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, 2000
[ ] 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 10, 2000, the number of shares of Registrant's common stock
outstanding was: Class A - 3,303,155 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, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Earnings
For the Three Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Earnings
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999 (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, 2000 and 1999 (Unaudited)
Exhibit 11 - Computation of Earnings per Share
For the Nine Months Ended September 30, 2000 and 1999 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,129,024 2,151,924
Securities available for sale,
at fair value 723,906 717,948
Securities held to maturity,
for possible
losses ($4,215 and $4,104) 202,224 183,902
Policy loans 113,953 117,309
Index options 16,277 32,820
Other long-term investments 39,765 32,766
Cash and short-term investments 11,432 14,010
Total cash and investments 3,236,581 3,250,679
Deferred policy acquisition costs 390,043 369,665
Accrued investment income 46,452 47,756
Federal income tax receivable - 237
Deferred Federal income tax asset 3,058 -
Other assets 21,030 14,491
$ 3,697,164 3,682,828
<FN>
Note: The balance sheet at December 31, 1999, 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,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 160,449 165,020
Universal life and investment
annuity contracts 2,974,022 2,983,060
Other policyholder liabilities 27,926 24,103
Federal income taxes payable:
Current 2,429 4,763
Deferred - 4,659
Other liabilities 37,455 25,701
Total liabilities 3,202,281 3,207,306
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,302,155
and 3,300,728 shares issued and
outstanding in 2000 and 1999 3,302 3,301
Class B - $1 par value; 200,000
shares authorized, issued,
and outstanding in 2000 and 1999 200 200
Additional paid-in capital 25,090 25,028
Accumulated other comprehensive loss (13,200) (3,566)
Retained earnings 479,491 450,559
Total stockholders' equity 494,883 475,522
$ 3,697,164 3,682,828
<FN>
Note: The balance sheet at December 31, 1999, 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, 2000 and 1999
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 2,658 2,559
Universal life and investment
annuity contract revenues 23,082 21,131
Net investment income 52,829 44,562
Other income 149 8,583
Realized gains (losses) on investments (124) 191
Total premiums and other revenue 78,594 77,026
Benefits and expenses:
Life and other policy benefits 10,484 9,654
Decrease in liabilities for
future policy benefits (1,357) (941)
Amortization of deferred policy
acquisition costs 15,009 9,705
Universal life and investment
annuity contract interest 33,701 32,565
Other operating expenses 7,112 6,973
Total benefits and expenses 64,949 57,956
Earnings before Federal income taxes 13,645 19,070
Provision (benefit) for Federal income taxes:
Current 7,927 (1,136)
Deferred (3,288) 7,620
Total Federal income taxes 4,639 6,484
Net earnings $ 9,006 12,586
Basic Earnings Per Share:
Net earnings $ 2.57 3.60
Diluted Earnings Per Share:
Net earnings $ 2.56 3.57
<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, 2000 and 1999
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 7,930 8,351
Universal life and investment
annuity contract revenues 69,369 63,321
Net investment income 159,384 167,118
Other income 403 8,860
Realized gains (losses) on investments (6,536) 5,869
Total premiums and other revenue 230,550 253,519
Benefits and expenses:
Life and other policy benefits 30,077 26,807
Decrease in liabilities for
future policy benefits (4,850) (1,590)
Amortization of deferred policy
acquisition costs 37,187 29,711
Universal life and investment
annuity contract interest 103,112 118,169
Other operating expenses 21,189 21,502
Total benefits and expenses 186,715 194,599
Earnings before Federal income taxes 43,835 58,920
Provision (benefit) for
Federal income taxes:
Current 17,432 11,988
Deferred (2,529) 8,045
Total Federal income taxes 14,903 20,033
Net earnings $ 28,932 38,887
Basic Earnings Per Share:
Net earnings $ 8.26 11.11
Diluted Earnings Per Share:
Net earnings $ 8.22 11.01
<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, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings $ 9,006 12,586
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 2,455 (3,518)
Reclassification adjustment for
gains included in net earnings (25) (529)
Amortization of net unrealized gains
related to transferred securities (156) (114)
Net unrealized gains (losses)
on securities 2,274 (4,161)
Foreign currency translation adjustments 650 335
Other comprehensive income (loss) 2,924 (3,826)
Comprehensive income $ 11,930 8,760
<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, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings $ 28,932 38,887
Other comprehensive income (loss),
net of effects of
deferred policy acquisition costs
and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (5,319) (15,464)
Reclassification adjustment for
losses (gains) included
in net earnings 4,178 (2,577)
Amortization of net unrealized gains
related to transferred securities (335) (145)
Unrealized losses on securities
transferred during period
from held to maturity to
available for sale (9,166) -
Net unrealized losses on securities (10,642) (18,186)
Foreign currency translation adjustments 1,008 257
Other comprehensive loss (9,634) (17,929)
Comprehensive income $ 19,298 20,958
<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, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,501 3,498
Shares exercised under stock option plan 1 3
Balance at end of period 3,502 3,501
Additional paid-in capital:
Balance at beginning of year 25,028 24,899
Shares exercised under stock option plan 62 129
Balance at end of period 25,090 25,028
Accumulated other comprehensive
income (loss):
Unrealized gains (losses)
on securities:
Balance at beginning of year (6,412) 16,000
Change in unrealized
losses during period (10,642) (18,186)
Balance at end of period (17,054) (2,186)
Foreign currency translation adjustments:
Balance at beginning of year 2,846 2,634
Change in translation adjustments
during period 1,008 257
Balance at end of period 3,854 2,891
Accumulated other comprehensive
income (loss) at end of period (13,200) 705
Retained earnings:
Balance at beginning of year 450,559 391,334
Net earnings 28,932 38,887
Balance at end of period 479,491 430,221
Total stockholders' equity $ 494,883 459,455
<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, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,932 38,887
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment
annuity contract interest 103,112 118,169
Surrender charges and other
policy revenues (33,597) (29,131)
Realized losses (gains) on investments 6,536 (5,869)
Accrual and amortization of
investment income (3,492) (3,761)
Depreciation and amortization 816 735
Decrease in insurance receivables
and other assets 305 6,309
Decrease (increase) in accrued
investment income 1,304 (976)
Increase in deferred policy
acquisition costs (8,503) (18,795)
Decrease in liability for
future policy benefits (4,850) (1,590)
Increase (decrease) in other
policyholder liabilities 3,823 (536)
Decrease in Federal income taxes payable (3,840) (4,067)
Increase (decrease) in other liabilities 11,754 (25,342)
Decrease in value of index options 15,961 12,039
Other (582) (364)
Net cash provided by operating activities 117,679 85,708
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - -
Securities available for sale 15,167 50,897
Other investments 22,546 15,910
Proceeds from maturities and
redemptions of:
Securities held to maturity 24,215 59,573
Securities available for sale 31,971 46,808
Purchases of:
Securities held to maturity (64,815) (178,121)
Securities available for sale (20,935) (115,600)
Other investments (29,114) (31,679)
Principal payments on mortgage loans 13,068 36,113
Cost of mortgage loans acquired (30,949) (29,315)
Decrease in policy loans 3,356 7,155
Decrease in assets of
discontinued operations - 48
Decrease in liabilities of
discontinued operations - (48)
Other (6,831) (982)
Net cash used in investing activities (42,321) (139,241)
<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, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances for
universal life
and investment annuity contracts $ 274,336 310,217
Return of account balances
on universal life
and investment annuity contracts (352,335) (277,433)
Issuance of common stock under
stock option plan 63 132
Net cash provided by (used
in) financing activities (77,936) 32,916
Net decrease in cash and
short-term investments (2,578) (20,617)
Cash and short-term investments
at beginning of year 14,010 24,508
Cash and short-term investments
at end of period $ 11,432 3,891
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of National Western Life Insurance Company and its wholly owned
subsidiaries (the Company), The Westcap Corporation (Westcap), NWL
Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services,
Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage
operations during 1995 and filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in 1996. The bankruptcy reorganization was completed in
January, 1999, and National Western retained 100% continuing ownership of the
reorganized subsidiary. As a result, The Westcap Corporation is reflected as
discontinued operations in the accompanying financial statements for portions
of 1999 and prior years. Westcap is currently operating as a real estate
management company. All significant intercorporate transactions and accounts
have been eliminated in consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of September 30, 2000, and the results of its
operations for the three months and nine months ended September 30, 2000 and
1999, and its cash flows for the nine months ended September 30, 2000 and
1999. The results of operations for the three months and nine months ended
September 30, 2000 and 1999 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,
2000 1999
(In thousands)
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year 3,501 3,498
Shares exercised under stock option plan 1 3
Shares outstanding at end of period 3,502 3,501
</TABLE>
(B) Dividends
The Company paid no cash dividends on common stock during the nine months
ended September 30, 2000 and 1999.
