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 June 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 August 10, 2000, the number of shares of Registrant's common stock
outstanding was: Class A - 3,301,755 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
June 30, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Earnings
For the Three Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Earnings
For the Six Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended June 30, 2000 and 1999 (Unaudited)
Exhibit 11 - Computation of Earnings per Share
For the Six Months Ended June 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)
June 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,138,688 2,151,924
Securities available for sale, at fair value 728,186 717,948
Mortgage loans, net of allowances for
possible losses ($4,104 and $4,104) 202,024 183,902
Policy loans 115,772 117,309
Index options 22,598 32,820
Other long-term investments 40,396 32,766
Cash and short-term investments 2,638 14,010
Total cash and investments 3,250,302 3,250,679
Deferred policy acquisition costs 392,123 369,665
Accrued investment income 49,444 47,756
Federal income tax receivable 282 237
Deferred Federal income tax asset 1,345 -
Other assets 23,588 14,491
$ 3,717,084 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)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 161,806 165,020
Universal life and investment
annuity contracts 2,984,775 2,983,060
Other policyholder liabilities 25,861 24,103
Federal income taxes payable:
Current - 4,763
Deferred - 4,659
Short-term borrowings 23,000 -
Other liabilities 38,714 25,701
Total liabilities 3,234,156 3,207,306
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,301,755
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 25,065 25,028
Accumulated other comprehensive loss (16,124) (3,566)
Retained earnings 470,485 450,559
Total stockholders' equity 482,928 475,522
$ 3,717,084 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 June 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 $ 2,900 3,381
Universal life and investment annuity
contract revenues 25,384 20,658
Net investment income 48,815 64,704
Other income 139 127
Realized gains (losses) on investments (5,832) 873
Total premiums and other revenue 71,406 89,743
Benefits and expenses:
Life and other policy benefits 9,501 8,465
Decrease in liabilities for
future policy benefits (1,011) (408)
Amortization of deferred policy
acquisition costs 11,293 10,435
Universal life and investment annuity
contract interest 32,760 44,993
Other operating expenses 7,360 7,828
Total benefits and expenses 59,903 71,313
Earnings before Federal income taxes 11,503 18,430
Provision (benefit) for Federal income taxes:
Current 4,180 7,664
Deferred (270) (1,432)
Total Federal income taxes 3,910 6,232
Net earnings $ 7,593 12,198
Basic Earnings Per Share:
Net earnings $ 2.17 3.49
Diluted Earnings Per Share:
Net earnings $ 2.16 3.46
<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 Six Months Ended June 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 $ 5,272 5,792
Universal life and investment annuity
contract revenues 46,287 42,190
Net investment income 106,555 122,556
Other income 254 277
Realized gains (losses) on investments (6,412) 5,678
Total premiums and other revenue 151,956 176,493
Benefits and expenses:
Life and other policy benefits 19,593 17,153
Decrease in liabilities for
future policy benefits (3,493) (649)
Amortization of deferred policy
acquisition costs 22,178 20,006
Universal life and investment annuity
contract interest 69,411 85,604
Other operating expenses 14,077 14,529
Total benefits and expenses 121,766 136,643
Earnings before Federal income taxes 30,190 39,850
Provision for Federal income taxes:
Current 9,505 13,124
Deferred 759 425
Total Federal income taxes 10,264 13,549
Net earnings $ 19,926 26,301
Basic Earnings Per Share:
Net earnings $ 5.69 7.52
Diluted Earnings Per Share:
Net earnings $ 5.66 7.45
<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 June 30, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings $ 7,593 12,198
Other comprehensive income (loss),
net of effects of deferred
policy acquisition costs and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (6,298) (7,060)
Less: reclassification adjustment
for losses (gains)
included in net earnings 4,203 (377)
Amortization of net unrealized gains
related to transferred securities (110) 54
Unrealized losses on securities
transferred during period from
held to maturity to available for sale (1,145) -
Net unrealized losses on securities (3,350) (7,383)
Foreign currency translation adjustments 5 (69)
Other comprehensive loss (3,345) (7,452)
Comprehensive income $ 4,248 4,746
<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 Six Months Ended June 30, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings $ 19,926 26,301
Other comprehensive income (loss),
net of effects of deferred
policy acquisition costs and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (7,774) (11,946)
Less: reclassification adjustment
for losses (gains)
