UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ X ] No [ ]
As of November 12, 1999, the number of shares of Registrant's common stock
outstanding was: Class A - 3,300,728 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statements of Earnings
For the Three Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Earnings
For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended September 30, 1999 and 1998 (Unaudited)
Exhibit 11 - Computation of Earnings per Share
For the Nine Months Ended September 30, 1999 and 1998 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,150,111 2,029,728
Securities available for
sale, at fair value 707,966 735,587
Mortgage loans, net of
allowances for possible
losses ($3,904 and $4,640) 168,990 174,921
Policy loans 117,286 124,441
Index options 21,253 23,900
Other long-term investments 33,066 24,999
Cash and short-term investments 3,891 24,508
Total cash and investments 3,202,563 3,138,084
Accrued investment income 45,753 44,777
Deferred policy acquisition costs 356,240 314,493
Other assets 21,653 20,601
Assets of discontinued operations - 48
$ 3,626,209 3,518,003
<FN>
Note: The balance sheet at December 31, 1998, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 165,658 167,248
Universal life and investment
annuity contracts 2,933,691 2,812,230
Other policyholder liabilities 23,419 23,955
Federal income taxes payable:
Current - 5,221
Deferred 8,038 9,646
Other liabilities 35,948 61,290
Liabilities of discontinued operations - 48
Total liabilities 3,166,754 3,079,638
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,300,728
and 3,298,128 shares issued and
outstanding in 1999 and 1998 3,301 3,298
Class B - $1 par value; 200,000
shares authorized, issued,
and outstanding in 1999 and 1998 200 200
Additional paid-in capital 25,028 24,899
Accumulated other comprehensive income 705 18,634
Retained earnings 430,221 391,334
Total stockholders' equity 459,455 438,365
$ 3,626,209 3,518,003
<FN>
Note: The balance sheet at December 31, 1998, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 2,559 3,050
Universal life and investment
annuity contract revenues 21,131 22,150
Net investment income 44,562 50,689
Other income 8,583 80
Realized gains on investments 191 606
Total premiums and other revenue 77,026 76,575
Benefits and expenses:
Life and other policy benefits 9,654 9,155
Decrease in liabilities for
future policy benefits (941) (945)
Amortization of deferred policy
acquisition costs 9,705 11,137
Universal life and investment
annuity contract interest 32,565 33,177
Other operating expenses 6,973 7,501
Total benefits and expenses 57,956 60,025
Earnings before Federal income
taxes and discontinued operations 19,070 16,550
Provision (benefit) for Federal income taxes:
Current (1,136) (26)
Deferred 7,620 680
Total Federal income taxes 6,484 654
Earnings from continuing operations 12,586 15,896
Losses from discontinued operations - (14,125)
Net earnings $ 12,586 1,771
Basic Earnings Per Share:
Earnings from continuing operations $ 3.60 4.55
Losses from discontinued operations - (4.04)
Net earnings $ 3.60 0.51
Diluted Earnings Per Share:
Earnings from continuing operations $ 3.57 4.48
Losses from discontinued operations - (3.98)
Net earnings $ 3.57 0.50
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 8,351 9,617
Universal life and investment
annuity contract revenues 63,321 62,741
Net investment income 167,118 163,488
Other income 8,860 891
Realized gains on investments 5,869 2,114
Total premiums and other revenue 253,519 238,851
Benefits and expenses:
Life and other policy benefits 26,807 28,283
Decrease in liabilities for
future policy benefits (1,590) (2,438)
Amortization of deferred
policy acquisition costs 29,711 31,537
Universal life and investment
annuity contract interest 118,169 108,727
Other operating expenses 21,502 21,829
Total benefits and expenses 194,599 187,938
Earnings before Federal income
taxes and discontinued operations 58,920 50,913
Provision (benefit) for Federal income taxes:
Current 11,988 12,619
Deferred 8,045 (242)
Total Federal income taxes 20,033 12,377
Earnings from continuing operations 38,887 38,536
Losses from discontinued operations - (14,125)
Net earnings $ 38,887 24,411
Basic Earnings Per Share:
Earnings from continuing operations $ 11.11 11.03
Losses from discontinued operations - (4.04)
Net earnings $ 11.11 6.99
Diluted Earnings Per Share:
Earnings from continuing operations $ 11.01 10.91
Losses from discontinued operations - (4.00)
Net earnings $ 11.01 6.91
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net earnings $ 12,586 1,771
Other comprehensive income (loss),
net of effects of
deferred policy acquisition costs and taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (3,518) 5,328
Reclassification adjustment
for net gains and losses
included in net earnings (529) (228)
Amortization of net unrealized
gains related to transferred securities (114) (67)
Net unrealized gains
(losses) on securities (4,161) 5,033
Foreign currency translation adjustments 335 -
Other comprehensive income (loss) (3,826) 5,033
Comprehensive income $ 8,760 6,804
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net earnings $ 38,887 24,411
Other comprehensive income (loss),
net of effects of
deferred policy acquisition costs and taxes:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during period (15,464) 6,930
Reclassification adjustment
for net gains and losses
included in net earnings (2,577) (645)
Amortization of net unrealized gains
related to transferred securities (145) (401)
Net unrealized gains (losses)
on securities (18,186) 5,884
Foreign currency translation adjustments 257 (35)
Other comprehensive income (loss) (17,929) 5,849
Comprehensive income $ 20,958 30,260
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,498 3,492
Shares exercised under stock option plan 3 6
Balance at end of period 3,501 3,498
Additional paid-in capital:
Balance at beginning of year 24,899 24,662
Shares exercised under stock option plan 129 237
Balance at end of period 25,028 24,899
Accumulated other comprehensive income:
Unrealized gains (losses) on securities:
Balance at beginning of year 16,000 13,782
Change in unrealized gains
(losses) during period (18,186) 5,884
Balance at end of period (2,186) 19,666
Foreign currency translation adjustments:
Balance at beginning of year 2,634 2,486
Change in translation adjustments
during period 257 (35)
Balance at end of period 2,891 2,451
Accumulated other comprehensive
income at end of period 705 22,117
Retained earnings:
Balance at beginning of year 391,334 356,441
Net earnings 38,887 24,411
Balance at end of period 430,221 380,852
Total stockholders' equity $ 459,455 431,366
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 38,887 24,411
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment
annuity contract interest 118,169 108,727
Surrender charges and other
policy revenues (29,131) (30,884)
Realized gains on investments (5,869) (2,114)
Accrual and amortization of
investment income (3,761) (6,397)
Depreciation and amortization 735 737
Decrease in insurance receivables
and other assets 6,309 864
Increase in accrued investment income (976) (1,553)
Increase in deferred policy
acquisition costs (18,795) (15,008)
Decrease in liability for future
future policy benefits (1,590) (2,438)
Decrease in other policyholder liabilities (536) (197)
Decrease in Federal income taxes payable (4,067) (7,160)
Increase (decrease) in other liabilities (25,342) 12,121
Decrease in value of index options 12,039 5,201
Other (364) (245)
Net cash provided by operating activities 85,708 86,065
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 2,978
Securities available for sale 50,897 -
Other investments 15,910 2,595
Proceeds from maturities and
redemptions of:
Securities held to maturity 59,573 77,855
Securities available for sale 46,808 45,296
Purchases of:
Securities held to maturity (178,121) (226,321)
Securities available for sale (115,600) (83,125)
Other investments (31,679) (13,252)
Principal payments on mortgage loans 36,113 31,421
Cost of mortgage loans acquired (29,315) (6,642)
Decrease in policy loans 7,155 7,901
Decrease in assets of
discontinued operations 48 283
Decrease in liabilities
of discontinued operations (48) 13,842
Other (982) (349)
Net cash used in investing activities (139,241) (147,518)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances
for universal life
and investment annuity contracts $ 310,217 327,897
Return of account balances
on universal life
and investment annuity contracts (277,433) (263,385)
Issuance of common stock under
stock option plan 132 243
Net cash provided by financing activities 32,916 64,755
Net increase (decrease) in cash
and short-term investments (20,617) 3,302
Cash and short-term investments
at beginning of year 24,508 7,870
Cash and short-term investments
at end of period $ 3,891 11,172
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of National Western Life Insurance Company and its wholly-owned
subsidiaries (the Company), The Westcap Corporation (Westcap), NWL
Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services,
Inc., NWL Financial, Inc., and National Annuity Programs, Inc. The Westcap
Corporation ceased brokerage operations during 1995 and filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a
result, The Westcap Corporation is reflected as discontinued operations in the
accompanying financial statements for 1998 and prior years. The bankruptcy
reorganization was completed in January, 1999 and National Western retained
100% continuing ownership of the reorganized subsidiary. Westcap is now
operating as a real estate management company. The Company's new subsidiary,
National Annuity Programs, Inc., was acquired in September, 1999, as a result
of a litigation settlement as described in note 3 below. All significant
intercorporate transactions and accounts have been eliminated
in consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of September 30, 1999, and the results of its
operations for the three months and nine months ended September 30, 1999 and
1998, and its cash flows for the nine months ended September 30, 1999 and
1998. The results of operations for the three months and nine months ended
September 30, 1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
(2) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding are provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,498 3,492
Shares exercised under
stock option plan 3 6
Shares outstanding at end of period 3,501 3,498
</TABLE>
(B) Dividends
The Company paid no cash dividends on common stock during the nine months
ended September 30, 1999 and 1998.