(3) LEGAL PROCEEDINGS
On March 28, 1994, the Community College District No. 508, County of Cook and
State of Illinois (The City Colleges) filed a complaint in the United States
District Court for the Northern District of Illinois, Eastern Division,
against National Western Life Insurance Company (the Company or National
Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned
subsidiary of the Company. The suit sought rescission of securities purchase
transactions by The City Colleges from Westcap between September 9, 1993, and
November 3, 1993, alleged compensatory damages, punitive damages, injunctive
relief, declaratory relief, fees, and costs. National Western was named as a
"controlling person" of the Westcap defendants. In the meantime, Westcap
filed Chapter 11 bankruptcy, and The City Colleges filed a claim in the
bankruptcy court against Westcap. The claim was tried before the bankruptcy
court, and in September, 1997, a $56,173,000 judgment was entered against
Westcap favorable to The City Colleges. Westcap appealed this decision to
the United States District Court for the Southern District of Texas (Houston
Division). On July 24, 1998, the District Court affirmed the orders of the
bankruptcy court with respect to their underlying conclusion that Westcap was
liable to The City Colleges under the Texas Securities Act, but the Court
vacated the orders and remanded them to the bankruptcy court to determine the
correct amount of damages in a manner consistent with the Court's opinion and
the Texas Securities Act. The bankruptcy court on November 16, 1998, entered
an order allowing a claim of The City Colleges against the Westcap
estate of $51,738,868. Westcap appealed the bankruptcy court's and District
Court's judgment to the United States Court of Appeals for the Fifth Circuit,
New Orleans, Louisiana. Westcap prevailed in this appeal in an October 13,
2000, decision by the Appellate Court which reversed the $51,738,868 judgment
entered in 1998 by the District Court and the bankruptcy court in favor of
The City Colleges. The Appellate Court ruled in favor of Westcap and
determined that there had been no violations by Westcap of the Texas
securities laws. The Appellate Court remanded the case to the District Court
for entry of a new judgment in favor of Westcap. The Appellate decision is
subject to further review by the Fifth Circuit Court of Appeals upon filed
motion for rehearing en banc on November 3, 2000, and possible appeal to the
United States Supreme Court by The City Colleges.
The ruling does not affect the consolidated financial statements of National
Western Life Insurance Company as no liability had been previously accrued for
the District Court judgment. However, National Western will be entitled to
recover a portion of the settlement of the Westcap bankruptcy, but not to
exceed $600,000, should the Appellate Court decision become final. While
Westcap is a wholly owned subsidiary of the Company, the Company is not a
party to the bankruptcy or the judgment against Westcap by the bankruptcy
court or the United States District Court. The lawsuit of The City Colleges
against the Company was stayed in September, 1994, pending resolution of
The City Colleges' claim against Westcap. Following the judgment against
Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted
by the United States District Court in Illinois, and The City Colleges filed
an amended complaint seeking to hold the Company liable for the claim allowed
in the bankruptcy court against Westcap under the "control person" provision
of the Texas Securities Act. The suit seeks approximately $56 million plus
fees and costs. The maximum sought by The City Colleges will be determined
by the final amount allowed The City Colleges in the Westcap bankruptcy
appeal discussed above. The Company filed jurisdictional and venue motions
to have the case transferred to the United States District Court for the
Western District of Texas, which motions were agreed to by the Plaintiff,
and the case is now pending in the United States District Court for the
Western District of Texas, where the parties have engaged in discovery
activities. The case is awaiting the final outcome of the Westcap bankruptcy
appeal discussed above. If the current decision of the Fifth Circuit Court of
Appeals in the bankruptcy case becomes final, the Company will move to
dismiss the City Colleges case. Otherwise, the Company believes it has
reasonable and adequate defenses to the suit. Although the alleged
damages, if sustained, would be material to the Company's financial
statements, a reasonable estimate of any actual losses which may result
from the suit cannot be made at this time. Accordingly, no provision for
any liability that may result from this suit has been recognized in National
Western's financial statements.
(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, 2000 and 1999 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>
September 30,
2000:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 73,821 76,350 239,872 - 390,043
Total segment
assets 403,336 383,636 2,843,253 42,851 3,673,076
Future policy
benefits 319,319 297,756 2,517,396 - 3,134,471
Other
policyholder
liabilities 9,442 7,929 10,555 - 27,926
Three Months
Ended
September 30,
2000:
Condensed
Income
Statements:
Premiums and
contract
revenues $ 5,609 11,654 8,477 - 25,740
Net investment
income 6,607 5,693 39,936 593 52,829
Other income 3 8 84 54 149
Total revenues 12,219 17,355 48,497 647 78,718
Policy benefits 4,125 4,955 47 - 9,127
Amortization of
deferred
policy
acquisition
costs 1,357 3,540 10,112 - 15,009
Universal life
and investment
annuity
contract
interest 2,459 3,981 27,261 - 33,701
Other operating
expenses 1,980 2,036 2,729 367 7,112
Federal income
taxes 782 967 2,839 94 4,682
Total expenses 10,703 15,479 42,988 461 69,631
Segment earnings $ 1,516 1,876 5,509 186 9,087
Nine Months Ended
September 30,
2000:
Condensed Income
Statements:
Premiums and
contract
revenues $ 17,546 33,362 26,391 - 77,299
Net investment
income 19,642 17,112 119,278 3,352 159,384
Other income 25 37 287 54 403
Total revenues 37,213 50,511 145,956 3,406 237,086
Policy benefits 12,323 12,749 155 - 25,227
Amortization of
deferred
policy
acquisition
costs 3,555 10,491 23,141 - 37,187
Universal life
and investment
annuity
contract
interest 7,099 11,867 84,146 - 103,112
Other operating
expenses 6,363 6,079 8,140 607 21,189
Federal income
taxes 2,687 3,182 10,366 955 17,190
Total expenses 32,027 44,368 125,948 1,562 203,905
Segment earnings $ 5,186 6,143 20,008 1,844 33,181
</TABLE>
Selected Segment Information:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
September 30,
1999:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 71,207 75,765 209,268 - 356,240
Total segment
assets 406,900 374,964 2,786,552 36,140 3,604,556
Future policy
benefits 323,374 289,023 2,486,952 - 3,099,349
Other
policyholder
liabilities 9,185 7,196 7,038 - 23,419
Three Months
Ended
September 30,
1999:
Condensed Income
Statements:
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
Total revenues 12,477 16,538 47,395 425 76,835
Policy benefits 3,194 4,663 856 - 8,713
Amortization of
deferred
policy
acquisition
costs 1,222 2,872 5,611 - 9,705
Universal life
and investment
annuity
contract
interest 2,430 3,503 26,632 - 32,565
Other operating
expenses 1,965 2,073 2,935 - 6,973
Federal income
taxes 1,245 1,164 3,864 144 6,417
Total expenses 10,056 14,275 39,898 144 64,373
Segment earnings $ 2,421 2,263 7,497 281 12,462
Nine Months Ended
September 30, 1999:
Condensed Income
Statements:
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
Total revenues 37,502 48,238 159,270 2,640 247,650
Policy benefits 11,894 13,070 253 - 25,217
Amortization of
deferred
policy
acquisition
costs 3,614 9,434 16,663 - 29,711
Universal life
and investment
annuity
contract
interest 7,315 10,397 100,457 - 118,169
Other operating
expenses 6,784 6,476 8,242 - 21,502
Federal income
taxes 2,676 3,003 11,407 893 17,979
Total expenses 32,283 42,380 137,022 893 212,578
Segment earnings $ 5,219 5,858 22,248 1,747 35,072
</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,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Premiums and Other
Revenue:
Premiums and
