxes (516) (1,056) (568)
Ending unamortized gains
from transfers $ 1,029 1,545 2,601
</TABLE>
Net unrealized gains and losses on investment securities included in
stockholders' equity at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 43,957 36,297
Gross unrealized losses (4,703) (2,835)
Adjustments for:
Deferred policy acquisition costs (16,222) (14,637)
Deferred Federal income taxes (8,061) (6,588)
14,971 12,237
Net unrealized gains related
to securities transferred
to held to maturity 1,029 1,545
Net unrealized gains
on investment securities $ 16,000 13,782
</TABLE>
(F) Change in Accounting Principles
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 defines several designations of
derivatives based on the instrument's intended use and specifies the
appropriate accounting treatment for changes in the fair value of the
derivative based on its resulting designation. The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company currently sells equity-indexed annuities that contain an equity
return component for policyholders which is an embedded derivative instrument.
The Company purchases index options, which are also derivative instruments, to
hedge this equity return component. The index options are reported at fair
value in the Company's financial statements, which is in accordance with SFAS
No. 133 requirements. The Company also uses a fair value approach in
recording policy liabilities for the equity-indexed annuities. However, there
is currently no specific, authoritative interpretation of SFAS No. 133 with
respect to accounting for equity-indexed annuity liabilities. Additional
guidance in 1999 regarding this issue may result in a definitive method
significantly different from that currently used by the Company. As a result,
the ultimate implementation of SFAS No. 133 could have a significant effect on
the Company's results of operations. The Company expects to implement the new
statement in the first quarter of 2000.
(4) REINSURANCE
(A) Summary of Significant Reinsurance Information
The Company is party to several reinsurance agreements. The Company's general
policy is to reinsure that portion of any risk in excess of $200,000 on the
life of any one individual. Prior to 1996, the Company's policy was to
reinsure amounts in excess of $150,000. Total life insurance in force was
$9.40 billion and $8.56 billion at December 31, 1998 and 1997, respectively.
Of these amounts, life insurance in force totaling $1.47 billion and $1.24
billion was ceded to reinsurance companies, primarily on a yearly renewable
term basis, at December 31, 1998 and 1997, respectively.
In accordance with the reinsurance contracts, reinsurance receivables
including amounts related to claims incurred but not reported and liabilities
for future policy benefits totaled $4,269,000 and $5,396,000 at December 31,
1998 and 1997, respectively. Premium revenues were reduced by $7,245,000,
$5,719,000, and $6,442,000 for reinsurance premiums incurred during 1998,
1997, and 1996, respectively. Benefit expenses were reduced by $3,013,000,
$5,396,000, and $19,070,000 for reinsurance recoveries during 1998, 1997, and
1996, respectively. A liability exists with respect to reinsurance, as the
Company remains liable if the reinsurance companies are unable to meet their
obligations under the existing agreements.
(B) Change in Accounting Principles
In October, 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." The SOP specifies classifications for insurance and
reinsurance contracts for which deposit accounting is appropriate and
specifies accounting methods for each. For each insurance and reinsurance
contract accounted for under deposit accounting, a deposit asset or liability
should be recognized at inception and should be measured based on
consideration paid or received, less any premiums or fees to be retained by
the insurer or reinsurer, irrespective of the experience of the contract. The
Company anticipates that this SOP will not have a significant effect on its
financial statements, as the Company's current insurance and reinsurance
contracts all transfer insurance risk. SOP 98-7 is effective for all fiscal
years beginning after June 15, 1999. The Company currently plans to implement
the SOP in the first quarter of 2000.
(5) FEDERAL INCOME TAXES
Total Federal income taxes for 1998, 1997, and 1996 were allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Taxes on earnings from
continuing operations:
Current $ 22,128 23,934 21,624
Deferred (4,781) (2,211) 2,499
Taxes on earnings from
continuing operations 17,347 21,723 24,123
Taxes on components of
stockholders' equity:
Net unrealized gains
and losses on
securities available for sale 1,196 2,115 (2,876)
Foreign currency
translation adjustments 80 1,338 -
Total Federal income taxes $ 18,623 25,176 21,247
</TABLE>
The provisions for Federal income taxes attributable to earnings from
continuing operations vary from amounts computed by applying the statutory
income tax rate to earnings before Federal income taxes. The reasons for the
differences and the corresponding tax effects are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 23,228 22,503 24,618
Tax-exempt income (931) (822) (298)
Amortization of life interest in the
Libbie Shearn Moody Trust 101 100 99
Non-deductible travel
and entertainment 108 101 116
Tax benefits from
discontinued operations (4,944) (350) (182)
Other (215) 191 (230)
Taxes on earnings from
continuing operations $ 17,347 21,723 24,123
</TABLE>
There were no deferred taxes attributable to enacted tax rate changes for the
years ended December 31, 1998, 1997, and 1996.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Deferred tax assets:
Future policy benefits, excess of financial
accounting liabilities over tax liabilities $ 100,023 90,314
Mortgage loans, principally due to valuation
allowances for financial accounting purposes 1,506 1,657
Real estate, principally due to writedowns
for financial accounting purposes 1,615 1,678
Accrued and unearned investment income
recognized for tax purposes and deferred for
financial accounting purposes 634 2,333
Accrued operating expenses
recorded for financial
accounting purposes not
currently tax deductible 5,440 2,357
Net operating loss carryforward 1,509 73
Other 36 886
Total gross deferred tax assets 110,763 99,298
Less valuation allowance - -
Net deferred tax assets 110,763 99,298
Deferred tax liabilities:
Deferred policy acquisition costs,
principally expensed for tax purposes (104,383) (97,173)
Securities, principally due to deferred
market discount for tax (5,132) (5,687)
Real estate, principally due to
differences in tax and
financial accounting for depreciation (851) (823)
Net unrealized gains on securities
available for sale (8,616) (7,420)
Foreign currency translation adjustment (1,418) (1,338)
Other (9) (10)
Total gross deferred tax liabilities (120,409) (112,451)
Net deferred tax liabilities $ (9,646) (13,153)
</TABLE>
There was no valuation allowance for deferred tax assets at December 31, 1998
and 1997. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance
company's income was not subject to tax until it was distributed to
stockholders, at which time it was taxed at the regular corporate tax rate.
In accordance with the 1984 Act, this income, referred to as policyholders'
surplus, would not increase, yet any amounts distributed would be taxable at
the regular corporate rate. The balance of this account as of December 31,
1998, is approximately $2,446,000. No provision for income taxes has been
made on this untaxed income, as management is of the opinion that no
distribution to stockholders will be made from policyholders' surplus in the
foreseeable future. Should the balance in the policyholders' surplus account
at December 31, 1998, become taxable, the Federal income taxes computed at
present rates would be approximately $856,000.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation of the consolidated tax liability is based on
separate return calculations pursuant to the "wait-and-see" method as
described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current
Treasury Regulations. Under this method, consolidated group members are not
given current credit for net losses until future net taxable income is
generated to realize such credits. In accordance with this consolidated tax
sharing agreement, tax benefits resulting from discontinued brokerage
operation losses totaling $4,944,000, $350,000, and $182,000 for 1998, 1997,
and 1996 were included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company's wholly owned subidiary, NWL Services, Inc., is the beneficial
owner of a life interest (1/8 share) in the trust estate of Libbie Shearn
Moody (the Trust) which was previously owned by Mr. Robert L. Moody, Chairman
of the Board of Directors of the Company. The Company has issued term
insurance policies on the life of Mr. Robert L. Moody which are reinsured
through agreements with unaffiliated insurance companies. NWL Services, Inc.
is the beneficiary of these policies for an amount equal to the statutory
admitted value of the Trust, which was $14,721,000 at December 31, 1998. The
excess of $27,000,000 face amount of the reinsured policies over the statutory
admitted value of the Trust has been assigned to Mr. Robert L. Moody. The
recorded net asset values in the accompanying consolidated financial
statements for the life interest in the Trust are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Original valuation of life
interest at February 26, 1960 $ 13,793 13,793
Less accumulated amortization (9,446) (9,157)
Net asset value of life interest in the Trust $ 4,347 4,636
</TABLE>
Income from the Trust and related expenses reflected in the accompanying
consolidated statements of earnings are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Income distributions $ 3,451 3,335 3,252
Deduct:
Amortization (289) (286) (284)
Reinsurance premiums (300) (266) (238)
Net income from life
interest in the Trust $ 2,862 2,783 2,730
</TABLE>
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the
total outstanding shares of the Company's Class B common stock and 1,160,896
of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board of
Directors of the Company, and holders of the Class B common stock elect the
remainder. Any cash or in-kind dividends paid on each share of Class B common
stock shall be only one-half of the cash or in-kind dividends paid on each
share of Class A common stock. Also, in the event of liquidation of the
Company, the Class A stockholders shall first receive the par value of their
shares; then the Class B stockholders shall receive the par value of their
shares; and the remaining net assets of the Company shall be divided between
the stockholders of both Class A and Class B common stock, based on the number
of shares held.
(7) PENSION PLANS
(A) Defined Benefit Plans
The Company has a qualified defined benefit pension plan covering
substantially all full-time employees. The plan provides benefits based on the
participants' years of service and compensation. The Company makes annual
contributions to the plan that comply with the minimum funding provisions of
the Employee Retirement Income Security Act. During 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." This statement
revises employers' disclosures about pension and other postretirement benefit
plans, but it does not change the measurement or recognition of those plans.