(3) COMMITMENTS AND CONTINGENCIES
(A) Discontinued Brokerage Operations
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation, was completed in the first quarter of
1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in 1999 as the entire $14,125,000 settlement
payment was accrued and reported as a loss in the third quarter of 1998. Any
additional losses will depend on the results of The City Colleges lawsuit
filed against National Western on March 28, 1994, for alleged federal or state
securities law "control person" violations relating to Westcap, and which is
pending in the United States District Court, Western District of Texas.
National Western believes it has reasonable and adequate defenses to this suit
and, accordingly, no amounts have been accrued in National Western's financial
statements for potential losses relating to such suit.
(B) Other Litigation
On September 30, 1999, National Western Life Insurance Company (the Company),
National Annuity Programs, Inc. (NAP), Robert L. Myer (Myer), and certain
affiliates of Myer executed a Definitive Compromise Settlement Agreement
(Agreement) of the declaratory judgment lawsuit pending between them in the
District Court of Travis County, Texas. The declaratory judgment action was
filed by the Company and sought court construction of a general agent manager
contract and amendments thereto (Contract) between the Company and NAP entered
into in 1983 and amended thereafter, a declaration that the contract was
enforceable, but had been breached by NAP, and for damages from NAP. The
Company alleged tortious interference by Myer with the Contract, conspiracy
and damages. NAP and Myer had counter-claimed for declaratory judgment,
breach of contract, indemnity, fraud, statutory violations, damages and
attorneys' fees from the Company.
By the settlement each party dismisses with prejudice all claims asserted by
them in the pending lawsuit. NAP and Myer release the Company from any claim
for any funds and other rights arising under the Contract and from all
negligence and other claims arising prior to the Agreement. The Company
releases NAP, Myer and Myer affiliates from all negligence and other claims,
excluding any claims arising under the reinsurance contract between the
Company and NAP Life Insurance Company, a Myer affiliate. The Company
acquired NAP, and Myer indemnifies and holds the Company harmless from all
claims of any nature asserted against NAP based on its acts or omissions prior
to the Agreement, except for claims by policyholders and agents relating to
the sale of the Company's products. The Company indemnifies Myer for NAP acts
or omissions occurring after September 30, 1999. The Company will pay or
cause to be paid or released all valid claims for unpaid commissions to sub-
agents of NAP who wrote business for the Company under the Contract.
The Company had accrued agent commission liabilities totaling $9,642,000
related to the Contract. As a result of the Agreement, it is expected that
approximately $1,160,000 thereof could be paid as commissions due to NAP sub-
agents. The remaining $8,482,000 is no longer a liability of the Company and
will not be paid pursuant to the Contract. Accordingly, these remaining
accrued commissions were released from liabilities in the quarter ended
September 30, 1999, resulting in additional income of $8,482,000, before
taxes. It is anticipated that any future renewal premiums received by the
Company on currently issued and in force annuity policies written by NAP sub-
agents under the Contract could generate additional commissions for such sub-
agents. The payment of such future commissions is subject to and conditioned
upon receipt of such renewal premiums by the Company and compliance by the
sub-agents with the terms of the agents' contracts with the Company and NAP.
By separate Commutation Agreement dated September 30, 1999, Registrant and NAP
Life Insurance Company ("NAP Life"), an affiliate of Robert L. Myer, canceled
and terminated the Specific Benefit Reinsurance Agreement between them dated
March 1, 1988, whereby Registrant had ceded fifty percent (50%) of the
premiums, reserves and liabilities on a portion of its policies of insurance.
The effect of the Commutation Agreement did not have a significant impact on
the financial statements of the Company.
(4) SEGMENT AND OTHER OPERATING INFORMATION
The Company's reportable operating segments include domestic life insurance,
international life insurance, and annuities. These segments are organized
based on product types and geographic marketing areas. A summary of segment
information for the three and nine months ended September 30, 1999 and 1998 is
provided below.
Selected Segment Information:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Three Months Ended
September 30, 1999:
Premiums and
contract revenues $ 6,194 11,075 6,421 - 23,690
Net investment
income 6,318 5,484 32,335 425 44,562
Other income (35) (21) 8,639 - 8,583
Universal life
and investment
annuity contract
interest 2,430 3,503 26,632 - 32,565
Amortization of
deferred policy
acquisition costs 1,222 2,872 5,611 - 9,705
Federal income
taxes 1,245 1,164 3,863 145 6,417
Segment earnings 2,421 2,263 7,497 281 12,462
Segment assets 406,900 374,964 2,786,552 36,140 3,604,556
Three Months Ended
September 30, 1998:
Premiums and
contract revenues $ 5,990 10,503 8,707 - 25,200
Net investment
income 6,873 5,805 38,010 1 50,689
Other income 5 9 66 - 80
Universal life
and investment
annuity contract
interest 2,621 3,413 27,143 - 33,177
Amortization of
deferred policy
acquisition costs 1,507 3,020 6,610 - 11,137
Federal income
taxes 584 1,134 3,669 (1) 5,386
Segment earnings 1,152 2,210 7,194 2 10,558
Segment assets 410,359 371,655 2,605,046 16,661 3,403,721
</TABLE>
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 1999:
Premiums and
contract revenues $ 18,474 31,819 21,379 - 71,672
Net investment income 18,996 16,387 129,095 2,640 167,118
Other income 32 32 8,796 - 8,860
Universal life
and investment
annuity contract
interest 7,315 10,397 100,457 - 118,169
Amortization of
deferred policy
acquisition costs 3,614 9,434 16,663 - 29,711
Federal income
taxes 2,676 3,003 11,406 894 17,979
Segment earnings 5,219 5,858 22,248 1,747 35,072
Segment assets 406,900 374,964 2,786,552 36,140 3,604,556
Nine Months Ended
September 30, 1998:
Premiums and
contract revenues $ 18,005 29,853 24,500 - 72,358
Net investment
income 19,832 16,516 125,492 1,648 163,488
Other income 465 18 408 - 891
Universal life and
investment annuity
contract interest 7,392 10,042 91,293 - 108,727
Amortization of
deferred policy
acquisition costs 3,327 11,393 16,817 - 31,537
Federal income
taxes 2,575 1,847 11,599 560 16,581
Segment earnings 5,003 3,589 22,538 1,088 32,218
Segment assets 410,359 371,655 2,605,046 16,661 3,403,721
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Premiums and Other
Revenue:
Premiums and
contract revenues $ 23,690 25,200 71,672 72,358
Net investment income 44,562 50,689 167,118 163,488
Other income 8,583 80 8,860 891
Realized gains
on investments 191 606 5,869 2,114
Total consolidated
premiums
and other revenue $ 77,026 76,575 253,519 238,851
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Total segment
Federal income taxes $ 6,417 5,386 17,979 16,581
Taxes on realized
gains on investments 67 212 2,054 740
Tax benefits
from discontinued
operations - (4,944) - (4,944)
Total consolidated
Federal income taxes $ 6,484 654 20,033 12,377
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(In thousands)
<S> <C> <C> <C> <C>
Net Earnings:
Total segment earnings $ 12,462 10,558 35,072 32,218
Realized gains on
investments,
net of taxes 124 394 3,815 1,374
Losses from
discontinued
operations - (14,125) - (14,125)
Tax benefits
from discontinued
operations - 4,944 - 4,944
Total consolidated
net earnings $ 12,586 1,771 38,887 24,411
</TABLE>
<TABLE>
<CAPTION>
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Assets:
Total segment assets $ 3,604,556 3,403,721
Assets of discontinued operations - 609
Other unallocated assets 21,653 18,806
Total consolidated assets $ 3,626,209 3,423,136
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. The Company also accepts applications from and
issues policies to residents of various Central and South American, Caribbean,
and Pacific Rim countries. A distribution of the Company's direct premium
revenues and deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
United States domestic market:
Investment annuities 80.8% 81.9%
Life insurance 6.1 6.3
Total domestic market 86.9 88.2
International market:
Investment annuities 0.9 0.2
Life insurance 12.2 11.6
Total international market 13.1 11.8
Total direct premiums collected 100.0% 100.0%
</TABLE>
Insurance Operations - Domestic
The Company's domestic operations concentrate marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and equity-indexed annuities. Most of these annuities
can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and supervising agents. The Company
currently has over 80 IMOs contracted for sales of life and annuity products.
These IMOs are expected to meet minimum production standards set by the
Company.
Insurance Operations - International
The Company's international operations focus marketing efforts on foreign
nationals in upper socioeconomic classes with substantial financial resources.
Insurance sales are on insureds from countries in Central and South America,
the Caribbean, and the Pacific Rim. Policy sales on insureds from numerous
countries in these different regions provides diversification that helps to
minimize large fluctuations in sales that can occur due to various economic,
political, and competitive pressures that may occur from one country to
another. Products sold in the international market are almost entirely
universal life and traditional life insurance products. However, certain
annuity and investment contracts are also available in this market.