contract revenues $ 25,740 23,690 77,299 71,672
Net investment income 52,829 44,562 159,384 167,118
Other income 149 8,583 403 8,860
Realized gains
(losses) on
investments (124) 191 (6,536) 5,869
Total consolidated
premiums
and other revenue $ 78,594 77,026 230,550 253,519
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Total segment
Federal income taxes $ 4,682 6,417 17,190 17,979
Taxes (benefits)
on realized
gains (losses)
on investments (43) 67 (2,287) 2,054
Total consolidated
Federal income taxes $ 4,639 6,484 14,903 20,033
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Net Earnings:
Total segment earnings $ 9,087 12,462 33,181 35,072
Realized gains
(losses) on
investments, net
of taxes (81) 124 (4,249) 3,815
Total consolidated
net earnings $ 9,006 12,586 28,932 38,887
</TABLE>
<TABLE>
<CAPTION>
September 30,
2000 1999
(In thousands)
<S> <C> <C>
Assets:
Total segment assets $ 3,673,076 3,604,556
Other unallocated assets 24,088 21,653
Total consolidated assets $ 3,697,164 3,626,209
</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,
2000 1999
<S> <C> <C>
United States domestic market:
Investment annuities 77.0% 80.8%
Life insurance 6.3 6.1
Total domestic market 83.3 86.9
International market:
Investment annuities 2.8 0.9
Life insurance 13.9 12.2
Total international market 16.7 13.1
Total direct premiums collected 100.0% 100.0%
</TABLE>
Insurance Operations - Domestic
The Company's domestic operations concentrate marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and equity-indexed annuities. Most of these annuities
can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and supervising agents. The Company
currently has over 80 IMOs contracted for sales of life and annuity products.
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, 2000, approximately 25.8% 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, 2000
and December 31, 1999. 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,
2000 1999
<S> <C> <C>
Debt securities 87.7% 87.8%
Mortgage loans 6.2 5.7
Policy loans 3.5 3.6
Index options 0.5 1.0
Equity securities 0.5 0.5
Real estate 0.4 0.4
Other 1.2 1.0
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).
An important aspect of the Company's investment philosophy is managing the
credit quality of its investments in debt securities. Thorough credit
analysis is performed on existing and potential corporate investments
including examination of a company's credit and industry outlook, financial
strength, effectiveness of management, and event risks. In the past few
years, credit analysis has become one of the most critical activities of the
Company's portfolio management.
National Western 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 holdings of below
investment grade debt securities, which are lower than industry averages, are
summarized below.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Amortized Carrying Market Invested
Cost Value Value Assets
(In thousands except percentages)
<S> <C> <C> <C> <C>
September 30, 2000 $ 103,652 76,586 73,929 2.4%
December 31, 1999 $ 73,607 70,900 63,864 2.2%
December 31, 1998 $ 46,453 44,974 45,317 1.4%
</TABLE>
Although National Western purchases only investment grade debt securities, a
growing number of companies have become more leveraged due to an environment
of heightened acquisition activity and large share repurchase programs.
Therefore, continued monitoring of credit quality after the purchase of a
company's debt securities is crucial in order for National Western to maintain
a high quality portfolio with a low percentage of below investment grade debt
securities. While the Company's holdings of below investment grade debt
securities remain low, these holdings have increased from $44,974,000 at
December 31, 1998, to $76,586,000 at September 30, 2000. This increase is due
to downgrades of investment grade debt securities as opposed to purchases of
such holdings. Historically, the Company's strong credit risk management and
commitment to quality has resulted in minimal defaults in the debt securities
portfolio.
During the third and fourth quarters of 1999, the Company recorded permanent
impairment writedowns totaling $4,403,000 related to two separate securities.
The writedowns were reflected as realized losses. One of these securities was
classified as available for sale and the other as held to maturity. The
Company subsequently transferred the held to maturity holding to securities
available for sale during the first quarter of 2000. Subsequently, three
additional debt securities experienced significant credit deterioration. As a
result of the significant deterioration of the issuing companies'
creditworthiness, National Western also transferred these three securities
from held to maturity to available for sale during the first quarter of 2000.
Amortized cost, net of writedowns, of the four transferred securities totaled
$49,528,000. Unrealized losses resulting from recording the securities at
fair value, before effects of taxes and deferred policy acquisitions costs,
totaled $20,376,000. Upon the transfers, the unrealized losses were recorded
as a component of accumulated other comprehensive loss.
During the second quarter of 2000, an additional below investment grade debt
security, which the Company has been monitoring closely due to credit
deterioration, defaulted on its interest payment. Based on the current
condition of the issuing company, complete recovery of National Western's
investment in this security is not expected. As a result, the Company
recorded a permanent impairment writedown for this security totaling
$6,715,000 during the quarter ended June 30, 2000 and also transferred the
security from held to maturity to available for sale. The writedown was
recorded as a realized investment loss. Amortized cost, net of writedowns, of
this security totaled $8,250,000 and unrealized losses resulting from
recording the security at fair value, before the effects of taxes and deferred
policy acquisition costs, totaled $4,000,000. Upon the transfer, the
unrealized losses were recorded as a component of accumulated other
comprehensive loss. Reductions to investment income due to this security
totaled $734,000 for the nine months ended September 30, 2000.
The Company is closely monitoring the previously described securities as well
as its other below investment grade holdings. While additional losses are not
currently anticipated based on the existing status and condition of these
securities, continued credit deterioration of some securities is possible,
which may result in further writedowns.
Although there is loss exposure related to its below investment grade debt
securities, the Company is firmly committed to minimizing credit risks and
maintaining a high quality portfolio. This commitment is reflected in the
high average credit rating of the Company's portfolio. In the table below,
investments in debt securities are classified according to credit ratings by
Standard and Poor's (S&P), a nationally recognized statistical rating
organization (NRSRO). If securities were not rated by S&P, the equivalent
rating of another NRSRO or the National Association of Insurance Commissioners
was used.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
AAA and U.S. government 28.2% 28.7%
AA 8.0 8.8
A 33.8 34.1
BBB 27.3 25.9
BB and other below investment grade 2.7 2.5
100.0% 100.0%
</TABLE>
Another important part of the Company's investment philosophy is managing the
cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments,
extensions, and calls, the Company takes steps to manage and minimize these
risks. The Company reduced its exposure to prepayment and extension risks by
lowering its holdings of mortgage-backed securities. This strategy began in
1994 when mortgage-backed securities totaled 47.6% of the entire portfolio,
but at September 30, 2000, totaled only 20.0% which is comparable to the life
insurance industry average. The majority of this reduction has been achieved
by shifting investments into corporate securities and public utilities, as
these holdings have increased from 47.0% at December 31, 1994 to 69.7% at
September 30, 2000. Also, most of these additions have been noncallable
corporates, which help reduce prepayment and call risks.