A detail of plan disclosures in accordance with SFAS No. 132 is provided
below:
The following summarizes the changes in benefit obligations for the years
ended:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Benefit obligations at
beginning of year $ 9,408 8,332 8,199
Service cost 363 286 287
Interest cost 647 620 571
Actuarial (gain) loss 386 661 (266)
Benefits paid (513) (491) (459)
Benefit obligations at end of year $ 10,291 9,408 8,332
</TABLE>
The following summarizes the changes in the fair value of plan assets,
primarily consisting of equity and fixed income securities, for the years
ended:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Fair value of plan assets at
beginning of year $ 9,265 7,899 6,557
Actual return on plan assets 1,549 1,437 643
Employer contribution - 420 1,158
Benefits paid (513) (491) (459)
Fair value of plan
assets at end of year $ 10,301 9,265 7,899
</TABLE>
The following sets forth the plan's funded status and the related amounts
recognized in the Company's financial statements as of:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Funded status $ 10 (143) (433)
Unrecognized net actuarial loss 964 1,503 1,766
Unrecognized transition assets (154) (209) (264)
Minimum liability - - (1,039)
Unrecognized prior service cost (146) (176) (206)
Prepaid (accrued) benefit cost $ 674 975 (176)
</TABLE>
The following are the weighted-average assumptions as of:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 7.50 7.50 8.50
Rate of compensation increase 4.50 4.50 4.50
</TABLE>
Net periodic benefit costs include the following components for the years
ended:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Service cost $ 363 286 287
Interest cost 647 620 571
Expected return on plan assets (674) (594) (614)
Amortization of unrecognized
transition assets (55) (55) (55)
Amortization of prior service cost (30) (30) (30)
Recognized net actuarial loss 50 81 113
Net periodic benefit cost $ 301 308 272
</TABLE>
The Company also sponsors a nonqualified defined benefit plan primarily for
senior officers. The plan provides benefits based on the participants' years
of service and compensation. During 1998 the Company transferred the pension
obligations and administrative responsibilities of the plan to a pension
administration firm. Upon transfer, the Company paid $4,880,000 to cover
current and future liabilities and administration of the plan. Pension
expense for 1998, up to the time of transfer, was $324,000. The financial
effects of the transaction resulted in additional pension expense during 1998
totaling $2,543,000, as the amount paid upon transfer exceeded the pension
liabilities recorded for financial statement purposes in accordance with SFAS
No. 87 and SFAS No. 132.
The obligations under the plan are now the responsibility of the new pension
administration firm, which is a subsidiary of American National Insurance
Company (ANICO). ANICO has also guaranteed the payment of pension obligations
under the plan. However, National Western has a contingent liability with
respect to the pension plan should these entities be unable to meet their
obligations under the existing agreements. Also, National Western has a
contingent liability with respect to the plan in the event that a plan
participant continues employment with National Western beyond age seventy, the
aggregate average annual participant salary increases exceed 10% per year, or
any additional employees become eligible to participate in the plan. If any
of these conditions are met, National Western would be responsible for any
additional pension obligations resulting from these items.
(B) Defined Contribution Plans
In addition to the defined benefit plans, the Company has a qualified 401(k)
plan for substantially all full-time employees and a nonqualified deferred
compensation plan primarily for senior officers. The Company makes annual
contributions to the 401(k) plan of two percent of each employee's
compensation. Additional Company matching contributions of up to two percent
of each employee's compensation are also made each year based on the
employee's personal level of salary deferrals to the plan. All Company
contributions are subject to a vesting schedule based on the employee's years
of service. For the years ended December 31, 1998, 1997, and 1996, Company
contributions totaled $270,000, $250,000, and $217,000, respectively.
The nonqualified deferred compensation plan was established to allow eligible
employees to defer the payment of a percentage of their compensation and to
provide for additional Company contributions. Company contributions are
subject to a vesting schedule based on the employee's years of service. For
the years ended December 31, 1998, 1997, and 1996, Company contributions
totaled $60,000, $36,000, and $62,000, respectively.
(8) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for cash
management purposes relating to investment transactions. The Company is
required to maintain a collateral security deposit in trust with the bank
equal to 120% of any outstanding liability. The Company had no outstanding
liabilities or collateral security deposits with the bank at December 31, 1998
and 1997. The Company had no borrowings on the line of credit during 1998.
The weighted average interest rates on borrowings for the years ended December
31, 1997 and 1996 were 6.42% and 6.91%, respectively. Actual borrowings and
interest expense for 1997 and 1996 were minimal.
(9) COMMITMENTS AND CONTINGENCIES
(A) Legal Proceedings
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 received
credit for $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid 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. Of the
$14,125,000, amounts totaling $7,284,000 were paid and transmitted to a
Disbursing Trust Committee on behalf of Westcap for payment to holders of
allowed claims against the Westcap debtors, and National Western paid
$6,841,000 to settling Westcap creditors with allowed claims against the
Westcap debtors who also settled and released National Western from alleged
federal or state securities law "control person" violations relating to
Westcap. The settling creditors were:
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 retained 100% continuing ownership of
the reorganized Westcap. Westcap will no longer engage in brokerage
operations, but will operate as a real estate management company.
Community College District No. 508, County of Cook and State of Illinois (The
City Colleges), was excluded from the compromise and settlement by National
Western with the settling creditors, but participated with all creditors in
the distribution from Westcap. In addition to the amounts described above,
included in the distribution to the Disbursing Trust were $48,000 of Westcap
assets. The City Colleges had previously obtained a bankruptcy court judgment
for approximately $56 million against the Westcap debtors (which was
subsequently reduced to approximately $52 million). Under the Plan, The City
Colleges participated in the $7,332,000 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 bankruptcy
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 $7,332,000 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 was paid by National Western on January 13, 1999. However,
the settlement payment has been accrued in other liabilities as of December
31, 1998, and reflected as a 1998 loss from discontinued operations in the
accompanying financial statements. The $1,000,000 previously contributed to
Westcap in bankruptcy was also reflected as a loss from discontinued
operations in 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 financial statements for potential losses relating to such
suit.
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. The bankruptcy court on November 16, 1998, entered
an order allowing a claim of The City Colleges against the Westcap estate of
$51,738,868. Westcap will appeal the bankruptcy court's and 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 is 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. Accordingly, no provision for any liability that may result from this
suit has been recognized in the accompanying financial statements.
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court
of San Patricio County, Texas, against National Western Life Insurance Company
(the Company) and its chief executive officer, Robert L. Moody. The suit
arose from derivative investments purchased by San Patricio County from
Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of
The Westcap Corporation. The suit alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit was
settled effective March 9, 1998, with a payment of $200,000 by National
Western to San Patricio County and with no admission of liability. In
exchange for the payment, National Western and Robert L. Moody received a
general release of all claims asserted, including all claims that have been
asserted against Westcap Securities, L.P., or could have been asserted in
another court against Westcap Securities, L.P., and the lawsuit was dismissed.
The $200,000 settlement payment was recorded as other operating expenses in
1998.
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,
intervenors, 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.
National Western proceeded with notification of class members and preliminary
administration of the claims process during late 1998 and January, 1999.
Estimated costs for this process totaling $250,000 were accrued as other
operating expenses as of December 31, 1998, in the accompanying financial
statements. On January 20, 1999, the Court held a "fairness hearing" and
approved the Settlement Agreement. As a result, National Western also accrued
the estimated $5,000,000 settlement as other operating expenses as of December
31, 1998. The actual settlement payments are expected to be paid during 1999.
Other Pending Litigation
On December 31, 1997, National Western Life Insurance Company (National
Western) filed a declaratory judgment action against National Annuity
Programs, Inc. (NAP), and Robert L. Myer (Myer) for construction of a General
Agent Manager Contract and amendments thereto between National Western and
NAP, a declaration that the contract is enforceable, and for an award for
damages. The contract was entered into in 1983 and amended in 1994, by which
NAP was to market insurance and annuity products issued by National Western.
The suit alleges that during the course of the contract NAP violated its terms
and conditions, violated the insurance laws and regulations of the State of
Texas, misrepresented the terms and conditions of National Western's insurance
and annuity products, induced National Western's policyholders to relinquish
or terminate its policies of insurance or annuities, and failed to use
reasonable efforts to conserve its insurance and annuity products. National
Western seeks (i) to withhold, deduct, and/or terminate the payment of agency
commissions under the contract to NAP, which are based on future premiums
received and policies maintained in force; (ii) damages from breach of the
contract; (iii) recovery of damages from Robert L. Myer for tortious
interference with National Western's contractual relations with its
policyholders; (iv) recovery of damages from Robert L. Myer for conspiracy to
cause NAP to breach its contract with National Western and to induce its
policyholders to terminate their policies with National Western; and (v)
reasonable attorneys' fees, costs, and expenses. The parties have started
discovery proceedings.
National Western Life Insurance Company is also currently a defendant in
several other lawsuits, substantially all of which are in the normal course of
business. In the opinion of management, the liability, if any, which may arise
from these lawsuits would not have a material adverse effect on the Company's
financial position.
(B) Financial Instruments
In order to meet the financing needs of its customers in the normal course of
business, the Company is a party to financial instruments with off-balance
sheet risk. These financial instruments are commitments to extend credit which
involve elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amounts, assuming that the amounts are fully
advanced and that collateral or other security is of no value. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company controls
the credit risk of these transactions through credit approvals, limits, and
monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans
totaling $6,946,000 at December 31, 1998. Commitments to extend credit are
legally binding agreements to lend to a customer that generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Commitments do not necessarily represent future liquidity requirements,
as some could expire without being drawn upon. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The Company also had
commitments to purchase investment securities totaling $10,000,000 at December
31, 1998.
(C) Guaranty Association Assessments
National Western Life Insurance Company is subject to state guaranty
association assessments in all states in which it is licensed to do business.
These associations generally guarantee certain levels of benefits payable to
resident policyholders of insolvent insurance companies. Many states allow
premium tax credits for all or a portion of such assessments, thereby allowing
potential recovery of these payments over a period of years. However, several
states do not allow such credits.
The Company estimates its liabilities for guaranty association assessments by
using the latest information available from the National Organization of Life
and Health Insurance Guaranty Associations. The Company monitors and revises
its estimates for assessments as additional information becomes available
which could result in changes to the estimated liabilities. Guaranty
association assessments reflected significant decreases in 1998, as these
expenses declined $1,317,000 from the prior year. The reduction is due to
changes in estimated liabilities, changes in estimated recoverable capitalized
assessments, and assessment refunds received from states during 1998. These
changes and refunds resulted in a net credit in other operating expenses for
guaranty association assessments totaling $365,000 for 1998. Other operating
expenses related to state guaranty association assessments totaled $952,000,
and $1,146,000 for the years ended December 31, 1997 and 1996, respectively.