International sales production is from broker-agents, many of whom have been
selling National Western products for 20 or more years. The Company continues
to expand its sales networks in specifically targeted South American and
Pacific Rim countries which have higher growth potential than other countries.
There are inherent risks of conducting international business that are not
present within the domestic market. The risks involved with international
business are reduced substantially by the Company in several ways. As
previously described, the Company focuses its marketing efforts on a specific
niche group, which is foreign nationals in upper socioeconomic classes who
have substantial financial resources. This targeted customer base coupled
with National Western's conservative, yet competitive, underwriting practices
have historically resulted in claims experience similar to that in the United
States. The Company also minimizes exposure to foreign currency risks, as
almost all foreign policies require payment of premiums and claims in United
States dollars. Finally, the Company's experience in the international market
and its strong broker-agent relationships, which in many cases exceed 20
years, help minimize risks and problems when selling products to foreign
nationals.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of
investment grade debt and equity securities that provide adequate liquidity to
meet policyholder obligations and other cash needs. The prevailing strategy
within this philosophy is the intent to hold investments in debt securities to
maturity. However, the Company manages its portfolio, which entails monitoring
and reacting to all components which affect changes in the price, value, or
credit rating of investments in debt and equity securities.
Investments in debt and equity securities are classified and reported as
either securities held to maturity or securities available for sale. The
Company does not maintain a portfolio of trading securities. The reporting
category chosen for the Company's securities investments depends on various
factors including the type and quality of the particular security and how it
will be incorporated into the Company's overall asset/liability management
strategy. At September 30, 1999, approximately 25% 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 are 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 September 30, 1999
and December 31, 1998. The Company emphasizes investment grade debt
securities, with smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
September 30, December 31,
1999 1998
<S> <C> <C>
Debt securities 88.7% 87.6%
Mortgage loans 5.3 5.6
Policy loans 3.7 4.0
Index options 0.7 0.8
Equity securities 0.5 0.5
Real estate 0.4 0.4
Other 0.7 1.1
Totals 100.0% 100.0%
</TABLE>
Portfolio Analysis
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include primarily U.S. government agency
pass-through securities and collateralized mortgage obligations (CMOs).
At September 30, 1999, the Company's debt and equity securities were
classified as follows:
<TABLE>
<CAPTION>
Fair Amortized Unrealized
Value Cost Gains (Losses)
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,119,649 2,150,111 (30,462)
Securities available for sale:
Debt securities 691,957 706,527 (14,570)
Equity securities 16,009 12,755 3,254
Totals $ 2,827,615 2,869,393 (41,778)
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities are a
small component of the portfolio. Unrealized losses totaling $41,778,000 on
the securities portfolio at September 30, 1999, is a reflection of market
interest rates at quarter-end. The fair values, or market values, of fixed
income debt securities correlate to external market interest rate conditions.
Because the interest rates are fixed on almost all of the Company's debt
securities, market values typically increase when market interest rates
decline, and decrease when market interest rates rise. An analysis of the
change in unrealized gains and losses on the Company's securities portfolio
during the quarter ended September 30, 1999, is detailed below:
<TABLE>
<CAPTION>
Change in
Unrealized Gains (Losses) Unrealized
At At Gains (Losses)
September 30, June 30, During 3rd
1999 1999 Quarter 1999
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ (30,462) (4,286) (26,176)
Securities available for sale:
Debt securities (14,570) (2,954) (11,616)
Equity securities 3,254 3,643 (389)
Totals $ (41,778) (3,597) (38,181)
</TABLE>
Changes in interest rates typically have a significant impact on the market
values of the Company's debt securities. The substantial increase in
unrealized losses during the third quarter of 1999 is due to a significant
increase in interest rates. Market interest rates of the ten year U.S.
Treasury bond have risen over 120 basis points from year-end 1998, increasing
approximately 60, 50, and 10 basis points in the first, second, and third
quarters of 1999, respectively. However, because the majority of the
Company's debt securities are classified as held to maturity, which are
recorded at amortized cost, changes in market values have relatively small
effects on the Company's financial statements. Also, the Company has the
intent and ability to hold these securities to maturity, and it is unlikely
that sales of such securities would be required, which would realize market
gains or losses.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve a predictable spread between
what is earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest risk through surrender
charges that are imposed to discourage policy surrenders. Interest rate
changes can be anticipated and risk may be limited due to management actions
regarding asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest changes
will likely be different from actual changes experienced, and the differences
may be material.
The Company's market risk-sensitive assets include debt securities, equity
securities which are almost entirely preferred stocks, mortgage loans, policy
loans, and index options. The Company does not maintain a securities trading
portfolio. Market risk-sensitive liabilities include policy liabilities for
deferred and immediate investment annuity contracts and supplemental
contracts. Sensitivity analysis expresses the potential gain or loss in fair
value, over a selected time period, from one or more selected hypothetical
changes in interest rates which are reasonably possible in the near term. The
Company performed detailed sensitivity analysis at December 31, 1998, for its
interest rate-sensitive assets. Based on the recent increase in market
interest rates as previously described above, the changes in market values of
the Company's assets are within the expected range of results of this
analysis.
In addition to the securities described above, the Company invests in index
options which are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuities. The values of
these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500 Composite Stock
Price Index (S&P 500 Index). However, increases or decreases in investment
returns from these options are offset by corresponding increases or decreases
in amounts paid to equity-indexed annuity policyholders, subject to minimum
guaranteed policy interest rates. An example of this equity price risk is
reflected in the decline in the value of the Company's index options during
the third quarter of 1999. The S&P 500 Index declined approximately 6.6%
which resulted in a net decrease in investment income totaling $13.1 million
for the quarter ended September 30, 1999.
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.
While interest rates have not declined but have increased during 1999 as
previously disclosed, there has been no significant impact to earnings as a
direct result of the rate increases. However, equity markets, more
specifically the S&P 500 Index, have declined which may be related to interest
rates movements. The decline in the value of the S&P 500 Index during the
third quarter of 1999 did significantly lower earnings of the Company's
equity-indexed annuity business. Additionally, the S&P 500 Index decline also
resulted in lower interest credited to equity-indexed annuity contracts.
However, primarily because of policy liability reserving treatments related to
minimum guaranteed interest rates, the reduction in annuity contract interest
expense was much less than the decline in investment income. The Company's
equity-indexed annuity products are long-term policies with contractual
periods of either nine or fifteen years. The Company routinely analyzes the
profitability of its equity-indexed annuity products under numerous economic
scenarios, including both positive and negative equity market conditions.
Although earnings may not be level or constant for this product due to timing
of market conditions and policy liability reserving methods, the Company
anticipates the equity-indexed annuities will be profitable over the long-term
contractual periods of the policies.
Another important aspect of the Company's investment philosophy is managing
the cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments,
extensions, and calls, the Company takes steps to manage and minimize such
risks. The Company continues to invest primarily in corporate debt
securities, many of which are noncallable, which helps reduce prepayment and
call risks. At September 30, 1999, corporate and public utility securities
represented over 68% of the entire debt securities portfolio.
Mortgage-backed securities are also an important component of the Company's
debt securities portfolio, representing 21% of the portfolio at September 30,
1999. Although holdings of mortgage-backed securities are subject to
prepayment and extension risks, both of these risks are addressed by specific
portfolio management strategies which add stability to the Company's cash flow
management. The Company substantially reduces both prepayment and extension
risks of mortgage-backed securities by investing primarily in collateralized
mortgage obligations which have more predictable cash flow patterns than
pass-through securities. These securities, known as planned amortization
class I (PAC I) CMOs, are designed to amortize in a more predictable manner
than other CMO classes or pass-throughs. Using this strategy, the Company can
more effectively manage and reduce prepayment and extension risks, thereby
helping to maintain the appropriate matching of the Company's assets and
liabilities.
As of September 30, 1999, CMOs represent about 93% of the Company's mortgage-
backed securities. The CMOs in the Company's portfolio have been modeled and
subjected to detailed, comprehensive analysis by the Company's investment
staff. The overall structure of the CMO as well as the individual tranche
being considered for purchase have been evaluated to ensure that the security
fits appropriately within the Company's investment philosophy and
asset/liability management parameters. The Company's investment mix between
mortgage-backed securities and other fixed income securities helps effectively
balance prepayment, extension, and credit risks.
In addition to managing prepayment, extension, and call risks, the Company
closely manages the credit quality of its investments in debt securities.
Thorough credit analysis is performed on potential corporate investments
including examinations of a company's credit and industry outlook, financial
ratios and trends, and event risks. The Company continues to follow its
conservative investment philosophy by minimizing its holdings of below
investment grade debt securities, as these securities generally have greater
default risk than higher rated corporate debt. These issuers usually are more
sensitive to adverse industry or economic conditions than are investment grade
issuers. The Company's small holdings of below investment grade debt
securities are summarized below.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Fair Invested
Value Value Assets
(In thousands)
<C> <C> <C> <C>
September 30, 1999 $ 53,199 47,237 1.7%
December 31, 1998 44,974 45,317 1.4%
December 31, 1997 41,149 41,969 1.4%
</TABLE>
The Company's strong credit risk management and commitment to quality has
resulted in minimal defaults in the debt securities portfolio in recent years.