As indicated above, the Company's holdings of mortgage-backed securities are
also subject to prepayment risk, as well as extension risk. Both of these
risks are addressed by specific portfolio management strategies. The Company
has substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations, which have more predictable
cash flow patterns than pass-through securities. These securities, known as
planned amortization class I (PAC I) CMOs, are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
As of September 30, 2000, CMOs represent approximately 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.
At September 30, 2000, 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 $ 2,077,757 2,129,024 (51,267)
Securities available for sale:
Debt securities 707,892 762,448 (54,556)
Equity securities 16,014 12,669 3,345
Totals $ 2,801,663 2,904,141 (102,478)
</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 $102,478,000 on
the securities portfolio at September 30, 2000, are a reflection of market
conditions at quarter-end. The fair values, or market values, of fixed income
debt securities generally 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.
However, market values may fluctuate for other reasons, such as changing
economic conditions or increasing event-risk concerns. An analysis of the
change in unrealized gains and losses on the Company's securities portfolio
for the quarter ended September 30, 2000, is detailed below:
<TABLE>
<CAPTION>
Change in
Unrealized Gains (Losses) Unrealized
At At Gains (Losses)
September 30, June 30, During 3rd
2000 2000 Quarter 2000
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ (51,267) (75,295) 24,028
Securities available for sale:
Debt securities (54,556) (59,846) 5,290
Equity securities 3,345 3,315 30
Totals $ (102,478) (131,826) 29,348
</TABLE>
While unrealized losses did decrease during the third quarter of 2000 as
reflected above, unrealized losses at September 30, 2000, have still increased
13% from year-end 1999. Unrealized losses have increased for the year even
though market interest rates of the ten year U.S. Treasury bond actually
decreased approximately 64 basis points during this nine month period. With
lower market interest rates, it would be expected that market values of debt
securities would be higher. However, market values actually decreased over
the nine months ended September 30, 2000, because of the substantial widening
of the yield premium for corporate bonds over comparable Treasury securities.
Approximately 70% of National Western's bond portfolio consists of corporate
bonds, including public utilities. The increase of the yield premium has
primarily been event-risk driven as companies increase their leverage through
stock buyback programs and acquisitions. 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 had relatively small
effects on the Company's financial statements.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve 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, 1999, for its
interest rate-sensitive assets. Based on the recent changes in market
conditions in the first nine months of 2000, the changes in market values of
the Company's debt securities fell somewhat outside the expected range of
results of this analysis. The deviation from the expected results was due to
the volatility in the corporate bond market as previously described above.
In addition to the securities described above, the Company invests in index
options which are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuities. The values of
these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500 Composite Stock
Price Index. However, increases or decreases in investment returns from these
options are substantially offset by corresponding increases or decreases in
amounts paid to equity-indexed annuity policyholders, subject to minimum
guaranteed policy interest rates.
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
both a 100 basis point increase and decrease in the U.S. Treasury yield curve
as of December 31, 1999. A 100 basis point interest rate decline would
decrease net earnings for 2000 by approximately $300,000, based on the
Company's projections. A 100 basis point increase in interest rates would
increase net earnings by approximately $200,000, based on the Company's
projections. These estimated impacts to earnings are net of tax effects
determined at a tax rate of 35% and are also net of the estimated effects of
deferred policy acquisition costs.
The Company has modeled these scenarios, as a change in market interest rates
could pose potential risks to the current profitability levels of this
business. These movements in interest rates are also reasonably possible
near-term scenarios given the current interest rate environment. The risks
from such changes are primarily due to changes in interest rate spreads, which
are the differences between investment income earned and credited interest
paid to policyholders. Also, the changes in interest rates can effect the
level of surrenders and timing of cash flows related to policy liabilities.
The above-described scenarios produce estimated changes in cash flows as well
as cash flow reinvestment projections. Estimated cash flows in the Company's
model assume cash flow reinvestments which are representative of the Company's
current investment strategy. Calls and prepayments include scheduled
maturities and those expected to occur which would benefit the security
issuers. Assumed policy surrenders consider differences and relationships
between credited interest rates and market interest rates as well as surrender
charges on individual policies. The impact to earnings also includes the
expected effects on amortization of deferred policy acquisition costs. The
model considers only investment annuity and supplemental contracts in-force at
December 31, 1999, and does not consider new product sales or the possible
impact of interest rate changes on sales.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans is
typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities.
The Company seeks to minimize the credit and default risk in its mortgage loan
portfolio through strict underwriting guidelines and diversification of
underlying property types and geographic locations. In addition to being
secured by the property, mortgage loans with leases on the underlying property
are often guaranteed by the lessee, in which case the Company approves the
loan based on the credit strength of the lessee. This approach has resulted
in higher quality mortgage loans with fewer defaults.
The Company's direct investments in real estate are not a significant portion
of its total investment portfolio. Many of these investments were 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. These investments have typically enhanced the Company's
investment portfolio returns.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $202,224,000 and
$183,902,000, or 6.2% and 5.7% of total invested assets, at September 30,
2000, and December 31, 1999, 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, 2000, and December
31, 1999, was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
Geographic Region: 2000 1999
<S> <C> <C>
West South Central 53.9% 58.8%
Mountain 23.8 20.5
Pacific 10.7 11.0
South Atlantic 4.5 5.1
East South Central 3.8 4.2
Other 3.3 0.4
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
Property Type: 2000 1999
<S> <C> <C>
Retail 61.1% 56.1%
Office 24.0 27.4
Hotel/Motel 6.3 7.2
Land/Lots 3.2 2.5
Nursing Homes 2.0 2.4
Apartment 1.0 1.6
Other 2.4 2.8
Totals 100.0% 100.0%
</TABLE>
As of September 30, 2000, the allowance for possible losses on mortgage loans
was $4,215,000. Additions to the allowance of $111,000 were made for the
three and nine months ended September 30, 2000, and were reflected as realized
losses on investments in the accompanying financial statements. 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. The
Company had mortgage loan principal balances on nonaccrual status totaling
$3,012,000 and $3,014,000 at September 30, 2000 and December 31, 1999,
respectively. 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, 2000,
the reductions in interest income due to nonaccrual and restructured mortgage
loans were approximately $232,000. For the nine months ended September 30,
1999, 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 $12,047,000 and $11,388,000 at September 30, 2000,
and December 31, 1999, 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 $588,000 and $698,000 for the nine
months ended September 30, 2000 and 1999. Also during the first nine months
of 2000 and 1999, the Company sold real estate properties resulting in
realized gains on investments totaling $255,000 and $1,419,000, respectively.
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 nine months ended September 30, 2000 and 1999,
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, 2000 AND 1999
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the three months ended September 30, 2000
and 1999 is provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
investment gains (losses)
and index options $ 85,020 89,886
Index options (6,302) (13,051)
Realized gains (losses)
on investments (124) 191
Total revenues $ 78,594 77,026
Earnings:
Earnings from operations $ 9,087 12,462
Net realized gains (losses)
on investments (81) 124
Net earnings $ 9,006 12,586
Basic Earnings Per Share:
Earnings from operations $ 2.59 3.56
Net realized gains (losses)
on investments (0.02) 0.04
Net earnings $ 2.57 3.60
Diluted Earnings Per Share:
Earnings from operations $ 2.58 3.53
Net realized gains (losses)
on investments (0.02) 0.04
Net earnings $ 2.56 3.57
</TABLE>
Consolidated Operating Results: Earnings from operations, excluding net
realized gains and losses on investments, totaled $9,087,000 for the quarter
ended September 30, 2000, compared to $12,462,000 for the third quarter of
1999. Earnings for the current quarter were affected by the Company's annuity
business. Although slowing in the third quarter, the Company has experienced
higher policy surrenders for certain annuity products in 2000. As a result,
amortization of deferred policy acquisition costs was higher this quarter
primarily due to effects from the Company's periodic refinements to its
actuarial assumptions. Although to a lesser extent, earnings for the quarter
ended September 30, 2000, were also lower due to reductions in investment
income and higher universal life and annuity contract interest expenses.