(D) Changes in Accounting Principles
In December, 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, which provides guidance on accounting
by insurance and other enterprises for assessments related to insurance
activities. The SOP provides: (1) guidance for determining when an entity
should recognize a liability for guaranty fund and other insurance related
assessments, (2) guidance on how to measure the liability including
discounting of the liability if the amount and timing of the cash payments are
fixed or reliably determinable, (3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges, and
(4) requirements for disclosure of certain information. The Company
anticipates that this SOP will not have a significant effect on its reporting
of liabilities for guaranty fund assessments, as the Company is currently
applying accounting procedures similar to those in the new statement. SOP 97-
3 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will implement the SOP in the first quarter of
1999.
(10) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,492 3,491 3,491
Shares exercised under
stock option plan 6 1 -
Shares outstanding at end of year 3,498 3,492 3,491
</TABLE>
(B) Dividend Restrictions
The Company is restricted by state insurance laws as to dividend amounts which
may be paid to stockholders without prior approval from the Colorado Division
of Insurance. The restrictions are based on statutory earnings and surplus
levels of the Company. The maximum dividend payment which may be made without
prior approval in 1999 is $30,749,000. The Company has never paid cash
dividends on its common stock, as it follows a policy of retaining any
earnings in order to finance the development of business and to meet
regulatory requirements for capital.
(C) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors that
are applied to statutory financial balances or various levels of activity
based on the perceived degree of risk. Regulatory compliance is determined by
a ratio of the Company's regulatory total adjusted capital to its authorized
control level RBC, as defined by the NAIC. Companies below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. The Company's current statutory capital and
surplus is significantly in excess of the threshold RBC requirements.
(D) Stock and Incentive Plan
The Company has a stock and incentive plan which provides for the grant of any
or all of the following types of awards to eligible employees: (1) stock
options, including incentive stock options and nonqualified stock options;
(2) stock appreciation rights, in tandem with stock options or freestanding;
(3) restricted stock; (4) incentive awards; and (5) performance awards.
The plan began on April 21, 1995, and will terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The number of shares of Class
A, $1.00 par value, common stock which may be issued under the plan, or as to
which stock appreciation rights or other awards may be granted, may not exceed
300,000. These shares may be authorized and unissued shares or treasury
shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Company directors,
including members of the Compensation and Stock Option Committee, are eligible
for nondiscretionary stock options.
The Committee approved the issuance of nonqualified stock options to selected
officers of the Company during 1998, 1997, and 1996 totaling 48,500, 21,900,
and 33,000, respectively. Additionally, during 1998 the Committee granted
10,000 nonqualified, nondiscretionary stock options to Company directors. The
directors' stock options vest 20% annually following one full year of service
to the Company from the date of grant. The officers' stock options vest 20%
annually following three full years of service to the Company from the date of
grant. The exercise prices of the stock options were set at the fair market
values of the common stock on the dates of grant. A summary of shares
available for grant and stock option activity is detailed below:
<TABLE>
<CAPTION>
Options Outstanding
Shares Weighted-
Available Average
For Grant Shares Exercise Price
<S> <C> <C> <C>
Balance at January 1, 1996 240,500 59,500 $ 38.13
Stock Options:
Granted (33,000) 33,000 65.00
Balance at December 31, 1996 207,500 92,500 47.71
Stock Options:
Granted (21,900) 21,900 85.13
Exercised - (400) 38.13
Forfeited 100 (100) 75.06
Balance at December 31, 1997 185,700 113,900 54.92
Stock Options:
Granted (58,500) 58,500 111.16
Exercised - (6,390) 38.13
Forfeited 250 (250) 105.25
Balance at December 31, 1998 127,450 165,760 $ 73.68
</TABLE>
Vested and exercisable options at December 31, 1998, 1997, and 1996 totaled
7,910, 2,400, and 1,400, respectively. The weighted-average exercise price for
these options was $38.13.
The following table summarizes information about stock options outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding
Weighted-
Number Average Options
Outstanding Remaining Life Exercisable
<S> <C> <C> <C>
Exercise prices:
$ 38.13 52,710 6.4 years 7,910
65.00 32,950 7.3 years -
85.13 21,850 8.3 years -
105.25 48,250 9.3 years -
112.38 10,000 9.5 years -
Totals 165,760 7,910
</TABLE>
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. It defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to measure
compensation cost for plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees."
Under the fair value based method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. For stock options, fair value is
determined using an option pricing model that takes into account various
information and assumptions regarding the Company's stock and options. Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
The Company has elected to continue to apply the accounting methods prescribed
by APB Opinion No. 25 for its existing stock and incentive plan. No
compensation costs have been recorded for the Company's existing plan using
the intrinsic value based method. However, if compensation expense for the
stock options had been determined using the fair value based method under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands except per share amounts)
<S> <C> <C> <C>
Net earnings:
As reported $ 34,893 41,572 46,215
Pro forma $ 34,241 41,211 45,975
Basic earnings per share:
As reported $ 9.98 11.91 13.24
Pro forma $ 9.80 11.80 13.17
Diluted earnings per share:
As reported $ 9.87 11.81 13.17
Pro forma $ 9.69 11.70 13.10
</TABLE>
The fair value of the options used in estimating the pro forma amounts above
were estimated on the date of grant using an option pricing model with the
weighted-average assumptions as detailed below:
<TABLE>
<CAPTION>
Options Granted in
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rates 5.1% 5.4% 6.5%
Dividend yields - - -
Volatility factors 29.0% 32.1% 32.6%
Weighted-average expected life 7 years 7 years 7 years
Weighted-average fair
value per share $44.29 $39.08 $31.63
</TABLE>
(11) EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
statement changes the computation, presentation, and disclosure requirements
for earnings per share (EPS). SFAS No. 128 replaces the presentation of
primary and fully diluted EPS with basic and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
The Company adopted SFAS No. 128 effective December 31, 1997. In accordance
with the new statement, prior period earnings per share data was restated.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands except per share amounts)
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings from
continuing operations
available to common
stockholders before and after
assumed conversions $ 49,018 42,572 46,215
Denominator:
Basic earnings per share -
weighted-average shares 3,495 3,491 3,491
Effect of dilutive stock options 40 30 19
Diluted earnings per share -
adjusted weighted-average shares
for assumed conversions 3,535 3,521 3,510
Basic earnings per share $ 14.02 12.20 13.24
Diluted earnings per share $ 13.87 12.09 13.17
</TABLE>
(12) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS No. 130 affects the Company's reporting presentation of certain items
such as foreign currency translation adjustments and unrealized gains and
losses on investment securities. These items are now a component of other
comprehensive income, as reported in the accompanying financial statements.
Prior period financial statements have been reclassified for comparative
purposes in accordance with SFAS No. 130. Components of other comprehensive
income and related taxes are provided below for 1998, 1997, and 1996.
<TABLE>
<CAPTION>
Amounts Amounts
Before (Taxes) Net of
Taxes Benefits Taxes
(In thousands)
<S> <C> <C> <C>
1998:
Unrealized gains (losses) on
securities, net of effects
of deferred policy
acquisition costs of $1,024:
Unrealized holding gains
(losses) arising during period $ 5,100 (1,785) 3,315
Less: reclassification
adjustment for
(gains) losses included
in net earnings (893) 312 (581)
Amortization of net
unrealized gains related
to transferred securities (793) 277 (516)
Net unrealized gains
(losses) on securities 3,414 (1,196) 2,218
Foreign currency
translation adjustments 228 (80) 148
Other comprehensive income $ 3,642 (1,276) 2,366
1997:
Unrealized gains (losses) on
securities, net of effects
of deferred policy
acquisition costs of $3,598:
Unrealized holding gains
(losses)arising during period $ 8,730 (3,055) 5,675
Less: reclassification
adjustment for
(gains) losses included
in net earnings (1,061) 371 (690)
Amortization of net
unrealized gains related
to transferred securities (1,625) 569 (1,056)
Net unrealized gains
(losses) on securities 6,044 (2,115) 3,929
Foreign currency
translation adjustments 3,824 (1,338) 2,486
Other comprehensive income $ 9,868 (3,453) 6,415
</TABLE>
<TABLE>
<CAPTION>
Amounts Amounts
Before (Taxes) Net of
Taxes Benefits Taxes
(In thousands)
<S> <C> <C> <C>
1996:
Unrealized gains (losses) on
securities, net of effects
of deferred policy
acquisition costs of $14,179:
Unrealized holding gains
(losses) arising during period $ (7,109) 2,489 (4,620)
Less: reclassification
adjustment for
(gains) losses included
in net earnings (237) 83 (154)
Amortization of net
unrealized gains related
to transferred securities (872) 304 (568)
Other comprehensive income $ (8,218) 2,876 (5,342)
</TABLE>
(13) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations for 1998 are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
<S> <C> <C> <C> <C>
1998:
Revenues $ 80,145 82,131 76,575 94,763
Earnings from
continuing operations $ 10,370 12,270 15,896 10,482
Losses from
discontinued operations - - (14,125) -
Net earnings $ 10,370 12,270 1,771 10,482
Basic earnings per share:
Earnings from
continuing operations $ 2.97 3.51 4.55 3.00
Losses from
discontinued operations - - (4.04) -
Net earnings $ 2.97 3.51 0.51 3.00
Diluted earnings per share:
Earnings from
continuing operations $ 2.94 3.48 4.48 2.96
Losses from
discontinued operations - - (3.98) -
Net earnings $ 2.94 3.48 0.50 2.96
</TABLE>
The fourth quarter net earnings in 1998 reflect the following significant
items:
Net earnings for the quarter ended December 31, 1998, were $10,482,000
compared to $14,493,000 for the fourth quarter of 1997. Included in results
for the quarter are two nonrecurring charges which significantly lowered the
Company's earnings. As more fully described in Note 9, Commitments and
Contingencies, the Diffie, et al vs. National Western Life Insurance Company
and National Annuity Programs, Inc., class action litigation was settled in
January, 1999, with the Company agreeing to pay $5,000,000 in the settlement.
This amount was accrued in the accompanying financial statements in the fourth
quarter of 1998, thereby reducing earnings $3,250,000, after taxes. Also
during the fourth quarter of 1998, the Company transferred pension obligations
and administrative responsibilities of its nonqualified defined benefit plan
to a pension administration firm. The financial effects of the transaction
resulted in additional pension expense in the fourth quarter totaling
$1,653,000, net of taxes, as described in detail in Note 7, Pension Plans.