Although not in default, the Company recorded a $911,000 permanent impairment
writedown on a debt security in the quarter ended September 30, 1999. This
writedown was reflected as a realized loss in the accompanying financial
statements. The Company is also closely monitoring an additional debt
security which has had a significant decline in market value. Although the
decline in market value at September 30, 1999, is approximately $4,000,000,
the Company does not believe that there is sufficient current justification
for a permanent writedown. However, should there be further deterioration,
a writedown may be warranted in the future.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans is
typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities.
The Company seeks to minimize the credit and default risk in its mortgage loan
portfolio through strict underwriting guidelines and diversification of
underlying property types and geographic locations. In addition to being
secured by the property, mortgage loans with leases on the underlying property
are often guaranteed by the lessee, in which case the Company approves the
loan based on the credit strength of the lessee. This approach has resulted
in higher quality mortgage loans with fewer defaults.
While mortgage loans remain an important component of the Company's investment
portfolio, loans as a percentage of the portfolio have been declining in
recent years. Competition for high quality mortgage loans has impacted the
Company's level of mortgage loan originations, and the Company is unwilling to
compromise its strict underwriting guidelines to maintain specific mortgage
loan levels.
The Company's direct investments in real estate are not a significant portion
of its total investment portfolio, and the majority of real estate owned was
acquired through mortgage loan foreclosures. However, the Company also
participates in several real estate joint ventures and limited partnerships.
The joint ventures and partnerships invest primarily in income-producing
retail properties.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $168,990,000 and
$174,921,000, or 5.3% and 5.6% of total invested assets, at September 30,
1999, and December 31, 1998, respectively. The loans are real estate
mortgages, substantially all of which are related to commercial properties and
developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic regions of
the United States and by property type as of September 30, 1999, and December
31, 1998, was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
West South Central 54.9% 57.1%
Mountain 22.4 19.4
Pacific 12.1 7.7
South Atlantic 5.5 4.8
East South Central 4.6 4.6
West North Central 0.5 3.0
Other - 3.4
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Retail 56.2% 56.7%
Office 25.4 21.0
Hotel/Motel 7.9 7.9
Nursing Homes 2.9 3.0
Land/Lots 2.6 4.1
Apartment 2.0 4.2
Other 3.0 3.1
Totals 100.0% 100.0%
</TABLE>
As of September 30, 1999, the allowance for possible losses on mortgage loans
was $3,904,000. This balance reflects a net reduction of $736,000 recorded in
the third quarter of 1999, which was recognized as a realized gain on
investments. The allowance was adjusted primarily as a result of the complete
repayment of an impaired mortgage loan. Although management believes that the
current balance is adequate, future additions to the allowance may be
necessary based on changes in economic conditions, particularly in the West
South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas,
as this area contains the highest concentrations of the Company's mortgage
loans.
The Company currently places all loans past due three months or more on
nonaccrual status, thus recognizing no interest income on the loans. Also,
the Company will at times restructure mortgage loans under certain conditions
which may involve changes in interest rates, payment terms, or other
modifications. For the nine months ended September 30, 1999 and 1998, the
reductions in interest income due to nonaccrual and restructured mortgage
loans were not significant.
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling approximately $11,484,000 and $13,553,000 at
September 30, 1999, and December 31, 1998, respectively. This small
concentration of properties represents less than one percent of the Company's
entire investment portfolio. The real estate holdings consist primarily of
income-producing properties which are being operated by the Company. The
Company recognized operating income on these properties of approximately
$248,000 and $167,000 for the three months ended September 30, 1999 and 1998.
The Company does not anticipate significant changes in these operating results
in the near future.
The Company monitors the conditions and market values of these properties on a
regular basis. No significant realized losses were recognized due to declines
in values of properties for the three months ended September 30, 1999 and
1998, respectively. The Company makes repairs and capital improvements to
keep the properties in good condition and will continue this maintenance as
needed.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the three months ended September 30, 1999
and 1998 is provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
gains on investments $ 76,835 75,969
Realized gains on investments 191 606
Total revenues $ 77,026 76,575
Earnings:
Earnings from continuing operations $ 12,462 15,502
Losses from discontinued
brokergae operations - (14,125)
Net realized gains on investments 124 394
Net earnings $ 12,586 1,771
Basic Earnings Per Share:
Earnings from continuing operations $ 3.56 4.44
Losses from discontinued
brokerage operations - (4.04)
Net realized gains on investments 0.04 0.11
Net earnings $ 3.60 0.51
Diluted Earnings Per Share:
Earnings from continuing operations $ 3.53 4.37
Losses from discontinued
brokerge operatons - (3.98)
Net realized gains on investments 0.04 0.11
Net earnings $ 3.57 0.50
</TABLE>
Consolidated Operating Results: Earnings from continuing operations, excluding
net realized gains on investments, were $12,462,000 for the quarter ended
September 30, 1999, compared to $15,502,000 for the third quarter of 1998.
However, third quarter 1998 earnings include a $4.9 million tax benefit
resulting from losses from The Westcap Corporation bankruptcy settlement. The
tax benefit was recognized in continuing operations in accordance with the
Company's tax allocation agreement with its subsidiaries. Excluding the tax
benefit, 1999 third quarter earnings exceeded the comparable 1998 quarter by
$1,860,000.
In addition to the tax benefit affecting 1998 results, there were two
significant items impacting third quarter 1999 earnings. Earnings for the
current quarter were affected by the Company's equity-indexed annuity
business. The impact of equity-indexed annuity issues, as described in detail
in the following "Annuity Operations" section, decreased net earnings by over
$5 million for the third quarter of 1999. The second significant item
affecting third quarter 1999 earnings was the resolution of pending litigation
which resulted in additional other income to the Company totaling $8,482,000,
or $5,513,000, net of taxes. This litigation settlement is described in
detail in note 3 in the accompanying financial statements.
The Company recorded realized gains on investments, net of taxes, totaling
$191,000 for the quarter ended September 30, 1999, compared to gains of
$606,000 for the third quarter of 1998. The 1999 gains were primarily from
sales of investments in debt securities, net of permanent impairment
adjustments for debt securities and mortgage loans. The 1998 gains were
primarily from calls of investments in debt securities.
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation, was completed in the first quarter of
1999. However, no losses were reported in 1999 as the entire $14,125,000
settlement payment was accrued and reported as a loss from discontinued
brokerage operations in the third quarter of 1998.
Net Investment Income: Net investment income decreased 12.1% from the third
quarter of 1998, due to declines in fair values of index options used to hedge
the equity return component of the Company's equity-indexed annuity product.
The index options, which act as hedges to match closely the returns on the S&P
500 Index, are reported at fair value in the accompanying financial
statements. The changes in the values of the index options and the credited
interest on policyholder liabilities for equity-indexed annuities are both
reflected in the statement of earnings. The reduction to investment income
from index options for the quarter ended September 30, 1999, totaling
$13,051,000 is composed of $18,875,000 of unrealized losses in the value of
the options, offset partially by $5,824,000 of actual income realized as a
result of option expirations. This significant decline is directly
attributable to the decline in the S&P 500 Index over the same period. While
net investment income was lower due to these options, this reduction was
partially offset by lower annuity contract interest expense as the credited
return on the Company's equity-indexed annuities are also based on the same
S&P 500 Index.
The Company also experienced modest declines in investment income from
mortgage loans and policy loans which is consistent with decreases in the
investment balances of these assets. Additionally, investment income for the
third quarter of 1998 includes nonrecurring gains on investments in real
estate limited partnerships totaling $1,125,000. A detail of net investment
income is provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 51,347 49,149
Mortgage loans 3,821 4,189
Policy loans 2,024 2,290
Index options (13,051) (6,584)
Other investment income 1,034 2,220
Total investment income 45,175 51,264
Investment expenses 613 575
Net investment income $ 44,562 50,689
</TABLE>
Life and Other Policy Benefits: Expenses in 1999 were 5.5% higher than the
comparable period for 1998. Closer analysis shows life insurance benefit
claims were $1,110,000 higher in the third quarter of 1999 than in 1998.
Conversely, traditional life insurance surrenders decreased $435,000 in 1999
over the comparable 1998 period. However, much of the decrease in traditional
surrender expense is offset by corresponding changes in liabilities for future
policy benefits. A comparative detail of life and other policy benefits is
provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 6,506 5,396
Surrenders of traditional products 2,858 3,293
Other policy benefits 290 466
Totals $ 9,654 9,155
</TABLE>
Universal Life and Investment Annuity Contract Interest: The Company closely
monitors its credited interest rates, taking into consideration such factors
as profitability goals, policyholder benefits, product marketability, and
economic market conditions. Rates are established or adjusted after careful
consideration and evaluation of these factors against established objectives.
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. For the Company's equity-indexed annuities, credited
interest rates are based on the performance of the S&P 500 Index, subject to
guaranteed minimum interest rates. Total universal life and investment
annuity contract interest was $32.6 million and $33.2 million for the quarters
ended September 30, 1999 and 1998, respectively. The decrease is
attributable to declines in interest on the Company's equity-indexed annuity
products.
Other Operating Expenses: Operating expenses for the third quarter of 1999
were $6,973,000 compared to $7,501,000 for the comparable 1998 period.