Earnings from operations for the comparable 1999 third quarter included two
significant items. The Company experienced a decrease in 1999 third quarter
earnings of over $5 million from equity-indexed annuity business due to
significant volatility and declines in the S&P 500 Index. Equity-indexed
annuities combine features associated with traditional fixed annuities with an
option to have interest rates linked in part to an equity index, the S&P 500
Index. The second significant item affecting third quarter 1999 earnings was
the resolution of pending litigation which resulted in additional income to
the Company totaling $5,513,000, net of taxes. While there continues to be
significant volatility and declines in the S&P 500 Index during 2000,
including the third quarter, the financial impact on the Company's equity-
indexed annuity business was significantly less than the comparable 1999 third
quarter.
Revenues for the quarters ended September 30, 2000 and 1999 totaled
$78,594,000 and $77,026,000, respectively. Excluding index option revenues,
realized investment gains and losses, and nonrecurring litigation settlement
income, third quarter 2000 revenues totaled $85,020,000 compared to
$81,404,000. This reflects revenue growth of 4.4% over comparable 1999
quarterly results.
The Company recorded realized losses on investments, net of taxes, totaling
$81,000 for the quarter ended September 30, 2000, compared to gains of
$124,000 for the third quarter of 1999. The loss in the third quarter of 2000
is primarily due to additions to the allowances for mortgage loan losses
totaling $111,000. The 1999 gains were primarily from sales of investments in
debt securities, net of permanent impairment adjustments for debt securities
and mortgage loans.
Universal Life and Investment Annuity Contract Revenues: Contract revenues
increased during the quarter ended September 30, 2000 totaling $23,082,000
compared to $21,131,000 for the comparable 1999 period. This increase of over
9.2% is primarily due to higher annuity surrender charge income. Surrenders
for single-tier annuities were significantly higher during the third quarter
of 2000.
Net Investment Income: Net investment income increased 18.6% from the third
quarter of 1999, primarily due to increases 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. Although there was an increase
in index option fair values in the 2000 third quarter compared to the same
period of 1999, value changes for these options still reduced investment
income in both periods. The reductions to investment income from index
options for the quarters ended September 30, 2000 and 1999 totaled $6,302,000
and $13,051,000, respectively. The significant reductions are directly
attributable to the volatility and declines in the S&P 500 Index. While net
investment income decreased due to these options, these reductions were
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. Investment income from mortgage loans has increased from
$3,821,000 for the third quarter of 1999 to $4,695,000 for the comparable 2000
quarter. This increase is consistent with the 20% increase in mortgage loans
from September 30, 1999 to September 30, 2000. A detail of net investment
income is provided below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 51,712 51,347
Mortgage loans 4,695 3,821
Policy loans 2,056 2,024
Index options (6,302) (13,051)
Other investment income 1,144 1,034
Total investment income 53,305 45,175
Investment expenses 476 613
Net investment income $ 52,829 44,562
</TABLE>
Life and Other Policy Benefits: Policy benefits in the third quarter of 2000
increased 8.6% over the 1999 third quarter. The higher expenses were
primarily due to increases totaling $307,000 and $483,000 in life insurance
benefit claims and surrenders of traditional products, respectively. However,
much of the increase in traditional surrender expense was offset by
corresponding decreases 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,
2000 1999
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 6,813 6,506
Surrenders of traditional products 3,341 2,858
Other policy benefits 330 290
Totals $ 10,484 9,654
</TABLE>
Amortization of Deferred Policy Acquisition Costs: Amortization of deferred
policy acquisition costs was significantly higher in 2000 totaling $15,009,000
compared to $9,705,000 in 1999. These expenses represent the amortization of
the costs of acquiring or producing new business, which consists primarily of
agents' commissions. As described in more detail in the annuity operations
section, amortization was higher primarily relating to higher annuity policy
surrenders during 2000.
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. Contract interest totaled $33.7 million and $32.6 million
for the quarters ended September 30, 2000 and 1999, respectively.
Federal Income Taxes: Federal income taxes include no unusual items as
effective tax rates for the quarters ended September 30, 2000 and 1999 were
both 34.0%.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the quarters ended September 30, 2000 and
1999 is provided below. The segment earnings exclude realized gains and
losses on investments, net of taxes.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment earnings:
September 30,
2000 $ 1,516 1,876 5,509 186 9,087
September 30,
1999 $ 2,421 2,263 7,497 281 12,462
</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 $1,516,000 and
$2,421,000 for the three months ended September 30, 2000 and 1999,
respectively. The decrease in earnings in 2000 is primarily due to lower
premiums and contract revenues and higher policy benefits.
A comparative analysis of results of operations for the Company's domestic
life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
Domestic Life Insurance Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 5,609 6,194
Net investment income 6,607 6,318
Other income 3 (35)
Total premiums and other revenue 12,219 12,477
Benefits and expenses:
Policy benefits 4,125 3,194
Amortization of deferred
policy acquisition costs 1,357 1,222
Universal life insurance
contract interest 2,459 2,430
Other operating expenses 1,980 1,965
Total benefits and expenses 9,921 8,811
Segment earnings before
Federal income taxes 2,298 3,666
Federal income taxes 782 1,245
Segment earnings $ 1,516 2,421
</TABLE>
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,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 3,048 2,993
Surrender charges 413 416
Policy fees and other revenues 333 535
Traditional life insurance premiums 1,815 2,250
Totals $ 5,609 6,194
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
September 30, 2000 and 1999 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. While the Company did experience higher collected deposits in the
first two quarters of 2000, deposits were down in the third quarter primarily
due to lower first year premiums.
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 599 1,626
Renewal premiums 3,388 3,614
Totals $ 3,987 5,240
</TABLE>
Policy benefits were higher in the third quarter of 2000 totaling $4,125,000
compared to $3,194,000 for the comparable 1999 period. The increase is due to
higher surrenders of traditional products net of related changes in policy
liabilities. Life insurance benefit claims were relatively consistent between
quarters.
Universal life insurance contract interest remained relatively constant at
$2,459,000 in 2000 compared to $2,430,000 in 1999. This is consistent with
the relative stable to declining size of this block 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. Products sold in the international market
include both universal life and traditional life insurance products. The
Company minimizes exposure to foreign currency risks, as almost all foreign
policies require payment of premiums and claims in United States dollars.
Sales production from the international market is from independent broker-
agents, many of whom have been selling National Western products for 20 or
more years.
Earnings for the international life insurance operating segment were
$1,876,000 and $2,263,000 for the quarters ended September 30, 2000 and 1999,
respectively. Earnings in 2000 were somewhat lower due to higher amortization
of deferred policy acquisition costs and contract interest, partially offset
by increases in premiums and contract revenues.