Quarterly results of operations for 1997 are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
<S> <C> <C> <C> <C>
1997:
Revenues $ 72,916 80,924 76,094 82,340
Earnings from
continuing operations $ 6,752 11,798 9,529 14,493
Losses from
discontinued operations (1,000) - - -
Net earnings $ 5,752 11,798 9,529 14,493
Basic earnings
per share:
Earnings from
continuing operations $ 1.94 3.38 2.73 4.15
Losses from
discontinued operations (0.29) - - -
Net earnings $ 1.65 3.38 2.73 4.15
Diluted earnings
per share:
Earnings from
continuing operations $ 1.92 3.35 2.71 4.11
Losses from
discontinued operations (0.28) - - -
Net earnings $ 1.64 3.35 2.71 4.11
</TABLE>
The fourth quarter net earnings in 1997 reflect the following significant
items:
Net earnings for the quarter ended December 31, 1997, were $14,493,000
compared to $13,071,000 for the fourth quarter of 1996. This reflects an
increase of $1,422,000, or 10.9%, over 1996 fourth quarter earnings.
Increases in universal life and annuity contract revenues of 12.8% and net
investment income of 4.0% contributed to the higher earnings. Life insurance
benefit claims were also down 7.7%, which had a positive effect on 1997 fourth
quarter earnings. Realized gains, net of taxes, included in net earnings
totaled $509,000 and $219,000 for the fourth quarters of 1997 and 1996,
respectively.
(14) SEGMENT AND OTHER OPERATING INFORMATION
(A) Operating Segment Information
In previous years the Company reported two industry segments, life insurance
operations and brokerage operations. For the year ended December 31, 1998,
the Company implemented Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
and redefined its reportable operating segments as domestic life insurance,
international life insurance, and annuities. The Company's segments are
organized based on product types and geographic marketing areas.
A summary of segment information, prepared in accordance with SFAS No. 131, 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>
1998:
Premiums and
contract
revenues $ 24,296 40,606 31,432 - 96,334
Net investment
income 26,211 21,940 182,347 3,346 233,844
Other income 750 32 270 - 1,052
Universal life
and investment
annuity contract
interest 9,963 13,432 135,494 - 158,889
Amortization of
deferred policy
acquisition costs 2,954 15,836 21,625 - 40,415
Federal income
taxes 3,227 3,228 13,880 1,122 21,457
Segment earnings 6,395 6,397 27,508 2,224 42,524
Segment assets 412,538 373,201 2,692,330 19,285 3,497,354
1997:
Premiums and
contract revenues $ 23,639 40,429 31,994 - 96,062
Net investment
income 26,873 21,451 166,348 2,774 217,446
Other income 43 34 277 - 354
Universal life
and investment
annuity contract
interest 9,687 12,575 122,938 - 145,200
Amortization of
deferred policy
acquisition costs 5,058 13,608 21,268 - 39,934
Federal income taxes 3,089 3,739 14,848 953 22,629
Segment earnings 5,901 7,143 28,389 1,821 43,254
Segment assets 405,427 359,986 2,429,998 14,058 3,209,469
1996:
Premiums and
contract revenues $ 24,507 36,653 31,417 - 92,577
Net investment
income 27,766 21,243 165,943 (650) 214,302
Other income 375 256 2,087 - 2,718
Universal life
and investment
annuity contract
interest 9,694 11,853 129,928 - 151,475
Amortization of
deferred policy
acquisition costs 5,467 10,264 14,630 - 30,361
Federal income
taxes 4,597 3,773 15,595 (224) 23,741
Segment earnings 8,710 7,150 29,550 (425) 44,985
Segment assets 400,747 345,834 2,353,445 6,074 3,106,100
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Premiums and Other Revenue:
Premiums and contract revenues $ 96,334 96,062 92,577
Net investment income 233,844 217,446 214,302
Other income 1,052 354 2,718
Realized gains (losses)
on investments 2,384 (1,588) 1,612
Total consolidated premiums
and other revenue $ 333,614 312,274 311,209
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Federal Income Taxes:
Total segment Federal income taxes $ 21,457 22,629 23,741
Taxes on realized gains
(losses) on investments 834 (556) 564
Tax benefits from
discontinued operations (4,944) (350) (182)
Total taxes on earnings
from continuing operations $ 17,347 21,723 24,123
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Net Earnings:
Total segment earnings $ 42,524 43,254 44,985
Realized gains (losses)
on investments,
net of taxes 1,550 (1,032) 1,048
Losses from discontinued
operations (14,125) (1,000) -
Tax benefits from
discontinued operations 4,944 350 182
Total consolidated net earnings $ 34,893 41,572 46,215
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Assets:
Total segment assets $ 3,497,354 3,209,469 3,106,100
Assets of discontinued operations 48 892 1,257
Other unallocated assets 20,601 15,202 13,472
Total consolidated assets $ 3,518,003 3,225,563 3,120,829
</TABLE>
(B) Geographic Information
A significant portion of the Company's premiums and contract revenues are from
countries other than the United States. Premium and contract revenues
detailed by country are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
United States $ 56,341 56,122 56,503
Argentina 9,052 9,706 10,474
Peru 8,293 8,227 7,541
Chile 6,227 5,451 4,649
Haiti 4,941 4,430 3,796
Columbia 3,612 3,781 3,555
Other foreign countries 15,113 14,064 12,501
Revenues, excluding
reinsurance premiums 103,579 101,781 99,019
Reinsurance premiums (7,245) (5,719) (6,442)
Total premiums and
contract revenues $ 96,334 96,062 92,577
</TABLE>
Premiums and contract revenues are attributed to countries based on the
location of the policyholder.
(C) Major Agency Relationships
A significant portion of the Company's premiums and deposits were sold through
three marketing agencies in recent years. Combined business from these
agencies accounted for approximately 30% of total direct premium revenues and
universal life and investment annuity contract deposits for 1998. These same
three marketing agencies accounted for 22% and 16% of total direct premiums
and deposits for 1997 and 1996, respectively.
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity
securities are based on quoted market prices, where available. For securities
not actively traded, fair values are estimated using values obtained from
various independent pricing services and the Securities Valuation Office of
the National Association of Insurance Commissioners. In the cases where prices
are unavailable from these sources, prices are estimated by discounting
expected future cash flows using a current market rate applicable to the
yield, credit quality, and maturity of the investments.
Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Mortgage loans: The fair value of performing mortgage loans is estimated by
discounting scheduled cash flows through the scheduled maturities of the
loans, using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Fair value for significant
nonperforming loans is based on recent internal or external appraisals. If
appraisals are not available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Policy loans: The fair value for policy loans is calculated by discounting
estimated cash flows using U.S. Treasury bill rates as of December 31, 1998
and 1997. The estimated cash flows include assumptions as to whether such
loans will be repaid by the policyholders or settled upon payment of death or
surrender benefits on the underlying insurance contracts. As a result, these
assumptions incorporate both Company experience and mortality assumptions
associated with such contracts.
Index options: Fair values for index options are based on quoted market
prices.
Life interest in Libbie Shearn Moody Trust: The fair value of the life
interest is estimated based on assumptions as to future dividends from the
Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash
flows were discounted at a rate consistent with uncertainties relating to the
amount and timing of future cash distributions. However, the Company has
limited the fair value to the statutory admitted value of the Trust, as this
is the maximum amount to be received by the Company in the event of Mr.
Moody's premature death.
Investment annuity and supplemental contracts: Fair value of the Company's
liabilities for deferred investment annuity contracts is estimated to be the
cash surrender value of each contract. The cash surrender value represents the
policyholder's account balance less applicable surrender charges. The fair
value of liabilities for immediate investment annuity contracts and
supplemental contracts with and without life contingencies is estimated by
discounting estimated cash flows using U.S. Treasury bill rates as of December
31, 1998 and 1997.
Fair value for the Company's insurance contracts other than investment
contracts is not required to be disclosed. This includes the Company's
traditional and universal life products. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance and investment contracts.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Investments in debt and
equity securities:
Securities held
to maturity $ 2,029,728 2,124,715 1,874,643 1,949,876
Securities
available for sale 735,587 735,587 651,736 651,736
Cash and short-term
investments 24,508 24,508 7,870 7,870
Mortgage loans 174,921 186,161 181,878 192,640
Policy loans 124,441 150,583 133,826 152,809
Index options 23,900 23,900 420 420
Life interest in
Libbie Shearn
Moody Trust 4,347 14,721 4,636 16,668
Assets of discontinued
operations - cash 41 41 269 269
LIABILITIES
Deferred investment
annuity contracts $ 2,127,007 1,863,552 1,934,019 1,703,599
Immediate investment
annuity and
supplemental contracts 219,406 229,738 196,827 205,042
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(16) DISCONTINUED BROKERAGE OPERATIONS
Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned
brokerage subsidiary of National Western Life Insurance Company, discontinued
all sales and trading activities in its Houston, Texas, office. In September,
1995, Westcap approved a plan to close its remaining sales office in New
Jersey and to cease all brokerage operations. Subsequently, on April 12,
1996, The Westcap Corporation and its wholly owned subsidiary, Westcap
Enterprises, Inc., separately filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court, Southern District of Texas, Houston Division.
In accordance with generally accepted accounting principles, the assets and
liabilities of Westcap have been reclassified in the accompanying consolidated
balance sheets to separately identify them as assets and liabilities of
discontinued operations. Losses from discontinued brokerage operations have
also been reflected separately from continuing operations of the Company. The
1995 losses from discontinued operations resulted in the complete write-off of
National Western Life Insurance Company's investment in Westcap on a
consolidated basis. However, a $1,000,000 cash infusion was made to Westcap
on March 18, 1997, for operational expenses incurred during its bankruptcy.
This contribution was reflected as a loss from discontinued operations in
1997.
As more fully described in Note 9, Commitments and Contingencies, 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
Westcap Enterprises, Inc. Pursuant to the Plan, National Western received
credit for the $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid an additional $14,125,000 to compromise and settle
various claims and litigation.