Included in 1998 expenses is $250,000 for the estimated costs of the
notification and administration process for a class action lawsuit that was
ultimately settled in the fourth quarter of 1998. Also contributing to the
higher expenses in 1998 were increases in legal fees and several other areas,
most of which are related to increased marketing efforts such as salaries and
compensation, travel, and printing and publication costs.
Federal Income Taxes: Federal income taxes for the quarter ended September 30,
1999, totaled $6,484,000, reflecting an effective tax rate of 34.0%. However,
Federal income taxes for the quarter ended September 30, 1998, totaled
$654,000, reflecting an effective tax rate of only 4.0%. The low effective
tax rate is due to a $4.9 million tax benefit resulting from discontinued
brokerage operations losses totaling $14,125,000. The tax benefit was
reflected in earnings from continuing operations in accordance with the
Company's tax allocation agreement with its subsidiaries.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the quarters ended September 30, 1999 and
1998 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:
September 30, 1999 $ 2,421 2,263 7,497 281 12,462
September 30, 1998 1,152 2,210 7,194 2 10,558
</TABLE>
Domestic Life Insurance Operations
The Company's domestic life insurance operations concentrate marketing efforts
on federal employees, seniors, and specific employee groups in private
industry, as well as individual sales. The products marketed are universal
life insurance and traditional life insurance, which includes both term and
whole life products. National Western markets and distributes its domestic
products primarily through independent agents and brokers and independent
marketing organizations (IMOs). The IMOs also assist the Company in
recruiting, contracting, and supervising agents as well as providing
additional financial resources for product marketing. Geographically, the
domestic life insurance operations market products in most of the United
States, which encompasses 43 states and the District of Columbia. The states
in which the Company does not conduct business are primarily in the northeast
and include Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey,
New York, and Vermont.
Earnings for the domestic life insurance operating segment were $2,421,000 and
$1,152,000 for the three months ended September 30, 1999 and 1998,
respectively. The increase in earnings in 1999 is primarily due to increases
in cost of insurance revenues and other policy fees, coupled with lower
expenses. The lower expenses are from decreases in life insurance benefit
claims, traditional life insurance surrenders, contract interest, and
amortization of deferred policy acquisition costs. A detailed analysis of
significant revenues and expenses for this segment is provided below.
Revenues from domestic life insurance operations include life insurance
premiums on traditional type products and revenues from universal life
insurance. The Company's current marketing efforts focus more on universal
life insurance, and, as a result, revenues from these products continue to
increase over traditional products. Revenues from traditional products are
simply premiums collected, while revenues from universal life insurance
consist of policy charges for the cost of insurance, policy administration
fees, and surrender charges assessed during the period. A comparative detail
of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 2,993 2,744
Surrender charges 416 589
Policy fees and other revenues 535 334
Traditional life insurance premiums 2,250 2,323
Totals $ 6,194 5,990
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
September 30, 1999 and 1998 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles. Although first year and single premium deposits collected are
lower in 1999, the Company has made enhancements to several of its major
domestic products which could result in increased sales.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 1,626 1,733
Renewal premiums 3,614 3,343
Totals $ 5,240 5,076
</TABLE>
Significant expenses for domestic life insurance operations are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 3,182 3,405
Universal life insurance contract interest 2,430 2,621
Amortization of deferred policy acquisition costs 1,222 1,507
Other operating expenses 1,965 1,813
</TABLE>
Life insurance benefit claims were somewhat lower in 1999 at $3,182,000
compared to $3,405,000 in 1998. 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.
Amortization of deferred policy acquisition costs decreased $285,000 from
$1,507,000 in 1998 to $1,222,000 in 1999. These expenses represent the
amortization of the costs of acquiring or producing new business, which
consists primarily of agents' commissions. The majority of such costs are
amortized in direct relation to the anticipated future gross profits of the
applicable blocks of business.
International Life Insurance Operations
The Company's international life insurance operations focus marketing efforts
on foreign nationals in upper socioeconomic classes with substantial financial
resources. Insurance sales are primarily on insureds from countries in
Central and South America, the Caribbean, and the Pacific Rim. Policy sales
on insureds from numerous countries in these different regions provides
diversification that helps to minimize large fluctuations in sales that can
occur due to various economic, political, and competitive pressures that may
occur from one country to another. Historically, the top three countries in
insurance sales have often been Argentina, Chile, and Peru. Products sold in
the international market include both universal life and traditional life
insurance products. The Company minimizes exposure to foreign currency risks,
as almost all foreign policies require payment of premiums and claims in
United States dollars. Sales production from the international market is from
independent broker-agents, many of whom have been selling National Western
products for 20 or more years.
Earnings for the international life insurance operating segment were
$2,263,000 and $2,210,000 for the quarters ended September 30, 1999 and 1998,
respectively. Earnings in 1999 were only slightly higher primarily due to
increases in universal life insurance revenues and lower other operating
expenses. However, most of the positive impact to earnings was offset by
significantly higher life insurance benefit claims during the third quarter of
1999. A detailed analysis of significant revenues and expenses for this
segment is provided below.
As with domestic operations, revenues from the international life insurance
segment include both premiums on traditional type products and revenues from
universal life insurance. The international operations' marketing efforts are
also focused more on universal life insurance, and, as a result, revenues from
these products continue to increase over traditional products. Cost of
insurance revenues continue to increase as the international block of business
grows. Surrender charge revenues were also higher in 1999 as international
universal life insurance surrenders increased significantly during the third
quarter of 1999. A comparative detail of premiums and contract revenues is
provided below:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 7,406 7,018
Surrender charges 2,330 1,793
Policy fees and other revenues 1,050 985
Traditional life insurance premiums 289 707
Totals $ 11,075 10,503
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
September 30, 1999 and 1998 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 3,618 3,584
Renewal premiums 9,783 9,425
Totals $ 13,401 13,009
</TABLE>
Significant expenses for international life insurance operations are
summarized below:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 3,324 1,992
Universal life insurance contract interest 3,503 3,413
Amortization of deferred policy
acquisition costs 2,872 3,020
Other operating expenses 2,073 3,266
</TABLE>
Life insurance benefit claims were significantly higher in 1999 at $3,324,000
compared to $1,992,000 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.
Other operating expenses declined over $1.1 million from $3,266,000 in 1998 to
$2,073,000 in 1999. The lower expenses are partially due to lower legal fees
and marketing related expenses such as salaries and compensation, travel, and
printing and publication costs. However, approximately one-half of the
decrease is due to a reclassification of expenses in 1998, which did not
affect net earnings. As a result of a functional cost study in the third
quarter of 1998, certain investment expenses netted against investment income
were reclassified to other operating expenses.
Annuity Operations
The Company's annuity operations are almost exclusively in the United States.
Like the Company's domestic life insurance operations, annuities are marketed
in 43 states and the District of Columbia using independent agents, brokers,
and independent marketing organizations (IMOs). In fact, many of the agents,
brokers, and IMOs that sell life insurance also sell annuities for National
Western. For most of these organizations, annuity sales are much more
significant and are the primary focus of their business operations. Although
some of the Company's annuities are available in the international market,
current sales are insignificant to total annuity sales.
Annuities sold include single and flexible premium deferred annuities, single
premium immediate annuities, and equity-indexed annuities. These products can
be tax qualified or nonqualified annuities. In recent years the majority of
annuities sold have been nonqualified deferred annuities. The Company also
continues to collect additional premiums on existing two-tier annuities, as a
large portion of the two-tier block of business is flexible premium annuities
on which renewal premiums continue to be collected. However, the Company has
not sold two-tier annuities since 1992.
Earnings for the annuity operating segment were $7,497,000 and $7,194,000 for
the quarters ended September 30, 1999 and 1998, respectively. Although
earnings were relatively consistent between quarters, the third quarter of
1999 includes significantly higher income from a litigation settlement and
lower amortization of deferred policy acquisition costs, offset by decreases
in surrender charge revenues and lower earnings from the Company's equity-
indexed annuity business. A detailed analysis of these and other 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. Surrender charge revenues were down
30.1% in 1999 compared to 1998 primarily due to reductions in surrender
charges from two-tier annuities. Although total annuity policy surrenders
were down just 2.1% from 1998 to 1999, the mix of surrender types was
significantly different. While single-tier annuity policy surrenders
increased in 1999, two-tier annuity policy surrenders, which typically have
much higher surrender charges, declined over 42%. A comparative detail of
the components of premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 3,088 5,104
Single-tier annuities 1,826 1,925
Total surrender charges 4,914 7,029
Payout annuity and other
revenues 1,487 1,658
Traditional annuity premiums 20 20
Totals $ 6,421 8,707
</TABLE>
Actual annuity deposits collected for the quarters ended September 30, 1999
and 1998 are detailed below. Deposits collected on these nontraditional
products are not reflected as revenues in the Company's statements of
earnings, as they are recorded directly to policyholder liabilities upon
receipt, in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 33,572 76,460
Other 50,271 44,988
Total deferred annuities 83,843 121,448
Immediate annuities 9,457 4,753
Totals $ 93,300 126,201
</TABLE>
The Company experienced growth in immediate annuities and other deferred
annuities for the quarter ended September 30, 1999, compared to the same
quarter of 1998. In fact, immediate annuities almost doubled and other
deferred annuities increased 11.7%. However, these increases were more than
offset by a significant decline in equity-indexed annuity sales.