A comparative analysis of results of operations for the Company's
international life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
International Life Insurance Operations:
Premiums and other revenue:
Premiums and contract revenues $ 11,654 11,075
Net investment income 5,693 5,484
Other income 8 (21)
Total premiums and other revenue 17,355 16,538
Benefits and expenses:
Policy benefits 4,955 4,663
Amortization of deferred policy
acquisition costs 3,540 2,872
Universal life insurance contract
contract interest 3,981 3,503
Other operating expenses 2,036 2,073
Total benefits and expenses 14,512 13,111
Segment earnings before Federal income
income taxes 2,843 3,427
Federal income taxes 967 1,164
Segment earnings $ 1,876 2,263
</TABLE>
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. A comparative detail of premiums and contract revenues is provided
below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 7,772 7,406
Surrender charges 2,091 2,330
Policy fees and other revenues 964 1,050
Traditional life insurance premiums 827 289
Totals $ 11,654 11,075
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
September 30, 2000 and 1999 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,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 3,638 3,618
Renewal premiums 9,868 9,783
Totals $ 13,506 13,401
</TABLE>
Life insurance benefit claims, which are reflected in policy benefits for
segment reporting purposes, were slightly higher in 2000 at $3,532,000
compared to $3,324,000 in 1999. Mortality claims fluctuate from period to
period and these deviations, which can at times be significant, 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 increased $668,000 from
$2,872,000 in 1999 to $3,540,000 in 2000. 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.
Universal life insurance contract interest increased from $3,503,000 in 1999
to $3,981,000 in 2000. The increase in contract interest is consistent with
growth in the universal life insurance business.
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). 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 $5,509,000 and $7,497,000 for
the quarters ended September 30, 2000 and 1999, respectively. Earnings for
2000 were down from 1999 primarily due to higher amortization of deferred
policy acquisition costs, but offset significantly by higher net investment
income, higher premium and contract revenues, and lower traditional policy
benefits. Third quarter 1999 earnings were affected by several significant
items which substantially offset each other. Results for the 1999 third
quarter include higher income from a litigation settlement, offset by
decreases in surrender charge revenues and lower earnings from the Company's
equity-indexed annuity business.
A comparative analysis of results of operations for the Company's annuity
segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Annuity Operations:
Premiums and other revenue:
Premiums and contract revenues $ 8,477 6,421
Net investment income 39,936 32,335
Other income 84 8,639
Total premiums and other revenue 48,497 47,395
Benefits and expenses:
Policy benefits 47 856
Amortization of deferred
policy acquisition costs 10,112 5,611
Annuity contract interest 27,261 26,632
Other operating expenses 2,729 2,935
Total benefits and expenses 40,149 36,034
Segment earnings before
Federal income taxes 8,348 11,361
Federal income taxes 2,839 3,864
Segment earnings $ 5,509 7,497
</TABLE>
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 up 42%
in 2000 compared to 1999 due to increases in surrender charges primarily from
single-tier annuities. Although actual policy surrenders for two-tier
annuities were basically stable, policy surrenders for single-tier annuities
were abnormally high increasing 51% in the third quarter of 2000 from the
comparable period of 1999. Although slowing in the third quarter, the Company
has also experienced higher annuity policy surrenders in the first and second
quarters of 2000. A comparative detail of the components of premiums and
annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 3,109 3,088
Single-tier annuities 3,888 1,826
Total surrender charges 6,997 4,914
Payout annuity and other revenues 1,464 1,487
Traditional annuity premiums 16 20
Totals $ 8,477 6,421
</TABLE>
Actual annuity deposits collected for the quarters ended September 30, 2000
and 1999 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,
2000 1999
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 21,669 33,572
Other 52,938 50,271
Total deferred annuities 74,607 83,843
Immediate annuities 5,940 9,457
Totals $ 80,547 93,300
</TABLE>
Although total annuity deposits for the quarter ended September 30, 2000, were
lower than the comparable 1999 period, the decline is primarily attributable
to equity-indexed annuities. While sales have been lower in 2000, equity-
indexed annuities 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 that could 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.
Sales of equity-indexed annuities began declining during the year ended
December 31, 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. The lower production level has continued in the first nine
months of 2000, which is consistent with volatility in the stock market.
Net investment income for annuity operations for the third quarters of 2000
and 1999 totaled $39,936,000 and $32,335,000, respectively. Declines in fair
values of index options resulted in reductions to net investment income
totaling $6,302,000 and $13,051,000 for the quarters ended September 30, 2000
and 1999. 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.
Amortization of deferred policy acquisition costs represents the amortization
of the costs of acquiring or producing new business, primarily agents'
commissions, the majority of which are amortized in direct relation to the
anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level of policy surrenders. Amortization
for 2000 and 1999 was $10,112,000 and $5,611,000, respectively. The increase
in amortization is related to increases in annuity surrenders. Although
slowing in the third quarter, the Company has experienced higher policy
surrenders for certain annuity products in 2000. As a result, amortization of
deferred policy acquisition costs was higher this quarter primarily due to
effects from the Company's periodic refinements to its actuarial assumptions.
Annuity contract interest was $27,261,000 in 2000 compared to $26,632,000 in
1999. Contract interest amounts can be affected significantly by the
Company's equity-indexed annuities which have interest rates that are linked
in part to the S&P 500 Index. The substantial decline of the S&P 500 Index 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 a result of the litigation
settlement, which involved an independent marketing organization under
contract with the Company, accrued commission liabilities were released by the
Company in the quarter ended September 30, 1999, resulting in additional other
income of $8,482,000, or $5,513,000, net of taxes.
Other Operations
Earnings for other operations totaled $186,000 and $281,000 for the third
quarters of 2000 and 1999, respectively. While National Western's primary
business encompasses its domestic and international life insurance operations
and its annuity operations, the Company also has small real estate, nursing
home, 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.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the nine months ended September 30, 2000
and 1999 is provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
investment gains (losses)
and index options $ 257,603 253,174
Index options (20,517) (5,524)
Realized gains
(losses) on investments (6,536) 5,869
Total revenues $ 230,550 253,519
Earnings:
Earnings from operations $ 33,181 35,072
Net realized gains
(losses) on investments (4,249) 3,815
Net earnings $ 28,932 38,887
Basic Earnings Per Share:
Earnings from operations $ 9.47 10.02
Net realized gains
(losses) on investments (1.21) 1.09
Net earnings $ 8.26 11.11
Diluted Earnings Per Share:
Earnings from operations $ 9.43 9.93
Net realized gains
(losses) on investments (1.21) 1.08
Net earnings $ 8.22 11.01
</TABLE>
Consolidated Operating Results: For the nine months ended September 30, 2000,
earnings from operations, excluding net realized gains and losses on
investments, totaled $33,181,000 compared to $35,072,000 for the same period
of 1999. This 5.4% decrease in earnings is largely attributable to higher
amortization of deferred policy acquisition costs as previously described for
the quarter ended September 30, 2000. However, these higher costs were
substantially offset by an increase in universal life and investment annuity
contract revenues of 9.6% for the nine months ended September 30, 2000, over
the comparable 1999 period. Additionally, while life insurance benefit claims
were significantly higher in the first nine months of 2000, this increase was
largely mitigated by reductions in traditional policy liabilities.
The Company recorded realized losses on investments, net of taxes, totaling
$4,249,000 for the nine months ended September 30, 2000, compared to gains of
$3,815,000 for the first nine months of 1999. The losses in 2000 are
primarily due to a permanent impairment writedown for a specific debt security
which defaulted during the second quarter. The Company's policy is to record
an impairment writedown when a decline in value is other than temporary and
full recovery of the investment costs is not expected. Overall, the Company's
debt securities portfolio remains high quality with small holdings of below
investment grade securities. 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 described for the three months ended September 30, 1999, equity-
indexed annuity issues decreased net earnings by over $5 million in 1999.
Also affecting year-to-date 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.