The $14,125,000 was paid by National Western on January 13, 1999. However,
the settlement payment has been accrued in other liabilities as of December
31, 1998, and reflected as a 1998 loss from discontinued operations in the
accompanying financial statements. As part of the bankruptcy reorganization,
National Western retained 100% continuing ownership of the reorganized
Westcap, and the subsidiary is now operating as a real estate management
company.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Balance
(1) Market Sheet
Type of Investment Cost Value Amount
<S> <C> <C> <C>
Fixed maturity bonds:
Securities held to maturity:
United States government
and government
agencies and authorities $ 3,706 4,065 3,706
States, municipalities,
and political subdivisions 27,001 29,323 27,001
Foreign governments 51,389 55,643 51,389
Public utilities 302,484 319,335 302,484
Corporate 1,159,758 1,214,646 1,159,758
Mortgage-backed 410,818 427,077 410,818
Asset-backed 74,572 74,626 74,572
Total securities held to maturity 2,029,728 2,124,715 2,029,728
Securities available for sale:
United States government
and government
agencies and authorities 3,231 3,464 3,464
States, municipalities,
and political subdivisions 3,000 3,011 3,011
Public utilities 59,699 64,398 64,398
Corporate 303,196 318,633 318,633
Mortgage-backed 199,985 210,288 210,288
Asset-backed 115,204 120,081 120,081
Total securities available
for sale 684,315 719,875 719,875
Total fixed maturity bonds 2,714,043 2,844,590 2,749,603
Equity securities:
Securities available for sale:
Common stocks:
Public utilities 192 390 390
Banks, trust and
insurance companies 195 3,091 3,091
Industrial and other 86 81 81
Preferred stocks 11,545 12,150 12,150
Total equity securities 12,018 15,712 15,712
Index options 16,201 23,900 23,900
Mortgage loans (2) 167,354 162,714
Policy loans 124,441 124,441
Other long-term investments (3) 27,067 24,999
Cash and short-term investments 24,508 24,508
Total investments other than
investments in related parties $ 3,085,632 3,125,877
<FN>
Notes:
(1) Bonds are shown at amortized cost, mortgage loans are shown at unpaid
principal balances before allowances for possible losses of $4,640,000, and
real estate is stated at cost before allowances for possible losses of
$2,068,000.
(2) Mortgage loans with related parties totaling $12,207,000 have been
excluded.
(3) Real estate acquired by foreclosure included in other long-term
investments is as follows: cost $2,369,000; balance sheet amount $1,705,000.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1998, 1997, and 1996
(In thousands)
<TABLE>
<CAPTION>
(1)
Balance Charged Balance
at to Costs at
Beginning and (2) (3) End of
Description of Period Expenses Reductions Transfers Period
<S> <C> <C> <C> <C> <C>
Valuation accounts
deducted from
applicable assets:
Allowance for
possible losses
on mortgage loans:
December 31, 1998 $ 4,640 - - - 4,640
December 31, 1997 $ 5,988 1,133 (2,408) (73) 4,640
December 31, 1996 $ 5,668 500 (180) - 5,988
Allowance for
possible losses
on real estate:
December 31, 1998 $ 2,222 - (154) - 2,068
December 31, 1997 $ 2,288 46 (185) 73 2,222
December 31, 1996 $ 2,152 526 (390) - 2,288
<FN>
Notes:
(1) These amounts were charged to realized gains and losses on investments.
(2) These amounts were related to charge-off of assets against the allowances.
(3) These amounts were transferred to real estate.
</FN>
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 29, 1999 /S/ Robert L. Moody
By: Robert L. Moody, Chairman of the Board,
Chief Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title (Capacity) Date
/S/ Robert L. Moody Chairman of the Board, March 29, 1999
Robert L. Moody Chief Executive Officer,
and Director
(Principal Executive Officer)
/S/ Ross R. Moody President, Chief Operating March 29, 1999
Ross R. Moody Officer, and Director
/S/ Robert L. Busby, III Senior Vice President - March 29, 1999
Robert L. Busby, III Chief Administrative
Officer, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
/S/ Vincent L. Kasch Vice President - Controller March 29, 1999
Vincent L. Kasch and Assistant Treasurer
(Principal Accounting
Officer)
/S/ Arthur O. Dummer Director March 29, 1999
Arthur O. Dummer
Director March 29, 1999
Harry L. Edwards
/S/ E. Douglas McLeod Director March 29, 1999
E. Douglas McLeod
/S/ Charles D. Milos, Jr. Director March 29, 1999
Charles D. Milos, Jr.
Director March 29, 1999
Frances A. Moody
Director March 29, 1999
Russell S. Moody
/S/ Louis E. Pauls, Jr. Director March 29, 1999
Louis E. Pauls, Jr.
/S/ E.J. Pederson Director March 29, 1999
E.J. Pederson
EXHIBIT 10(n) - MATERIAL CONTRACTS
SIXTH AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFERRED COMPENSATION PLAN
This Sixth Amendment to the National Western Life Insurance Company Non-
Qualified Deferred Compensation Plan (the Plan) is hereby made effective this
7th day of August, 1998.
WITNESSETH:
WHEREAS, the Plan was originally established 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 5.4, Form of Payment, is hereby amended to read as follows:
"A Participant or Beneficiary entitled to payment may elect to receive a
single lump sum payment. Alternatively, a Participant or Beneficiary
entitled to payment may elect to have payment made on an annual
installment basis, provided that such election is made at least thirteen
(13) months prior to the first payment to be made under the annual
installment payment option. If a Participant does not choose a method of
payment, or fails to elect the installment payment option within the
thirteen (13) month time period specified above, payment shall be made on
the annual installment basis over an installment period of five (5)
years.
Under the annual installment payment option, the installment payment
period shall not exceed ten (10) years. Each annual installment payment
shall equal the Participant's Account Balance divided by the number of
annual installment payments remaining to be paid in the annual
installment payment period chosen by the Participant."
2. Section 5.3, Timing of Payment, is hereby amended to read as follows:
"A Participant, or in the case of a benefit due to the death of a
Participant, his Beneficiary, shall be entitled to payment of his vested
Account Balance immediately following the termination of his employment
status with the Employer, and payment shall be made according to the
following paragraphs of this Section 5.3.
If the Participant has chosen payment under the lump sum option of
Section 5.4, or if the Participant has chosen the installment payment
option under Section 5.4 and has not yet begun to receive installment
payments, payment shall be made as soon as administratively feasible
following the termination of his employment status, based on the
Participants Account Balance as of the last day of the calendar quarter
next preceding the date of distribution. However, if the Employer
determines that such payment would not be in the best interest of
remaining participants due to fluctuations in the value of the trust, no
distribution shall be made until a subsequent value of the trust is
determined as of the last day of the calendar quarter in which the event
requiring distribution occurs.
In the event of the death of a Participant who has begun to receive
annual payments under the installment payment option, such death
occurring before all of the installments are paid, the Account Balance
shall be paid to the Participant's beneficiary or estate within twelve
(12) months of the date of the Participant's death."
3. A new section 2.3, Loss of Eligible Employee Status, is hereby added to
read as follows:
In the event of the demotion of a participating Eligible Employee, such
that the employee is no longer an Eligible Employee within the meaning of
section 1.2(h) herein, no further contributions by that employee shall be
allowed under the Plan. The provisions of Article V, DETERMINATION OF
PAYMENT OF ACCOUNT, shall continue to govern the employee's account.
Approved by National Western Board of Directors
On December 11, 1998
EXHIBIT 10(o) - MATERIAL CONTRACTS
THIRD AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFINED BENEFIT PLAN
This Third Amendment to the National Western Life Insurance Company Non-
Qualified Defined Benefit Plan (the Plan) is hereby effective this 7th day of
August, 1998.
WITNESSETH:
WHEREAS, the Plan was originally established effective January 1, 1991; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at
anytime; and
WHEREAS, the Company desires to change certain provisions of the Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. A new Section 2.2, Loss of Eligible Employee Status, is hereby added to
read as follows:
"In the event of the demotion of a participating Eligible Employee, such
that the employee is no longer an Eligible Employee within the meaning of
Section 1.2(i) herein, the employee shall lose his status as Participant,
and no further contributions by that employee shall be allowed under the
Plan."
2. Section 1.2(e), Compensation, is hereby amended effective October 1,
1998, by the addition of the following
"As used throughout this Plan, `Compensation' shall not include income
from the exercise of Company stock options."
Approved by National Western Board of Directors
On December 11, 1998
EXHIBIT 10(p) - MATERIAL CONTRACTS
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (this "Agreement") is entered into as of November
___, 1998, by and among National Western Life Insurance Company ("National
Western"), a Colorado insurance corporation, NWL Services, Inc. ("NWL
Services") a Nevada corporation, Alternative Benefit Management, Inc. ("ABM"),
a Nevada corporation, and American National Insurance Company ("American
National"), a Texas insurance corporation.
RECITALS
A. National Western and NWL Services intend to transfer assets to ABM
in exchange for stock of ABM and the assumption of certain liabilities of
National Western by ABM. American National will guarantee ABM's obligations
under this Agreement. American National and ANTAC, Inc. will
contemporaneously execute a separate exchange agreement with ABM. All of the
above-referenced transfers are intended to qualify under Section 351 of the
Internal Revenue Code.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and the mutual
covenants and undertakings contained herein, the parties hereto agree as
follows:
1. Definitions. In addition to any other defined terms contained in
this Agreement, the following definitions of terms shall govern this
Agreement, unless the context thereof specifically indicates a different
meaning:
(a) National Western Cash Contribution. The sum of $5,130,000.
(b) NWL Services Cash Contribution. The sum of $1,850,000.
(c) Effective Date. The date, which shall be no later than
November 23, 1998, on which: (i) National Western transfers the National
Western Cash Contribution and ABM assumes the Liabilities (as hereinafter
defined) and issues 2,500 shares of its Class A Preferred Stock (as
hereinafter defined) to National Western, and (ii) NWL Services transfers the
NWL Services Cash Contribution and ABM issues 18,500 shares of its Class B
Preferred Stock (as hereinafter defined) to NWL Services, in accordance with
the terms of this Agreement.