Equity-indexed annuity sales are a major portion of the Company's total
annuity production. The Company's equity-indexed annuities are flexible
premium deferred annuities which combine 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 Index. These annuities are
long-term contracts designed as planning vehicles for retirement security.
These annuities are attractive to customers, as they have 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, these products provide a key equity-based
alternative to the Company's existing fixed annuity products. In conjunction
with the sale of these annuities, the Company uses 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 Index which may be paid to policyholders.
The Company introduced its first equity-indexed annuity in late 1997, and
sales continued to grow throughout the first quarter of 1998. Sales then
began to level off in the second quarter of 1998. Although sales of these
annuities continue to be strong, production has declined in 1999 primarily due
to volatility in the stock market. This volatility affects both the immediate
demand for these annuities and the pricing of these products. Increased
product costs from stock market volatility, particularly costs of index
options used to hedge the equity return component of these annuities, can
reduce potential credited interest to policyholders.
Net investment income for annuity operations for the third quarters of 1999
and 1998 totaled $32,335,000 and $38,010,000, respectively. Declines in fair
values of index options resulted in reductions to net investment income
totaling $13,051,000 and $6,584,000 for the quarters ended September 30, 1999
and 1998. These significant declines are directly attributable to the
declines in the S&P 500 Index over the same periods. While net investment
income was lower due to these options, these reductions were partially offset
by lower annuity contract interest expense as the credited interest on the
Company's equity-indexed annuities are also based on the same S&P 500 Index.
The correlation of investment income with annuity contract expense is
explained in more detail below.
Significant expenses for annuity operations are summarized below:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Annuity contract interest $ 26,632 27,143
Amortization of deferred
policy acquisition costs 5,611 6,610
Other operating expenses 2,935 2,422
</TABLE>
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 for 1999 and 1998 was $5,611,000 and $6,610,000, respectively.
The lower amortization was impacted by third quarter 1999 changes in
assumptions for anticipated future gross profits for the Company's entire
annuity business.
Annuity contract interest was $26,632,000 in 1999 compared to $27,143,000 in
1998. The decrease is due to the Company's equity-indexed annuities which
have interest rates that are linked in part to the S&P 500 Index. The S&P 500
Index decline in the third quarter of 1999 resulted in lower interest credited
to equity-indexed annuity contracts. However, primarily because of policy
liability reserving treatments related to minimum guaranteed interest rates,
the reduction in annuity contract interest expense was much less than the
decline in net investment income.
Differences between income from index options and contract interest credited
to policyholders will occur for several reasons, some of which may only be
timing differences between the recognition of income and expenses. One 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 treatments related to minimum guaranteed interest rates.
The impact of these equity-indexed annuity issues decreased annuity operations
earnings by over $5 million, net of taxes, for the third quarter of 1999. The
Company's equity-indexed annuity products are long-term policies with
contractual periods of either nine or fifteen years. The Company routinely
analyzes the profitability of its equity-indexed annuity products under
numerous economic scenarios, including both positive and negative equity
market conditions. Although earnings may not be level or constant for this
product due to timing of market conditions and policy liability reserving
methods, the Company anticipates the equity-indexed annuities will be
profitable over the long-term contractual periods of the policies.
Although annuity operations earnings were significantly lower due to its
equity-indexed annuity business for the third quarter of 1999, the Company
recorded nonrecurring income resulting from a lawsuit settlement that
essentially offset the lower earnings. As more fully described in note 3 of
the accompanying financial statements, National Western Life Insurance
Company, National Annuity Programs, Inc. (NAP), and others executed a
settlement agreement for a pending declaratory judgment lawsuit. NAP was an
independent marketing general agency under contract with the Company that
hired and supervised agents marketing annuity products on behalf of the
Company. The contract was entered into in 1983 and amended in 1994. The
Company alleged that during the course of the contract NAP violated its
terms and conditions among other things. By the settlement, each party
dismisses with prejudice all claims asserted by them in the lawsuit. The
Company was also released from any claims for any funds and other rights
arising under the contract.
The Company had accrued agent commission liabilities totaling $9,642,000
related to the contract. As a result of the Agreement, it is expected that
approximately $1,160,000 thereof could be paid as commissions due to NAP sub-
agents. The remaining $8,482,000 is no longer a liability of the Company and
will not be paid pursuant to the contract. Accordingly, these remaining
accrued commissions were released from liabilities in the quarter ended
September 30, 1999, resulting in additional income of $8,482,000, or
$5,513,000, net of taxes. It is anticipated that any future renewal premiums
received by the Company on currently issued and in force annuity policies
written by NAP sub-agents under the Contract could generate additional
commissions for such sub-agents. The payment of such future commissions is
subject to and conditioned upon receipt of such renewal premiums by the
Company and compliance by the sub-agents with the terms of the agents'
contracts with the Company and NAP.
Other Operations
National Western's primary business encompasses its domestic and international
life insurance operations and its annuity operations. However, National
Western also has small real estate and other investment operations through the
following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties,
Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. Also,
during January, 1999, the Company's wholly owned subsidiary, The Westcap
Corporation, completed its Chapter 11 bankruptcy reorganization. With the
reorganization complete, National Western transferred its investment real
estate holdings totaling approximately $11,589,000 to Westcap and the
subsidiary is now operating as a real estate management company. Earnings for
these other operations totaled $281,000 and $2,000 for the third quarters of
1999 and 1998, respectively.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the nine months ended September 30, 1999
and 1998 is provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
gains on investments $ 247,650 236,737
Realized gains on investments 5,869 2,114
Total revenues $ 253,519 238,851
Earnings:
Earnings from continuing operations $ 35,072 37,162
Losses from discontinued
brokerage operations - (14,125)
Net realized gains on investments 3,815 1,374
Net earnings $ 38,887 24,411
Basic Earnings Per Share:
Earnings from continuing operations $ 10.02 10.64
Losses from discontinued
brokerage operations - (4.04)
Net realized gains on investments 1.09 0.39
Net earnings $ 11.11 6.99
Diluted Earnings Per Share:
Earnings from continuing operations $ 9.93 10.52
Losses from discontinued
brokerage operations - (4.00)
Net realized gains on investments 1.08 0.39
Net earnings $ 11.01 6.91
</TABLE>
Consolidated Operating Results: For the nine months ended September 30, 1999,
earnings from continuing operations, excluding net realized gains on
investments, totaled $35,072,000 compared to $37,162,000 for the same period
of 1998. However, 1998 earnings include a $4.9 million tax benefit resulting
from losses from the Westcap bankruptcy settlement. The tax benefit was
recognized in earnings from continuing operations in accordance with the
Company's tax allocation agreement with its subsidiaries. Excluding the tax
benefit, 1999 earnings exceeded comparable 1998 earnings by $2,810,000, or
8.7%. This increase in earnings is largely attributable to higher universal
life and annuity contract revenues, lower life insurance benefits claims, and
lower amortization of deferred policy acquisition costs.
In addition to the tax benefit affecting 1998 results, there were two
significant items impacting earnings for the nine months ended September 30,
1999. Earnings for 1999 were affected by the Company's equity-indexed
annuity business. The impact of equity-indexed annuity issues, as described
in the following "Annuity Operations" section, decreased net earnings by over
$5 million in 1999. The second significant item affecting 1999 earnings
was the resolution of pending litigiation which resulted in additional other
income to the Company totaling $8,482,000, or $5,513,000, net of taxes.
This litigation settlement is described in detail in note 3 in the
accompanying financial statements.
The Company recorded realized gains on investments, net of taxes, totaling
$3,815,000 for the nine months ended September 30, 1999, compared to gains of
$1,374,000 for the first nine months of 1998. The 1999 gains were primarily
from sales and calls of investments in debt securities totaling $2,662,000,
net of taxes. Also included in 1999 was a net gain totaling $922,000 from the
sale of investment real estate owned by one of National Western's
subsidiaries, NWL 806 Main, Inc.
As previously reported, the bankruptcy reorganization of the Company's wholly
owned subsidiary, The Westcap Corporation, was completed in the first quarter
of 1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in 1999, as the entire $14,125,000
settlement payment was accrued and reported as a loss in the third quarter of
1998.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the nine months ended September 30, 1999 and
1998 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:
September 30, 1999 $ 5,219 5,858 22,248 1,747 35,072
September 30, 1998 5,003 3,589 22,538 1,088 32,218
</TABLE>
Domestic Life Insurance Operations
Earnings for the domestic life insurance operating segment were $5,219,000 and
$5,003,000 for the nine months ended September 30, 1999 and 1998,
respectively. The minimal increase in earnings is due to higher universal life
insurance revenues and lower life insurance benefit claims, partially offset
by lower net investment income and other income. 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. Concentration on sales of universal life insurance as opposed to
traditional products continue to result in increases in cost of insurance
revenues and declines in traditional premiums. A comparative detail of
premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 8,777 7,915
Surrender charges 1,299 1,520
Policy fees and other revenues 1,178 998
Traditional life insurance premiums 7,220 7,572
Totals $ 18,474 18,005
</TABLE>
Actual universal life insurance deposits, which are recorded directly to
policyholder liabilities upon receipt, for the nine months ended September 30,
1999 and 1998 are detailed below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 4,001 5,485
Renewal premiums 10,874 10,512
Totals $ 14,875 15,997
</TABLE>
Other income for the nine months ended September 30, 1999 and 1998 totaled
$32,000 and $465,000, respectively. Other income was higher in 1998 primarily
due to proceeds totaling $444,000 received from the U.S. government related to
previous litigation involving a failed savings and loan institution. The
litigation involved the Company's previous investment in bonds of the
financial institution and subsequent losses incurred upon its failure. The
financial institution had also purchased life insurance from National Western,
the cash values of which served as collateral for the bonds.