As previously reported, the bankruptcy reorganization of the Company's wholly
owned subsidiary, The Westcap Corporation, was completed in the first quarter
of 1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the nine months ended September 30, 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, 2000 and
1999 is provided below. The segment earnings exclude realized gains and
losses on investments, net of taxes.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment
earnings:
September 30,
2000 $ 5,186 6,143 20,008 1,844 33,181
September 30,
1999 $ 5,219 5,858 22,248 1,747 35,072
</TABLE>
Domestic Life Insurance Operations
Earnings for the domestic life insurance operating segment were $5,186,000 and
$5,219,000 for the nine months ended September 30, 2000 and 1999,
respectively. While premiums and contract revenues were lower and policy
benefits were higher for the nine months ended September 30, 2000, these
negative impacts to earnings were substantially reduced by increases in net
investment income and lower other operating expenses. These balancing
fluctuations resulted in the relatively comparable net earnings between 2000
and 1999.
A comparative analysis of results of operations for the Company's domestic
life insurance segment is detailed below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Domestic Life Insurance Operations:
Premiums and other revenue:
Premiums and contract revenues $ 17,546 18,474
Net investment income 19,642 18,996
Other income 25 32
Total premiums and other revenue 37,213 37,502
Benefits and expenses:
Policy benefits 12,323 11,894
Amortization of deferred
policy acquisition costs 3,555 3,614
Universal life insurance
contract interest 7,099 7,315
Other operating expenses 6,363 6,784
Total benefits and expenses 29,340 29,607
Segment earnings before
Federal income taxes 7,873 7,895
Federal income taxes 2,687 2,676
Segment earnings $ 5,186 5,219
</TABLE>
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,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 9,108 8,777
Surrender charges 1,371 1,299
Policy fees and other revenues 946 1,178
Traditional life insurance premiums 6,121 7,220
Totals $ 17,546 18,474
</TABLE>
Actual universal life insurance deposits, which are recorded directly to
policyholder liabilities upon receipt, for the nine months ended September 30,
2000 and 1999 are detailed below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 3,490 4,001
Renewal premiums 10,732 10,874
Totals $ 14,222 14,875
</TABLE>
Consistent with the third quarter of 2000, policy benefits were higher for the
nine months ended September 30, 2000, totaling $12,323,000 compared to
$11,894,000 for the comparable 1999 period. The increase is due to higher
life insurance benefit claims and surrenders of traditional products net of
related changes in policy liabilities.
Other operating expenses totaled $6,363,000 and $6,784,000 for the nine months
ended September 30, 2000 and 1999, respectively. Expenses for 2000 were lower
as 1999 expenses include an additional accrual for state income taxes.
International Life Insurance Operations
Earnings for the international life insurance operating segment were
$6,143,000 and $5,858,000 for the nine months ended September 30, 2000 and
1999, respectively. The 4.9% increase in net earnings is primarily due to
higher cost of insurance revenues and net investment income, tempered by
increases in expenses, primarily contract interest.
A comparative analysis of results of operations for the Company's
international life insurance segment is detailed below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
International Life Insurance
Operations:
Premiums and other revenue:
Premiums and contract revenues $ 33,362 31,819
Net investment income 17,112 16,387
Other income 37 32
Total premiums and other revenue 50,511 48,238
Benefits and expenses:
Policy benefits 12,749 13,070
Amortization of deferred
policy acquisition costs 10,491 9,434
Universal life insurance
contract interest 11,867 10,397
Other operating expenses 6,079 6,476
Total benefits and expenses 41,186 39,377
Segment earnings before
Federal income taxes 9,325 8,861
Federal income taxes 3,182 3,003
Segment earnings $ 6,143 5,858
</TABLE>
A comparative detail of premiums and contract revenues, which reflects the
increase in universal life cost of insurance revenues as previously described,
is provided below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 23,055 21,919
Surrender charges 5,864 5,993
Policy fees and other revenues 2,686 2,835
Traditional life insurance premiums 1,757 1,072
Totals $ 33,362 31,819
</TABLE>
Actual universal life insurance deposits collected for the nine months ended
September 30, 2000 and 1999 are detailed below. Increases in current year
premiums are due to improving economic conditions during 2000 in the
international Central and South American markets and higher sales production
from the Pacific Rim market.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 10,137 9,504
Renewal premiums 27,780 27,247
Totals $ 37,917 36,751
</TABLE>
Universal life insurance contract interest increased from $10,397,000 in 1999
to $11,867,000 in 2000. The increase in contract interest is consistent with
growth in the universal life insurance business. Interest is also higher due
to increasing policyholder persistency bonuses credited to specific
international products. Certain products are credited with bonus interest if
the policies remain in force for specified time periods.
Annuity Operations
Earnings for the annuity operating segment were $20,008,000 and $22,248,000
for the nine months ended September 30, 2000 and 1999, respectively.
Consistent with the third quarter results as previously described, earnings
for the nine months ended September 30, 2000, were lower than 1999 primarily
due to higher amortization of deferred policy acquisition costs. However,
increases in annuity contract revenues, primarily from policy surrender
charges, mitigated a significant portion of this effect. Also, as previously
described for the third quarter results, year-to-date earnings for 1999 were
affected by several significant items which substantially negated each other.
Results for the nine months ended September 30, 2000, include higher income
from a litigation settlement, offset by decreases in surrender charge revenues
and lower earnings from the Company's equity-indexed annuity business.
A comparative analysis of results of operations for the Company's annuity
segment is detailed below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Annuity Operations:
Premiums and other revenue:
Premiums and contract revenues $ 26,391 21,379
Net investment income 119,278 129,095
Other income 287 8,796
Total premiums and other revenue 145,956 159,270
Benefits and expenses:
Policy benefits 155 253
Amortization of deferred
policy acquisition costs 23,141 16,663
Annuity contract interest 84,146 100,457
Other operating expenses 8,140 8,242
Total benefits and expenses 115,582 125,615
Segment earnings before
Federal income taxes 30,374 33,655
Federal income taxes 10,366 11,407
Segment earnings $ 20,008 22,248
</TABLE>
Premiums and annuity contract revenues were up $5,012,000, or 23.4%, from
$21,379,000 in 1999 to $26,391,000 in 2000. This increase is due to higher
surrender charge revenues from single-tier annuities. As previously described
for the third quarter results, actual policy surrenders were abnormally high
through the first nine months of 2000 resulting in increased revenues.
However, the surrenders peaked in the second quarter and have begun to slow in
the third quarter of 2000. A comparative detail of the components of premiums
and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 11,575 11,655
Single-tier annuities 10,316 5,234
Total surrender charges 21,891 16,889
Payout annuity and other revenues 4,448 4,431
Traditional annuity premiums 52 59
Totals $ 26,391 21,379
</TABLE>
Annuity deposits for 2000 reflect a decline of 11.9% compared to the same
period of 1999, resulting substantially from decreases in equity-indexed
annuity deposits. Sales of these annuities continue to slow, largely a result
of volatility in the stock market as previously described for the quarter
ended September 30, 2000. Some of the decline in equity-indexed annuity sales
is being countered with increases in sales of other deferred annuities, which
reflect growth of 5.8% for 2000. Actual annuity deposits collected for the
nine months ended September 30, 2000 and 1999 are detailed below.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 82,991 123,491
Other 157,015 148,376
Total deferred annuities 240,006 271,867
Immediate annuities 19,940 23,124
Totals $ 259,946 294,991
</TABLE>
Net investment income for the nine months ended September 30, 2000 and 1999
totaled $119.3 million and $129.1 million, respectively. Declines in fair
values of index options resulted in reductions to net investment income
totaling $20,517,000 and $5,524,000 for the nine months ended September 30,
2000 and 1999, respectively. Index options are used to hedge the equity
return component of the Company's equity-indexed annuities. Fluctuations in
the income from index options correlates to the performance of the stock
market, more specifically the S&P 500 Index. The significant decline in
investment income resulting from the index options is substantially offset by
lower annuity contract interest expense. However, as more fully described for
third quarter 1999 results, primarily because of policy liability reserving
treatments related to minimums guaranteed interest rates, the reduction in
1999 annuity contract interest expense was much less than the decline in net
investment income.