(d) Class A Preferred Stock. The Class A Preferred Stock of ABM,
the terms of which are more particularly described in the Articles of
Incorporation of Alternative Benefit Management, Inc. dated September 25,
1998, as amended as of the Effective Date (the "Articles").
(e) Class B Preferred Stock. The Class B Preferred Stock of ABM,
the terms of which are more particularly described in the Articles.
(f) Employee Benefit Program. The employment-related benefit
program of National Western known as the non-qualified defined benefit plan as
in effect as of October 1, 1998, as amended from time to time.
(g) Liabilities. All current and future obligations associated
with the Employee Benefit Program, which amounts, as set forth in Exhibit A,
would be of a future nature as if any such obligation were an obligation of
National Western.
(h) Securities Act. The Securities Act of 1933, as amended.
2. Agreements Regarding Transfers of Assets, Values, Assumption of
Liabilities, and Issuance of Class A Preferred Stock and Class B Preferred
Stock.
(a) Exchanges for Class A Preferred Stock and Class B Preferred
Stock. In exchange for stock as hereinafter described, National Western, NWL
Services, and ABM shall perform the following exchanges, and American National
shall make the following guaranty:
(i) National Western shall transfer the National Western Cash
Contribution to ABM for 2,500 shares of Class A Preferred Stock and the
assumption of the Liabilities by ABM and the performance by ABM of all of the
administration of the Employee Benefit Program. This administration shall
include, but is not limited to, any and all activities currently being
undertaken by National Western, or its Pension Committee, in the
administration of the Employee Benefit Program, as well as any additional
activities that may become necessary or proper for the proper administration
of the Employee Benefit Program; and
(ii) NWL Services shall transfer the NWL Services Cash
Contribution to ABM for 18,500 shares of Class B Preferred Stock.
(b) Guaranty by American National. For valuable consideration, the
receipt and adequacy of which are hereby acknowledged, American National
hereby irrevocably and unconditionally guarantees to National Western the full
and prompt payment and performance of the Liabilities and of ABM's obligations
under Section 7(b) hereof (the "Guaranteed Obligations").
3. Representations and Warranties of National Western. National
Western represents and warrants to ABM and American National that, as of the
date hereof and the Effective Date:
(a) Due Organization. National Western is a Colorado insurance
corporation duly organized and validly existing under the laws of Colorado and
has full corporate power and authority to execute, deliver, and perform this
Agreement.
(b) Due Authorization. The execution, delivery, and performance of
this Agreement have been and remain duly authorized by all necessary corporate
action and do not contravene any provision of National Western's articles of
incorporation or bylaws, as amended to date, or any law, regulation, rule,
decree, order, judgment, or contractual restriction binding on National
Western or its assets.
(c) Consents. All consents, licenses, authorizations, and
approvals of, and registrations and declarations with, any governmental
authority or regulatory body necessary for the due execution, delivery, and
performance of this Agreement have been obtained and remain in full force and
effect, and all conditions thereof have been duly complied with, and no other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required in connection with the execution, delivery, or
performance of this Agreement.
(d) Binding Obligation. This Agreement constitutes the legal,
valid, and binding obligation of National Western and is enforceable against
National Western in accordance with its terms, subject, as to enforceability,
to bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership, and other laws of general applicability relating to or affecting
creditors' rights, and to equitable principles of general application.
(e) No Litigation or Claims. There is no litigation pending or, to
National Western's knowledge, threatened, either individually or in the
aggregate which, if determined adversely to National Western would materially
and adversely affect its execution, delivery, or performance of this
Agreement.
(f) Class A Preferred Stock.
(i) National Western understands that the Class A Preferred
Stock has not been and will not be registered under the Securities Act or any
other securities laws or regulations. Accordingly, the Class A Preferred
Stock may not be offered, sold, transferred, pledged, hypothecated, or
otherwise disposed of, except in a transaction exempt from the registration
requirements of the Securities Act and any other applicable securities laws
and regulations.
(ii) National Western understands that neither ABM nor any
person representing ABM has made any representations with respect to ABM or
the offering or sale of the Class A Preferred Stock other than as set forth or
specifically referred to herein.
(iii) National Western has had access to such financial and
other information concerning ABM as National Western has deemed necessary in
connection with National Western's decision to purchase the Class A Preferred
Stock. National Western has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
purchase of the Class A Preferred Stock.
(iv) National Western is acquiring the Class A Preferred Stock
for its own account. National Western will not offer, sell, or transfer,
directly or indirectly, any Class A Preferred Stock except in transactions
exempt from the Securities Act and any other applicable securities laws and
regulations.
(v) National Western is not acquiring the Class A Preferred
Stock directly or indirectly with the assets of any employee benefit plan.
4. Representations and Warranties of NWL Services. NWL Services
represents and warrants to ABM that, as of the date hereof and the Effective
Date:
(a) Due Organization. NWL Services is a Nevada corporation duly
organized and validly existing under the laws of Nevada and has full corporate
power and authority to execute, deliver, and perform this Agreement.
(b) Due Authorization. The execution, delivery and performance of
this Agreement have been and remain duly authorized by all necessary corporate
action and do not contravene any provision of NWL Services's articles of
incorporation or bylaws, as amended to date, or any law, regulation, rule,
decree, order, judgment, or contractual restriction binding on NWL Services or
its assets.
(c) Consents. All consents, licenses, authorizations, and
approvals of, and registrations and declarations with, any governmental
authority or regulatory body necessary for the due execution, delivery, and
performance of this Agreement have been obtained and remain in full force and
effect, and all conditions thereof have been duly complied with, and no other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required in connection with the execution, delivery, or
performance of this Agreement.
(d) Binding Obligation. This Agreement constitutes the legal,
valid, and binding obligation of NWL Services and is enforceable against NWL
Services in accordance with its terms, subject, as to enforceability, to
bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership, and other laws of general applicability relating to or affecting
creditors' rights, and to equitable principles of general application.
(e) No Litigation or Claims. There is no litigation pending or, to
NWL Services's knowledge, threatened, either individually or in the aggregate
which, if determined adversely to NWL Services would materially and adversely
affect its execution, delivery, or performance of this Agreement.
(f) Class B Preferred Stock.
(i) NWL Services understands that the Class B Preferred Stock
has not been and will not be registered under the Securities Act or any other
securities laws or regulations. Accordingly, the Class B Preferred Stock may
not be offered, sold, transferred, pledged, hypothecated, or otherwise
disposed of, except in a transaction exempt from the registration requirements
of the Securities Act and any other applicable securities laws and
regulations.
(ii) NWL Services understands that neither ABM nor any person
representing ABM has made any representations with respect to ABM or the
offering or sale of the Class B Preferred Stock other than as set forth or
specifically referred to herein.
(iii) NWL Services has had access to such financial and
other information concerning ABM as NWL Services has deemed necessary in
connection with NWL Services's decision to purchase the Class B Preferred
Stock. NWL Services has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
purchase of the Class B Preferred Stock.
(iv) NWL Services is acquiring the Class B Preferred Stock for
its own account and not with a view to or for sale in connection with a
distribution of the Class B Preferred Stock. NWL Services will not offer,
sell, or transfer, directly or indirectly, any Class B Preferred Stock except
in transactions exempt from the Securities Act and any other applicable
securities laws and regulations.
(v) NWL Services is not acquiring the Class B Preferred Stock
directly or indirectly with the assets of any employee benefit plan.
5. Representations and Warranties of ABM. ABM hereby represents and
warrants to National Western and NWL Services that, as of the date hereof and
the Effective Date:
(a) Due Organization. ABM is a Nevada corporation duly organized
and validly existing under the laws of Nevada and has full corporate power and
authority to execute, deliver, and perform this Agreement.
(b) Due Authorization. The execution, delivery, and performance of
this Agreement have been and remain duly authorized by all necessary corporate
action and do not contravene any provision of ABM's articles of incorporation
or by-laws, as amended to date, or any law, regulation, rule, decree, order,
judgment, or contractual restriction binding on ABM or its assets.
(c) Consents. All consents, licenses, authorizations, and
approvals of, and registrations and declarations with, any governmental
authority or regulatory body necessary for the due execution, delivery, and
performance of this Agreement have been obtained and remain in full force and
effect, and all conditions thereof have been duly complied with, and no other
action by, and no notice to or filing with, any governmental authority or
regulatory body is required in connection with the execution, delivery, or
performance of this Agreement.
(d) Binding Obligation. This Agreement constitutes the legal,
valid, and binding obligation of ABM and is enforceable against ABM in
accordance with its terms, subject, as to enforceability, to bankruptcy,
insolvency, reorganization, moratorium, conservatorship, receivership, and
other laws of general applicability relating to or affecting creditors'
rights, and to equitable principles of general application.
(e) No Litigation or Claims. There is no litigation pending or, to
ABM's knowledge, threatened, either individually or in the aggregate which, if
determined adversely to ABM, would materially and adversely affect the
issuance of its Class A Preferred Stock to National Western or Class B
Preferred Stock to NWL Services, the value of its Class A Preferred Stock or
Class B Preferred Stock, or its execution, delivery, or performance of this
Agreement.
(f) Right to Accept Transfers, Assume Liabilities, and Issue Class
A Preferred Stock and Class B Preferred Stock. ABM has the right, power, and
authority to (i) accept the National Western and NWL Services Cash
Contributions, (ii) assume and be liable for the Liabilities associated with
the Employee Benefit Program and, (iii) upon the receipt and assignment of the
Cash Contributions and the assumption of the Liabilities, to issue the Class A
Preferred Stock to National Western and Class B Preferred Stock to NWL
Services in exchange therefor, in accordance with the terms of this Agreement.
(g) Class A Preferred Stock.
(i) Assuming the accuracy of National Western's
representations and warranties and National Western's compliance with the
agreements set forth in Section 3 hereof, the sale of the Class A Preferred
Stock is exempt from registration under the Securities Act.
(ii) The Class A Preferred Stock has not been and will not be
registered under the Securities Act or any other securities laws or
regulations. The Class A Preferred Stock will be subject to certain
restrictions on the transferability thereof.
(h) Class B Preferred Stock.
(i) Assuming the accuracy of NWL Services's representations
and warranties and NWL Services's compliance with the agreements set forth in
Section 4 hereof, the sale of the Class B Preferred Stock is exempt from
registration under the Securities Act.