Significant expenses for domestic life insurance operations are summarized
below:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 9,295 10,367
Universal life insurance
contract interest 7,315 7,392
Amortization of deferred policy
acquisition costs 3,614 3,327
Other operating expenses 6,784 6,790
</TABLE>
Life insurance benefit claims were significantly lower in 1999 at $9,295,000
compared to $10,367,000 in 1998. This fluctuation is primarily due to benefit
claims in the first quarter of 1998 that were much higher than historical
averages.
International Life Insurance Operations
Earnings for the international life insurance operating segment were
$5,858,000 and $3,589,000 for the nine months ended September 30, 1999 and
1998, respectively. Consistent with the results as previously reported for
the first six months of 1999 and 1998, earnings for the nine months ended
September 30, 1999 were higher due to increases in universal life insurance
revenues and lower amortization of deferred policy acquisition costs. A
comparative detail of premiums and contract revenues, which reflects the
increase in universal life insurance revenues, is provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 21,919 20,380
Surrender charges 5,993 4,723
Policy fees and other revenues 2,835 2,769
Traditional life insurance premiums 1,072 1,981
Totals $ 31,819 29,853
</TABLE>
Actual universal life insurance deposits collected for the nine months ended
September 30, 1999 and 1998 are detailed below. Lower 1999 first year and
single premiums are partially due to unfavorable economic conditions in the
Company's Central and South American markets.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 9,504 9,937
Renewal premiums 27,247 26,192
Totals $ 36,751 36,129
</TABLE>
Significant expenses for international life insurance operations are
summarized below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 8,173 7,838
Universal life insurance
contract interest 10,397 10,042
Amortization of deferred
policy acquisition costs 9,434 11,393
Other operating expenses 6,476 6,795
</TABLE>
Except for amortization of deferred policy acquisition costs, there were no
significant fluctuations in the above detail of expenses for the nine months
ended September 30, 1999 and 1998. Amortization of deferred policy
acquisition costs was significantly lower in 1999, totaling $9,434,000
compared to $11,393,000 in 1998. The higher amortization costs in 1998
resulted from retrospective adjustments to deferred policy acquisition costs
in the second quarter as anticipated future gross profits on international
blocks of business were revised. The amortization in 1999 is more consistent
with historical levels.
Annuity Operations
Earnings for the annuity operating segment were $22,248,000 and $22,538,000
for the nine months ended September 30, 1999 and 1998, respectively.
Consistent with third quarter results, earnings for the nine months ended
September 30, 1999 and 1998 are relatively comparable. As previously
described for the third quarter of 1999, year-to-date 1999 earnings include
significantly higher income from a litigation settlement and lower
amortization of deferred policy acquisition costs, offset by decreases in
policy surrender charge revenues and lower earnings from the Company's equity-
indexed annuity business. A detailed analysis of significant revenues and
expenses for this segment is provided below.
Premiums and annuity contract revenues were down $3,121,000, or 12.7%, from
$24,500,000 in 1998 to $21,379,000 in 1999. Most of this decline is due to
lower surrender charge revenues from two-tier annuities as actual policy
surrenders of these annuities declined 22.3% for the nine months ended
September 30, 1999, compared to the same period of 1998. A comparative detail
of the components of premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 11,655 14,368
Single-tier annuities 5,234 5,134
Total surrender charges 16,889 19,502
Payout annuity and other revenues 4,431 4,934
Traditional annuity premiums 59 64
Totals $ 21,379 24,500
</TABLE>
Annuity deposits for 1999 decreased 4.6% compared to the same period of 1998.
Although the Company is experiencing growth in its immediate annuities and
other deferred annuities, sales of equity-indexed annuities have begun to
decrease, largely as a result of volatility in the stock market as previously
described for the quarter ended September 30, 1999. Actual annuity deposits
collected for the nine months ended September 30, 1999 and 1998 are detailed
below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 123,491 158,260
Other 148,376 136,070
Total deferred annuities 271,867 294,330
Immediate annuities 23,124 14,752
Totals $ 294,991 309,082
</TABLE>
Significant expenses for annuity operations are summarized below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
(In thousands)
<S> <C> <C>
Annuity contract interest $ 100,457 91,293
Amortization of deferred
policy acquisition costs 16,663 16,817
Other operating expenses 8,242 8,244
</TABLE>
Annuity contract interest was $100.5 million in 1999 compared to $91.3 million
in 1998. The increase is largely due to increases in annuities in force from
sales of equity-indexed annuities and other deferred annuities. However,
contract interest was reduced in 1999 as a result of declines in the S&P 500
Index during this period. Equity-indexed annuities have interest rates that
are linked in part to the S&P 500 Index, resulting in the lower interest
credited to theses contracts in 1999. While contract interest was lower due
to the stock market declines, net investment income was also substantially
lower as a result of index options used to hedge the equity-indexed annuities.
The impact of these equity-indexed annuity issues decreased annuity operations
earnings approximately $5 million, net of taxes, for the nine months ended
September 30, 1999, as the reduction in annuity contract interest was much
less than the decline in net investment income. This is primarily due to
policy liability reserving treatments related to minimum guaranteed interest
rates. Additionally, differences between income from index options and
contract interest credited to policyholders will occur for other reasons as
previously explained in detail for the three months ended September 30, 1999.
Although earnings may not be level or constant for this product due to timing
of market conditions and policy liability reserving methods, the Company
anticipates the equity-indexed annuities will be profitable over the long-term
contractual periods of the policies.
Other Operations
As previously described for the nine months ended September 30, 1999, National
Western has small real estate and other investment operations through its
wholly owned subsidiaries. Earnings for these other operations totaled
$1,747,000 and $1,088,000 for the nine months ended September 30, 1999 and
1998, respectively. Earnings are higher in 1999 primarily due to income from
real estate properties that were transferred from National Western Life
Insurance Company to The Westcap Corporation in January, 1999.
Most of the income from the Company's subsidiaries is from a life interest in
the Libbie Shearn Moody Trust. This asset was owned by National Western Life
Insurance Company during 1996 but was transferred to NWL Services, Inc., in
1997. Dividend distributions from the Trust are declared semi-annually in
June and December each year. Because the asset is a life interest, these
distributions are only accrued in the Company's financial statements when
declared. Semi-annual distributions included in the nine months ended
September 30, 1999 and 1998 totaled $1,751,000 and $1,725,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds provided
from operations. Premium deposits and revenues, investment income, and
investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary sources
of liquidity to meet cash needs are the Company's securities available for
sale portfolio, net cash provided by operations, and a bank line of credit.
The Company's investments consist primarily of marketable debt securities that
could be readily converted to cash for liquidity needs. The Company may also
borrow up to $60 million on its bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is the
risk of early policyholder withdrawals. Consequently, the Company closely
evaluates and manages the risk of early surrenders or withdrawals. The
Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests under
various market interest rate scenarios to assist in evaluating liquidity needs
and adequacy. The Company currently expects available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
In the past, cash flows from the Company's insurance operations have been more
than adequate to meet current needs. Cash flows from operating activities
were $85.7 million and $86.1 million for the nine months ended September 30,
1999 and 1998, respectively. Net cash flows from the Company's deposit
product operations, which includes universal life and investment annuity
products, totaled $32.8 million for the first nine months of 1999 and $64.5
million for the comparable period of 1998. The decline in cash flows from
deposit product operations is from decreases in premium deposits coupled with
increases in policy surrenders.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $106.4 million and $123.2 million for the nine months
ended September 30, 1999 and 1998, respectively. The Company expects
significant cash flows from these sources throughout the remainder of 1999.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1999 or recent years. The Company
does not anticipate the need for any long-term debt in the near future. There
are also no current or anticipated material commitments for capital
expenditures in 1999.
Stockholders' equity totaled $459.5 million at September 30, 1999, reflecting
an increase of $21.1 million from December 31, 1998. The increase in capital
is primarily from net earnings of $38.9 million, offset by a decline in net
unrealized gains on investment securities totaling $18.2 million during the
first nine months of 1999. Book value per share at September 30, 1999, was
$131.25.
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. Many of our systems were developed to process and administer
our insurance products into the next century. For several years National
Western has been working to alleviate or eliminate Year 2000 problems 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 was substantially completed as of June 30, 1999, and all changes
have been tested and implemented. Additional testing will continue throughout
1999 as a prudent, safeguard measure.