Annuity contract interest was $84.1 million in 2000 compared to $100.5 million
in 1999. The decrease is primarily due to lower interest credited on equity-
indexed annuities resulting from the volatility and decline in the S&P 500
Index. Also as described above, decreases in index option income were
experienced during the nine months ended September 30, 2000, reflecting the
hedging policy implemented for the equity-indexed annuity business. However,
differences between income from index options and contract interest credited
to policyholders will occur for several reasons as previously explained in
detail for the three months ended September 30, 2000.
Amortization for the nine months ended September 30, 2000 and 1999 totaled
$23,141,000 and $16,663,000, respectively. The increase in amortization is
related to the increase in annuity policy surrenders as previously described
for the three months ended September 30, 2000.
Other Operations
As previously described for the three months ended September 30, 2000,
National Western has small real estate, nursing home, and other investment
operations through its wholly owned subsidiaries. Earnings for these other
operations totaled $1,844,000 and $1,747,000 for the nine months ended
September 30, 2000 and 1999, respectively. Currently, most of the income from
these operations 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
totaled $1,793,000 and $1,751,000 in June 2000 and 1999, respectively.
During the first quarter of 2000, the Company acquired a nursing home facility
through an affiliated limited partnership. The acquisition, which totaled
approximately $6.6 million, was made by a newly formed limited partnership,
the partners of which are downstream subsidiaries of National Western. The
nursing home facility, which opened in late July, 2000, is operated by an
affiliated limited partnership and the financial operating results are
consolidated with those of the Company. Daily operations and management of
the nursing home are performed by an experienced management company through a
contract with the limited partnership. Initial start up expenses in 2000
could generate minimum operating losses of approximately $900,000, before
taxes. Currently, operating losses before taxes from initial start up costs
totaled approximately $540,000 for the period from inception to September 30,
2000.
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 $117.7 million and $85.7 million for the nine months ended September 30,
2000 and 1999, 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, but
reflected cash outflows of $78.0 million for the comparable period of 2000.
The negative cash flow in the Company's deposit product operations is
primarily due to abnormally high annuity surrenders during 2000. While
increased surrenders may continue, this high rate of surrenders has slowed
from its peak in the second quarter. Premium deposits have also been lower in
the first nine months of 2000 due to lower equity-indexed annuity sales, which
have been affected by the volatility in the stock market. The Company
primarily used cash generated from operations and some short-term borrowings
to manage this negative cash flow.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $56.2 million and $106.4 million for the nine months
ended September 30, 2000 and 1999, respectively. The Company expects
significant cash flows from these sources throughout the remainder of 2000.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 2000 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 2000.
Stockholders' equity totaled $494.9 million at September 30, 2000, reflecting
an increase of $19.4 million from December 31, 1999. The increase in capital
is primarily from net earnings of $28.9 million, offset by an increase in net
unrealized losses on investment securities totaling $10.6 million during the
first nine months of 2000. The increase in unrealized losses was due to
market interest rate conditions and transfers of securities from held to
maturity to available for sale. As previously described in Investments in
Debt and Equity Securities, the debt securities transfers were executed due to
significant credit deterioration of the issuing companies. Book value per
share at September 30, 2000, was $141.31.
CHANGES IN ACCOUNTING PRINCIPLES
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June, 1999, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," was issued deferring SFAS No.
133, which will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement defines several designations of
derivatives based on the instrument's intended use and specifies the
appropriate accounting treatment for changes in the fair value of the
derivative based on its resulting designation. In June, 2000, the FASB also
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," which amends SFAS No. 133 for certain
specifically identified derivative instruments and hedging activities. This
statement is to be adopted concurrently with SFAS No. 133.
The Company currently sells equity-indexed annuities that contain an equity
return component for policyholders which is an embedded derivative instrument.
The Company purchases index options, which are also derivative instruments, to
hedge this equity return component. The index options are reported at fair
value in the Company's financial statements, which is in accordance with SFAS
No. 133 requirements. The Company also uses a fair value approach in
recording policy liabilities for the equity-indexed annuities. However, one of
the more complex and challenging aspects of interpreting and implementing SFAS
No. 133 is how the insurance industry is to apply the statement's provisions
to policy liabilities for equity-indexed products. The Derivative
Implementation Group of the FASB is in the process of addressing this policy
liability issue and has only recently released what may ultimately be
definitive guidance. The Company is still in the process of reviewing the
guidance provided by the Derivatives Implementation Group. The initial review
indicates that the policy liability methodology is somewhat different from the
Company's, even though both calculations follow a fair value approach.
Additional review and system programming will be completed by the Company
during the fourth quarter of 2000 to determine policy liabilities under the
new method. Until this process is completed, the Company is unable to
determine if there will be any material changes to total policy liabilities
for its equity-indexed annuities. As a result, the ultimate implementation of
SFAS No. 133 could have a significant effect on the Company's results of
operations. The Company expects to implement the new statement in the first
quarter of 2001.
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 or operating
performance, future capital needs, and statutory or regulatory related 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
As more fully described in note 3 to the accompanying financial statements,
National Western Life Insurance Company's wholly owned subsidiary, The Westcap
Corporation, has prevailed in an October 13, 2000, decision issued by the
United States Court of Appeals for the Fifth Circuit, New Orleans, Louisiana.
The Court of Appeals decision reversed a $51,738,868 judgment entered in 1998
by the United States District Court for the Southern District of Texas
(Houston Division) and the United States Bankruptcy Court in Houston in favor
of The City Colleges of Chicago. The Appellate Court ruled in favor of The
Westcap Corporation and determined that there had been no violations by The
Westcap Corporation of the Texas securities laws. The Appellate Court
remanded the case to the U.S. District Court for entry of a new judgment in
favor of Westcap. The Appellate decision is subject to further review by the
Fifth Circuit Court of Appeals upon filed motion for rehearing en banc on
November 3, 2000, and possible appeal to the United States Supreme Court by
The City Colleges of Chicago.
The ruling does not affect the consolidated financial statements of National
Western Life Insurance Company as no liability had been previously accrued for
the District Court judgment. However, National Western will be entitled to
recover a portion of the settlement of the Westcap bankruptcy, but not to
exceed $600,000, should the Appellate Court decision become final.
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 October 13, 2000, was filed by the Company
disclosing the favorable court decision for the Company's wholly owned
subsidiary, The Westcap Corporation, as described above in Item 1, Legal
Proceedings.
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 10, 2000 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: November 10, 2000 /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 10, 2000 /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, 2000 and 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to common
stockholders before and after
assumed conversions:
Net earnings $ 9,006 12,586
Denominator:
Basic earnings per share -
weighted-average shares 3,502 3,501
Effect of dilutive stock options 18 27
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,520 3,528
Basic earnings per share:
Net earnings $ 2.57 3.60
Diluted earnings per share:
Net earnings $ 2.56 3.57
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to common stockholders
before and after assumed conversions:
Net earnings $ 28,932 38,887
Denominator:
Basic earnings per share -
weighted-average shares 3,501 3,499
Effect of dilutive stock options 18 32
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,519 3,531
Basic earnings per share:
Net earnings $ 8.26 11.11
Diluted earnings per share:
Net earnings $ 8.22 11.01
</TABLE>