(ii) The Class B Preferred Stock has not been and will not be
registered under the Securities Act or any other securities laws or
regulations. The Class B Preferred Stock will be subject to certain
restrictions on the transferability thereof.
6. Representations and Warranties of American National. American
National hereby represents and warrants to National Western and NWL Services
that, as of the date hereof and the Effective Date:
(a) Due Organization. American National is a Texas insurance
corporation duly organized and validly existing under the laws of Texas and
has full corporate power and authority to execute, deliver, and perform this
Agreement.
(b) Due Authorization. The execution, delivery, and performance of
this Agreement have been and remain duly authorized by all necessary corporate
action and do not contravene any provision of American National's articles of
incorporation or by-laws, as amended to date, or any law, regulation, rule,
decree, order, judgment, or contractual restriction binding on American
National or its assets.
(c) Consents. All consents, licenses, authorizations, and approval
of, and registrations and declarations with, any governmental authority or
regulatory body necessary for the due execution, delivery, and performance of
this Agreement have been obtained and remain in full force and effect, and all
conditions thereof have been duly complied with, and no other action by, and
no notice to or filing with, any governmental authority or regulatory body is
required in connection with the execution, delivery, or performance of this
Agreement.
(d) Binding Obligation. This Agreement constitutes the legal,
valid, and binding obligation of American National and is enforceable against
American National in accordance with its terms, subject, as to enforceability,
to bankruptcy, insolvency, reorganization, moratorium, conservatorship,
receivership, and other laws of general applicability relating to or affecting
creditors' rights, and to equitable principles of general application.
(e) No Litigation or Claims. There is no litigation pending or, to
American National's knowledge, threatened, either individually or in the
aggregate which, if determined adversely to American National, would
materially and adversely affect the performance of this Agreement.
7. Covenants Regarding Transaction, Liabilities, and Transfers of Class
A Preferred Stock.
(a) Decision To Enter into Transaction.
(i) National Western is a sophisticated investor. National
Western's decision to enter into this Agreement with ABM is based upon its
independent evaluation of the Class A Preferred Stock and the financial
condition of ABM. In entering into this Agreement, National Western has not
relied upon any oral or written information provided by ABM, other than the
representations and warranties of ABM contained herein. National Western
acknowledges that no officer, director, employee, agent, or representative of
ABM has been authorized to make, and that National Western has not relied
upon, any statements or representations other than those specifically
contained in this Agreement.
(ii) ABM is a sophisticated investor. ABM's decision to enter
into this Agreement with National Western is based upon its independent
evaluation of the transfer by National Western to it as provided hereunder of
the National Western Cash Contribution and the Liabilities. In entering into
this Agreement, ABM has not relied upon any oral or written information
provided by National Western, other than the representations and warranties of
National Western contained herein. ABM acknowledges that no officer,
director, employee, agent, or representative of National Western has been
authorized to make, and that ABM has not relied upon, any statements or
representations other than those specifically contained in this Agreement.
(b) Liabilities.
(i) In General. ABM covenants with National Western and their
respective successors and permitted assigns that, from and after the Effective
Date, ABM (A) shall be liable for the Liabilities associated with the Employee
Benefit Program and (B) shall indemnify, defend, and hold National Western and
their respective successors and permitted assigns harmless from same. ABM and
American National shall not secure or fund their obligations hereunder or take
any other action that would cause the Employee Benefit Program to be
considered funded or secured for purposes of the Employee Retirement Income
Security Act of 1974, as amended, or the Internal Revenue Code of 1986, as
amended.
(ii) ABM's Responsibility Regarding Payments of Liabilities
When National Western Is Insolvent.
Notwithstanding anything to the contrary herein:
(A) ABM (and American National if applicable) shall cease
payment of benefits to Employee Benefit Program participants and their
beneficiaries if National Western is Insolvent. National Western shall be
considered "Insolvent" for the purposes of this Agreement if: (1) National
Western is unable to pay its debts as they become due; or (2) National Western
is placed into receivership by the Colorado Department of Insurance or
ancillary receivership by any state in which National Western is licensed.
(B) At all times during the continuance of this
Agreement:
(1) The Board of Directors and Chief Executive
Officer of National Western have the duty to inform ABM in writing of National
Western's Insolvency. If a person claiming to be a creditor of National
Western alleges in writing to ABM that National Western has become Insolvent,
ABM shall determine whether National Western is Insolvent and, pending such
determination, ABM (and American National if applicable) shall discontinue
payment of benefits to Employee Benefit Program participants or their
beneficiaries.
(2) Unless ABM has actual knowledge of National
Western's Insolvency, or has received notice from National Western or a person
claiming to be a creditor alleging that National Western is Insolvent, ABM
shall have no duty to inquire whether National Western is Insolvent. ABM may
in all events rely on such evidence concerning National Western's solvency as
may be furnished to ABM and that provides ABM with a reasonable basis for
making a determination concerning National Western's solvency.
(3) If at any time ABM has determined that National
Western is Insolvent or has been notified by the Chief Executive Officer or
the Board of Directors of National Western that National Western is Insolvent,
ABM (and American National if applicable) shall discontinue payments to
Employee Benefit Program participants or their beneficiaries and shall
immediately remit the then fair market value of the Liabilities to National
Western. Nothing in this Agreement shall in any way diminish any rights of
Employee Benefit Program participants or their beneficiaries to pursue their
rights as general creditors of National Western with respect to benefits due
under the Employee Benefit Program or otherwise.
(C) Upon payment to National Western under Section
7(b)(ii)(B)(3) above, all obligations of ABM under this Agreement shall
terminate.
(c) American National Guarantee.
(i) American National's guaranty hereunder shall be an
absolute, continuing, irrevocable, and unconditional guaranty of payment and
performance, and not a guaranty of collection, and American National shall
remain liable on its obligations hereunder until the payment and performance
in full of the Guaranteed Obligations. No set-off, counterclaim, recoupment,
reduction, or diminution of any obligation, or any defense of any kind or
nature which ABM may have against National Western or any other party, or
which American National may have against ABM, National Western, or any other
party, shall be available to, or shall be asserted by, American National
against National Western or its successor or any part thereof or against
payment of the Guaranteed Obligations or any part thereof.
(ii) If American National becomes liable for the Guaranteed
Obligations, other than under this Agreement, such liability shall not be in
any manner impaired or affected hereby, and the rights of National Western
hereunder shall be cumulative of any and all other rights that it may ever
have against American National. The exercise by American National of any
right or remedy hereunder or under any other instrument, or at law or in
equity, shall not preclude the concurrent or subsequent exercise of any right
or remedy.
(iii) In the event of default by ABM in payment or
performance of the Guaranteed Obligations, or any part thereof, when such
Guaranteed Obligations become due, whether by their terms or otherwise,
American National agrees to promptly pay the amount due thereon to the
applicable beneficiary (subject to Section 7(b)(ii) hereof) under the Employee
Benefit Program or to National Western, without notice or demand in lawful
currency of the United States of America, and it shall not be necessary for
National Western, in order to enforce such payment by American National, first
to institute suit or exhaust its remedies against ABM or others liable for
such Guaranteed Obligations. Notwithstanding anything to the contrary
contained in this Agreement, American National hereby irrevocably subordinates
to the prior indefeasible payment in full of the Guaranteed Obligations, any
and all rights American National may now or hereafter have under this
Agreement or at law or in equity (including, without limitation, the law
subrogating American National to the rights of National Western) to assert the
claim against or seek contribution, indemnification or any other form of
reimbursement from ABM or any other party liable for payment of any or all of
the Guaranteed Obligations for the payment made by American National under or
in connection with this Agreement or otherwise.
(iv) If payment of any amount payable by ABM under the
Guaranteed Obligations is stayed upon the insolvency, bankruptcy, or
reorganization of ABM, all such amounts otherwise subject to payment under the
terms of the Guaranteed Obligations shall nonetheless be payable by American
National hereunder forthwith on demand by National Western.
(v) American National hereby agrees that its obligations
hereunder shall not be released, discharged, diminished, impaired, reduced, or
affected for any reason or by the occurrence of any event, including, without
limitation, one or more of the following events, whether or not with notice to
or the consent of American National: (A) the taking or accepting of
collateral as security for any or all of the Guaranteed Obligations or the
release, surrender, exchange, or subordination of any such collateral now or
hereafter securing any or all of the Guaranteed Obligations; (B) any partial
release of the liability of American National hereunder; (C) any disability of
ABM, or the dissolution, insolvency, or bankruptcy of ABM, American National,
or any other party at any time liable for the payment of any or all of the
Guaranteed Obligations; (D) any renewal, extension, modification, waiver,
amendment, or rearrangement of any or all of the Guaranteed Obligations or any
instrument, document, or agreement evidencing, securing, or otherwise relating
to any or all of the Guaranteed Obligations; (E) any adjustment, indulgence,
forbearance, waiver, or compromise that may be granted or given by National
Western to ABM, American National, or any other party ever liable for any or
all of the Guaranteed Obligations; (F) any neglect, delay, omission, failure,
or refusal of National Western to take or prosecute any action for the
collection of any of the Guaranteed Obligations or to foreclose or take or
prosecute any action in connection with any instrument, document, or agreement
evidencing, securing, or otherwise relating to any or all of the Guaranteed
Obligations; (G) the unenforceability or invalidity of any or all of the
Guaranteed Obligations or of any instrument, document, or agreement
evidencing, securing, or otherwise relating to any or all of the Guaranteed
Obligations; (H) any payment by ABM or any other party to National Western is
held to constitute a preference under applicable bankruptcy or insolvency law
or if for any other reason National Western is required to refund any payment
or pay the amount thereof to someone else; (I) the settlement or compromise of
any of the Guaranteed Obligations; (J) any change in the corporate existence,
structure, or ownership of ABM; or (K) any other circumstance which might
otherwise constitute a defense available to, or discharge of, ABM or American
National.
(d) Class A Preferred Stock.