included in net earnings 4,203 (2,048)
Amortization of net unrealized gains
related to transferred securities (179) (31)
Unrealized losses on securities
transferred during period
from held to maturity to available for sale (9,166) -
Net unrealized losses on securities (12,916) (14,025)
Foreign currency translation adjustments 358 (78)
Other comprehensive loss (12,558) (14,103)
Comprehensive income $ 7,368 12,198
<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 Six Months Ended June 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 37 129
Balance at end of period 25,065 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 (12,916) (14,025)
Balance at end of period (19,328) 1,975
Foreign currency translation adjustments:
Balance at beginning of year 2,846 2,634
Change in translation adjustments
during period 358 (78)
Balance at end of period 3,204 2,556
Accumulated other comprehensive
income (loss) at end of period (16,124) 4,531
Retained earnings:
Balance at beginning of year 450,559 391,334
Net earnings 19,926 26,301
Balance at end of period 470,485 417,635
Total stockholders' equity $ 482,928 450,695
<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 Six Months Ended June 30, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,926 26,301
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment
annuity contract interest 69,411 85,604
Surrender charges and other policy revenues (22,555) (19,616)
Realized losses (gains) on investments 6,412 (5,678)
Accrual and amortization of
investment income (2,213) (2,670)
Depreciation and amortization 527 505
Decrease (increase) in insurance
receivables and other assets (2,466) 4,965
Increase in accrued investment income (1,688) (1,294)
Increase in deferred policy
acquisition costs (8,988) (12,033)
Decrease in liability for future
policy benefits (3,493) (649)
Increase in other policyholder liabilities 1,758 122
Decrease in Federal income taxes payable (4,049) (2,138)
Increase (decrease) in other liabilities 13,013 (12,301)
Decrease (increase) in value of index options 11,832 (6,836)
Other (336) (221)
Net cash provided by operating activities 77,091 54,061
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - -
Securities available for sale 9,993 40,101
Other investments 13,874 9,848
Proceeds from maturities and redemptions of:
Securities held to maturity 14,189 42,997
Securities available for sale 24,825 34,535
Purchases of:
Securities held to maturity (64,815) (116,474)
Securities available for sale (18,765) (93,984)
Other investments (23,192) (23,512)
Principal payments on mortgage loans 9,683 29,140
Cost of mortgage loans acquired (27,357) (27,951)
Decrease in policy loans 1,537 5,333
Decrease in assets of discontinued operations - 48
Decrease in liabilities of
discontinued operations - (48)
Other (6,670) (212)
Net cash used in investing activities (66,698) (100,179)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 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 $ 188,988 210,832
Return of account balances on universal
life and investment annuity contracts (233,791) (184,474)
Increase in short-term borrowings 23,000 -
Issuance of common stock under
stock option plan 38 132
Net cash provided by (used in)
financing activities (21,765) 26,490
Net decrease in cash and short-term investments (11,372) (19,628)
Cash and short-term investments
at beginning of year 14,010 24,508
Cash and short-term investments at end of period $ 2,638 4,880
<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 June 30, 2000, and the results of its
operations for the three months and six months ended June 30, 2000 and 1999,
and its cash flows for the six months ended June 30, 2000 and 1999. The
results of operations for the three months and six months ended June 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>
Six Months Ended June 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 six months ended
June 30, 2000 and 1999.
(3) DISCONTINUED BROKERAGE OPERATIONS
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation, was completed in the first quarter of
1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in 1999 as the entire $14,125,000 settlement
payment was accrued and reported as a loss in the third quarter of 1998. Any
additional losses will depend on the results of The City Colleges lawsuit
filed against National Western on March 28, 1994, for alleged federal or state
securities law "control person" violations relating to Westcap, and which is
pending in the United States District Court, Western District of Texas.
National Western believes it has reasonable and adequate defenses to this suit
and, accordingly, no amounts have been accrued in National Western's financial
statements for potential losses relating to such suit.
(4) SEGMENT AND OTHER OPERATING INFORMATION
The Company's reportable operating segments include domestic life insurance,
international life insurance, and annuities. These segments are organized
based on product types and geographic marketing areas. A summary of segment
information for the three and six months ended June 30, 2000 and 1999 is
provided below.