The Company's investment accounting system is also a critical system, as it
provides accounting, analysis, and transaction processing for the Company's
bond and stock securities which comprise most of its investments. Like the
Company's policy administration system, this system was developed by a third-
party software vendor. However, National Western does maintain a product
support agreement with the original vendor. Maintenance and changes to this
investment system are the responsibility of the vendor in accordance with this
support agreement. National Western has addressed Year 2000 issues with the
vendor, and the vendor has provided assurance that their system has been
subjected to significant review for any problems. The review included
assessment, correction, and testing of date-sensitive problems, and the vendor
has provided us written acknowledgment that we should encounter no significant
Year 2000 related problems. The Company is using the vendor's Year 2000
modified software release for current processing and has not encountered any
problems.
National Western does have some exposure to date-sensitive embedded technology
such as microcontrollers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive, such as
manufacturing, National Western is a financial services company providing
insurance and annuities to its customers. As such, the primary equipment and
electronic devices used are computers and telephone-related equipment. This
type of hardware can have date-sensitive embedded technology which could be
subject to Year 2000 problems. Because of this exposure, National Western has
reviewed its computer hardware and telephone systems, with assistance from the
applicable vendors, and has replaced items that would not properly process
date-sensitive data in the Year 2000 or beyond. This project was
substantially completed as of December 31, 1998.
The final area of concern is the Company's use of third-party systems or
interfaces with vendor systems. National Western's most significant
interfaces and uses of third-party vendor systems are in the bank and trust
services area. The Company utilizes various banks to handle numerous types of
financial transactions. Several of these banks also provide trustee and
custodial services for National Western's investment holdings and
transactions. These services are critical to a financial service company such
as National Western, as its business centers around cash receipts and
disbursements to policyholders and the investment of policyholder funds. As a
result, National Western has received written confirmation from its vendor
banks regarding their status on Year 2000 issues. The banks indicate that
their Y2K issues have been resolved and that their systems are now Y2K
compliant. Like National Western, the banks plan to continue testing for the
remainder of 1999.
In reviewing the Year 2000 issue, National Western has identified various
risks to the Company that could impact daily operations and its ability to
satisfactorily transact business with its primary customers and vendors.
Risks related to servicing our customers are inabilities to process
policyholder and agent commission-related transactions timely, which could
lead to some loss of business. The accuracy of policyholder transactions
should not be affected, as the Company's policy administration system already
uses four-digit year data for policy calculations. Risks in the investment
accounting area center around accuracy of accounting for investments but
should not actually impact cash receipt and disbursement transactions.
However, the Company has various controls which should identify and enable
correction of such issues should they arise. Risks in interfaces with third-
party systems, which are primarily banking systems for National Western,
include the inability to timely and accurately receive and disburse cash and
process investment-related transactions. This could affect the Company's
service to its policyholders if cash flow issues arise due to delays in bank
processing. Based on information from the Company's banks, National Western
does not anticipate significant Year 2000 issues relating to bank processing.
Based on its analysis, the Company believes it is on schedule with its Year
2000 plan so that any disruptions by Year 2000 will be minimal. National
Western recognizes, however, that it is virtually impossible to assure that
the Company will be 100% compliant until Year 2000 is here. We anticipate
there will be problems that will have to be resolved in the ordinary course of
business on and after Year 2000. However, the Company does not believe that
the problems will have a material effect on the Company's operations or
financial condition. Under a worst case scenario, where systems do not
function adequately on or after Year 2000, the Company intends to place all
available resources it can to remedy any problems as soon as possible. The
resources include National Western staff as well as outside consulting
services.
The Company has reviewed Year 2000-related costs incurred to date and is
monitoring potential future costs to complete its Year 2000 plan. Such costs
are not expected to exceed $250,000. A significant amount of these costs have
not and will not be incremental costs to the Company, as internal resources
are primarily being used and will continue to be utilized and reallocated as
needed. Also, for externally developed systems under licensing contracts,
costs are primarily borne by the software developer. Costs already incurred
as of September 30, 1999, related to the Year 2000 plan total approximately
$220,000.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained herein or in
other written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries are or may be viewed as forward-looking.
Although the Company has used appropriate care in developing any such
information, forward-looking information involves risks and uncertainties that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company's SEC
filings such as exposure to market risks, anticipated cash flows, future
capital needs, and Year 2000 issues. However, National Western, as a matter
of policy, does not make any specific projections as to future earnings, nor
does it endorse any projections regarding future performance that may be made
by others. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments. Also, the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future developments, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
This information is included in Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Investments in Debt
and Equity Securities section.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Westcap Corporation Bankruptcy Proceedings
As previously reported in the Company's 1998 Form 10-K, the bankruptcy
reorganization of the Company's wholly owned subsidiary, The Westcap
Corporation, was completed in the first quarter of 1999. Pursuant to the
reorganization plan, National Western retained 100% continuing ownership of
the reorganized Westcap and the subsidiary is now operating as a real estate
management company. No losses were reported for discontinued brokerage
operations in the first nine months of 1999 as the entire $14,125,000
settlement payment was accrued and reported as a loss in the third quarter of
1998.
Any additional losses will depend on the results of The City Colleges lawsuit
filed against National Western on March 28, 1994, for alleged federal or state
securities law "control person" violations relating to Westcap, and which is
pending in the United States District Court, Western District of Texas.
National Western believes it has reasonable and adequate defenses to this
suit, and, accordingly, no amounts have been accrued in National Western's
financial statements for potential losses relating to such suit.
Other Litigation
As described in detail in note 3 to the accompanying financial statements, on
September 30, 1999, National Western Life Insurance Company (the Company),
National Annuity Programs, Inc., Robert L. Myer, and certain affiliates of
Myer executed a Definitive Compromise Settlement Agreement of the declaratory
judgment lawsuit pending between them in the District Court of Travis County,
Texas. As a result of the settlement, the Company was able to release accrued
commission liabilities in the quarter ended September 30, 1999, resulting in
additional income of $8,482,000, before taxes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -Computation of Earnings Per Share (filed on pages __ and __ of
this report).
Exhibit 27 -Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
A report on Form 8-K dated September 30, 1999, was filed by the Company
disclosing the execution of a settlement agreement of a pending lawsuit
between National Western Life Insurance Company, National Annuity Programs,
Inc., Robert L. Myer and certain affiliates of Myer as described in detail in
note 3 to the accompanying financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
Date: November 12, 1999 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: November 12, 1999 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: November 12, 1999 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to common stockholders
before and after assumed conversions:
Earnings from continuing operations $ 12,586 15,896
Losses from discontinued operations - (14,125)
Net earnings $ 12,586 1,771
Denominator:
Basic earnings per share -
weighted-average shares 3,501 3,498
Effect of dilutive stock options 27 46
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,528 3,544
Basic earnings per share:
Earnings from continuing operations $ 3.60 4.55
Losses from discontinued operations - (4.04)
Net earnings $ 3.60 0.51
Diluted earnings per share:
Earnings from continuing operations $ 3.57 4.48
Losses from discontinued operations - (3.98)
Net earnings $ 3.57 0.50
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to common stockholders
before and after assumed conversions:
Earnings from continuing operations $ 38,887 38,536
Losses from discontinued operations - (14,125)
Net earnings $ 38,887 24,411
Denominator:
Basic earnings per share -
weighted-average shares 3,499 3,495
Effect of dilutive stock options 32 38
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,531 3,533
Basic earnings per share:
Earnings from continuing operations $ 11.11 11.03
Losses from discontinued operations - (4.04)
Net earnings $ 11.11 6.99
Diluted earnings per share:
Earnings from continuing operations $ 11.01 10.91
Losses from discontinued operations - (4.00)
Net earnings $ 11.01 6.91
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 691,957
<DEBT-CARRYING-VALUE> 2,150,111
<DEBT-MARKET-VALUE> 2,119,649
<EQUITIES> 16,009
<MORTGAGE> 168,990
<REAL-ESTATE> 11,484
<TOTAL-INVEST> 3,202,563
<CASH> 3,891
<RECOVER-REINSURE> 1,218
<DEFERRED-ACQUISITION> 356,240
<TOTAL-ASSETS> 3,626,209
<POLICY-LOSSES> 3,099,349
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 13,222
<POLICY-HOLDER-FUNDS> 10,197
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,501
<OTHER-SE> 455,954
<TOTAL-LIABILITY-AND-EQUITY> 3,626,209
71,672<F1>
<INVESTMENT-INCOME> 167,118
<INVESTMENT-GAINS> 5,869
<OTHER-INCOME> 8,860
<BENEFITS> 143,386<F2>
<UNDERWRITING-AMORTIZATION> 29,711
<UNDERWRITING-OTHER> 21,502
<INCOME-PRETAX> 58,920
<INCOME-TAX> 20,033
<INCOME-CONTINUING> 38,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,887
<EPS-BASIC> 11.11
<EPS-DILUTED> 11.01
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Consists of $8,351 revenues from traditional contracts subject to FAS 60
accounting treatment and $63,321 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $26,807 benefits paid to policyholders, $(1,590) decrease in
reserves on traditional contracts and $118,169 interest on universal life
and investment annuity contracts.
</FN>
</TABLE>