(i) National Western agrees that if it decides to transfer all
or any part of its shares of Class A Preferred Stock to a third party, ABM may
in its sole discretion require (A) an investment letter, in form and substance
satisfactory to ABM, signed by National Western and such third party,
certifying as to the facts surrounding such transaction, and/or (B) a written
opinion of counsel (which shall not be at the expense of ABM), in form and
substance satisfactory to ABM, to the effect that such transaction will not
violate the Securities Act or any applicable state securities laws.
(ii) ABM agrees that if National Western decides to transfer
all or any part of its shares of Class A Preferred Stock to a third party, ABM
shall provide any and all information and documents reasonably requested by
National Western and shall otherwise reasonably cooperate with National
Western to ensure that any such transfer is made by National Western in
compliance with all applicable federal and state securities laws, rules, and
regulations.
8. Covenants Regarding Transaction and Transfers of Class B Preferred
Stock.
(a) Decision To Enter into Transaction.
(i) NWL Services is a sophisticated investor. NWL Services's
decision to enter into this Agreement with ABM is based upon its independent
evaluation of the Class B Preferred Stock and the financial condition of ABM.
In entering into this Agreement, NWL Services has not relied upon any oral or
written information provided by ABM, other than the representations and
warranties of ABM contained herein. NWL Services acknowledges that no
officer, director, employee, agent, or representative of ABM has been
authorized to make, and that NWL Services has not relied upon, any statements
or representations other than those specifically contained in this Agreement.
(ii) ABM is a sophisticated investor. ABM's decision to enter
into this Agreement with NWL Services is based upon its independent evaluation
of the transfer by NWL Services to it as provided hereunder of the NWL
Services Cash Contribution. In entering into this Agreement, ABM has not
relied upon any oral or written information provided by NWL Services, other
than the representations and warranties of NWL Services contained herein. ABM
acknowledges that no officer, director, employee, agent, or representative of
NWL Services has been authorized to make, and that ABM has not relied upon,
any statements or representations other than those specifically contained in
this Agreement.
(b) Class B Preferred Stock.
(i) NWL Services agrees that if it decides to transfer all or
any part of its shares of Class B Preferred Stock to a third party, ABM may in
its sole discretion require (A) an investment letter, in form and substance
satisfactory to ABM, signed by NWL Services and such third party, certifying
as to the facts surrounding such transaction, and/or (B) a written opinion of
counsel (which shall not be at the expense of ABM), in form and substance
satisfactory to ABM, to the effect that such transaction will not violate the
Securities Act or any applicable state securities laws.
(ii) ABM agrees that if NWL Services decides to transfer all or
any part of its shares of Class B Preferred Stock to a third party, ABM shall
provide any and all information and documents reasonably requested by NWL
Services and shall otherwise reasonably cooperate with NWL Services to ensure
that any such transfer is made by NWL Services in compliance with all
applicable federal and state securities laws, rules, and regulations.
9. Miscellaneous Provisions.
(a) Severability of Provisions. Any provision of this Agreement
which is illegal, invalid, prohibited, or unenforceable shall be ineffective
to the extent of such illegality, invalidity, prohibition, or unenforceability
without invalidating or impairing the remaining provisions hereof.
(b) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of National Western, NWL Services, ABM, and
American National and their respective successors and permitted assigns. No
party may assign its rights or delegate its obligations hereunder without the
prior written consent of the other parties; provided, however, that National
Western and NWL Services shall have the right to assign their rights and
delegate their obligations hereunder to a parent, any affiliate or subsidiary,
or to any successor by merger, reorganization, or acquisition of substantially
all of its assets, without ABM's consent.
(c) Sole Benefit. This Agreement and all of its provisions are for
the sole benefit of National Western, NWL Services, ABM, and American National
and their respective successors and permitted assigns. No third party shall
be a beneficiary of this Agreement, including with respect to any assets
transferred to ABM. In particular, this Agreement shall not grant any rights
or recourse to the employee participants or the beneficiaries thereof in
addition to those granted in the Employee Benefit Program.
(d) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which,
taken together, shall constitute one and the same instrument.
(e) Governing Law. This Agreement is made pursuant to, and shall
be construed and governed in accordance with, the laws of the State of Texas,
without regard to its conflict of laws provisions.
(f) Notices. Any notice or other communication hereunder with
respect to this Agreement shall be in writing and shall be deemed duly given
if delivered in person or sent by certified or registered mail or the
equivalent (with return receipt requested), or by overnight delivery service,
or by facsimile transmission, addressed as follows:
If to National Western:
National Western Life Insurance Company
850 East Anderson Lane
Austin, Texas 78752
Attention: Ross R. Moody
If to NWL Services:
NWL Services, Inc.
639 Isbell Road, Suite 390
Reno, Nevada 89509
Attention: Janice George
If to ABM:
Alternative Benefit Management, Inc.
One Moody Plaza
Galveston, Texas 77550
Attention: G. Richard Ferdinandtsen
If to American National:
American National Insurance Company
One Moody Plaza
Galveston, Texas 77550
Attention: Stephen E. Pavlicek
The name, address, and/or facsimile number for any person to whom any notice
is to be sent may be changed by written notice given in the manner provided in
this Section.
(g) Exhibits. Exhibit A to this Agreement is incorporated herein
and made a part hereof.
(h) Amendment. This Agreement may be amended only by a written
instrument signed by National Western, NWL Services, ABM, and American
National. No amendment, modification, or release of the provisions of this
Agreement shall be established by conduct, custom, or course of dealing.
(i) Further Assurances. Subject to the terms and conditions of
this Agreement, each of the parties agrees to use its best efforts to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to effect the transactions contemplated by this
Agreement, including, without limitation, the performance of such further acts
or the execution and delivery of such additional instruments or documents as
any party may reasonably request in order to carry out the purposes of this
Agreement and the transactions contemplated hereby.
(j) Confidentiality Provision. Each party hereto agrees that,
except as otherwise required by law, rule, regulation, or order, it shall keep
the contents of this Agreement and any information related to this Agreement
confidential and further agrees that it shall not generate or participate in
any publicity, publication, or media release, public announcement, or public
disclosure, whether oral or written, regarding this Agreement without the
prior written consent of the other parties. The provisions of the preceding
sentence shall not in any way limit any party's right to discuss any matters
relating to this Agreement with its respective regulators, consultants,
accountants, and attorneys.
(k) Section Headings. Section headings of this Agreement are
solely for convenience of reference and shall not be deemed a part of, nor
shall they govern the interpretation of any of the provisions in, this
Agreement.
(l) Entire Agreement. This Agreement, together with any separate
agreements specifically referenced herein, contains the entire agreement
between and among National Western, NWL Services, ABM, and American National
with respect to the subject matter hereof and supersedes all prior and
contemporaneous negotiations, arrangements, understandings, and agreements,
whether oral or written, express or implied, between and among them with
respect to the subject matter hereof. There are no written or oral
agreements, understandings, representations, or warranties between or among
the parties hereto other than those set forth herein.
IN WITNESS WHEREOF, National Western, NWL Services, ABM, and American
National have caused their names to be signed hereto as of the day and year
first written above.
NATIONAL WESTERN LIFE INSURANCE COMPANY, a
Colorado insurance corporation
By: /S/ Ross R. Moody
Ross R. Moody
Its: President and Chief Operating Officer
NWL SERVICES, INC., a Nevada corporation
By: /S/ Arthur O. Dummer
Arthur O. Dummer
Its: Vice President
ALTERNATIVE BENEFIT MANAGEMENT, INC., a Nevada
corporation
By: /S/ Stephen E. Pavlicek
Stephen E. Pavlicek
Its: Senior Vice President - Controller
AMERICAN NATIONAL INSURANCE COMPANY, a Texas
insurance corporation
By: /S/ G. Richard Ferdinandsten
G. Richard Ferdinandtsen
Its: Senior Executive Vice President and Chief
Operating Officer
Exhibit A
Liabilities
The Liabilities valued as of October 1, 1998, are as follows:
Non-Qualified Defined Benefit Plan $ 4,880,000
The Liabilities transferred under the Non-Qualified Defined Benefit Plan
do not include the following:
(1) Any amounts attributable to retirement dates beyond age seventy (70)
have been retained by National Western;
(2) Any amounts attributable to aggregate average annual salary
increases exceeding 10% per year have been retained by National
Western; and
(3) Any amounts attributable to participants in the Employee Benefit
Program other than participants includable as of the Effective Date
have been retained by National Western.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
The Westcap Corporation Delaware
NWL Investments, Inc. Texas
NWL Properties, Inc. Texas
NWL 806 Main, Inc. Texas
NWL Services, Inc. Nevada
NWL Financial, Inc. Nevada
All of the subsidiaries listed above are wholly owned by National Western Life
Insurance Company. The subsidiaries conduct business under the same corporate
names as detailed above.
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 719,875
<DEBT-CARRYING-VALUE> 2,029,728
<DEBT-MARKET-VALUE> 2,124,715
<EQUITIES> 15,712
<MORTGAGE> 174,921
<REAL-ESTATE> 13,553
<TOTAL-INVEST> 3,138,084
<CASH> 24,508
<RECOVER-REINSURE> 224
<DEFERRED-ACQUISITION> 314,493
<TOTAL-ASSETS> 3,518,003
<POLICY-LOSSES> 2,979,478
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,272
<POLICY-HOLDER-FUNDS> 9,683
<NOTES-PAYABLE> 2,571
0
0
<COMMON> 3,498
<OTHER-SE> 434,867
<TOTAL-LIABILITY-AND-EQUITY> 3,518,003
96,334<F1>
<INVESTMENT-INCOME> 233,844
<INVESTMENT-GAINS> 2,384
<OTHER-INCOME> 1,052
<BENEFITS> 191,330<F2>
<UNDERWRITING-AMORTIZATION> 40,415
<UNDERWRITING-OTHER> 35,504
<INCOME-PRETAX> 66,365
<INCOME-TAX> 17,347
<INCOME-CONTINUING> 49,018
<DISCONTINUED> (14,125)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,893
<EPS-PRIMARY> 9.98
<EPS-DILUTED> 9.87
<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 $13,165 revenues from traditional contracts subject to FAS 60
accounting treatment and $83,169 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $35,646 benefits paid to policyholders, $(3,205) decrease in
reserves on traditional contracts and $158,889 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