<TABLE>
<CAPTION>
Selected Segment Information:
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
June 30, 2000:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 74,601 76,165 241,357 - 392,123
Total segment
assets 406,158 382,253 2,860,791 47,899 3,697,101
Future policy
benefits 320,863 296,200 2,529,518 - 3,146,581
Other
policyholder
liabilities 9,259 6,944 9,658 - 25,861
Three Months
Ended
June 30, 2000:
Condensed Income
Statements:
Premiums and
contract
revenues $ 6,007 11,022 11,255 - 28,284
Net investment
income 6,563 5,769 34,246 2,237 48,815
Other income 22 2 115 - 139
Total
revenues 12,592 16,793 45,616 2,237 77,238
Policy benefits 4,305 4,144 41 - 8,490
Amortization of
deferred
policy
acquisition
costs 572 3,794 6,927 - 11,293
Universal life
and investment
annuity
contract
interest 2,418 3,956 26,386 - 32,760
Other operating
expenses 2,297 2,049 2,774 240 7,360
Federal income
taxes 1,029 979 3,260 683 5,951
Total expenses 10,621 14,922 39,388 923 65,854
Segment earnings $ 1,971 1,871 6,228 1,314 11,384
Six Months Ended
June 30, 2000:
Condensed Income
Statements:
Premiums and
contract
revenues $ 11,937 21,708 17,914 - 51,559
Net investment
income 13,035 11,419 79,342 2,759 106,555
Other income 22 29 203 - 254
Total revenues 24,994 33,156 97,459 2,759 158,368
Policy benefits 8,198 7,794 108 - 16,100
Amortization of
deferred
policy
acquisition
costs 2,198 6,951 13,029 - 22,178
Universal life
and investment
annuity
contract
interest 4,640 7,886 56,885 - 69,411
Other operating
expenses 4,383 4,043 5,411 240 14,077
Federal income
taxes 1,905 2,215 7,527 861 12,508
Total expenses 21,324 28,889 82,960 1,101 134,274
Segment earnings $ 3,670 4,267 14,499 1,658 24,094
</TABLE>
<TABLE>
<CAPTION>
Selected Segment Information:
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
June 30, 1999:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 69,886 73,021 200,654 - 343,561
Total segment
assets 408,013 373,831 2,767,952 34,521 3,584,317
Future policy
benefits 323,527 287,792 2,459,637 - 3,070,956
Other
policyholder
liabilities 9,062 7,383 7,632 - 24,077
Three Months
Ended
June 30, 1999:
Condensed Income
Statements:
Premiums and
contract
revenues $ 6,489 10,516 7,034 - 24,039
Net investment
income 6,347 5,460 50,864 2,033 64,704
Other income 51 41 35 - 127
Total revenues 12,887 16,017 57,933 2,033 88,870
Policy benefits 5,156 3,705 (804) - 8,057
Amortization of
deferred
policy
acquisition
costs 1,460 3,283 5,692 - 10,435
Universal life
and investment
annuity contract
interest 2,436 3,461 39,096 - 44,993
Other operating
expenses 2,757 2,268 2,803 - 7,828
Federal income
taxes 362 1,115 3,762 688 5,927
Total expenses 12,171 13,832 50,549 688 77,240
Segment earnings $ 716 2,185 7,384 1,345 11,630
Six Months Ended
June 30, 1999:
Condensed Income
Statements:
Premiums and
contract
revenues $ 12,280 20,744 14,958 - 47,982
Net investment
income 12,678 10,903 96,760 2,215 122,556
Other income 67 53 157 - 277
Total revenues 25,025 31,700 111,875 2,215 170,815
Policy benefits 8,700 8,407 (603) - 16,504
Amortization of
deferred
policy
acquisition
costs 2,392 6,562 11,052 - 20,006
Universal life
and investment
annuity contract
interest 4,885 6,894 73,825 - 85,604
Other operating
expenses 4,819 4,403 5,307 - 14,529
Federal income
taxes 1,431 1,839 7,543 749 11,562
Total expenses 22,227 28,105 97,124 749 148,205
Segment earnings $ 2,798 3,595 14,751 1,466 22,610
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Premiums and Other
Revenue:
Premiums and contract
revenues $ 28,284 24,039 51,559 47,982
Net investment income 48,815 64,704 106,555 122,556
Other income 139 127 254 277
Realized gains on
investments (5,832) 873 (6,412) 5,678
Total consolidated
premiums
and other revenue $ 71,406 89,743 151,956 176,493
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Federal Income Taxes:
Total segment Federal
income taxes $ 5,951 5,927 12,508 11,562
Taxes (benefits)
on realized
gains (losses)
on investments (2,041) 305 (2,244) 1,987
Total consolidated
Federal income taxes $ 3,910 6,232 10,264 13,549
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Net Earnings:
Total segment earnings $ 11,384 11,630 24,094 22,610
Realized gains (losses)
on investments,
net of taxes (3,791) 568 (4,168) 3,691
Total consolidated
net earnings $ 7,593 12,198 19,926 26,301
</TABLE>
<TABLE>
<CAPTION>
June 30,
2000 1999
(In thousands)
<S> <C> <C>
Assets:
Total segment assets $ 3,697,101 3,584,317
Other unallocated assets 19,983 15,535
Total consolidated assets $ 3,717,084 3,599,852
</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>
Six Months Ended June 30,
2000 1999
<S> <C> <C>
United States domestic market:
Investment annuities 77.3 % 81.6 %
Life insurance 6.6 5.9
Total domestic market 83.9 87.5
International market:
Investment annuities 3.0 0.9
Life insurance 13.1 11.6
Total international market 16.1 12.5
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 June 30, 2000, approximately 26.1% of the Company's total debt
and equity securities, based on fair values, were classified as securities
available for sale. These holdings provide flexibility to the Company to
react to market opportunities and conditions and to practice active management
within the portfolio to provide adequate liquidity to meet policyholder
obligations and other cash needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong cash
flows and matches expected maturities of assets and liabilities, the Company
has the ability to hold the securities, as it would be unlikely that forced
sales of securities would be required prior to maturity to cover payments of
liabilities. As a result, securities held to maturity are carried at amortized
cost less declines in value that are other than temporary. However, certain
situations may change the Company's intent to hold a particular security to
maturity, the most notable of which is a deterioration in the issuer's
creditworthiness. Accordingly, a security may be sold to avoid a further
decline in realizable value when there has been a significant change in the
credit risk of the issuer.
Securities that are not classified as held to maturity are reported as
securities available for sale. These securities may be sold if market or other
measurement factors change unexpectedly after the securities 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 June 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
June 30, December 31,
2000 1999
<S> <C> <C>
Debt securities 87.7% 87.8%
Mortgage loans 6.2 5.7
Policy loans 3.6 3.6
Index options 0.7 1.0
Equity securities 0.5 0.5
Real estate 0.4 0.4
Other 0.9 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>
June 30, 2000 $ 103,624 78,510 75,240 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 $78,510,000 at June 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. The unrealized losses were recorded as a component of
accumulated other comprehensive loss in the accompanying financial statements
for the quarter ended March 31, 2000.
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. The unrealized losses were
recorded as a component of accumulated other comprehensive loss in the
accompanying financial statements for the quarter ended June 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>
June 30, December 31,
2000 1999
<S> <C> <C>
AAA and U.S. government 28.4% 28.7%
AA 7.9 8.8
A 33.9 34.1
BBB 27.1 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 continues to reduce its exposure to prepayment and
extension risks by lowering its holdings of mortgage-backed securities. This
strategy began in 1994 when mortgage-backed securities totaled 47.6% of the
entire portfolio, but now total only 20.2% at June 30, 2000. 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 69.5% at June 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 June 30, 2000, CMOs represent approximately 94% 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 June 30, 2000, the Company's debt and equity securities were classified as
follows:
<TABLE>
<CAPTION>
Unrealized
Fair Amortized Gains
Value Cost (Losses)
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,063,393 2,138,688 (75,295)
Securities available for sale:
Debt securities 712,117 771,963 (59,846)
Equity securities 16,069 12,754 3,315
Totals $ 2,791,579 2,923,405 (131,826)
</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 $131,826,000 on
the securities portfolio at June 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 June 30, 2000, is detailed below:
<TABLE>
<CAPTION>
Change in
Unrealized Gains (Losses) Unrealized
At At Gains (Losses)
June 30, March 31, During 2nd
2000 2000 Quarter 2000
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ (75,295) (68,470) (6,825)
Securities available for sale:
Debt securities (59,846) (48,078) (11,768)
Equity securities 3,315 3,222 93
Totals $ (131,826) (113,326) (18,500)
</TABLE>
Unrealized losses at June 30, 2000, increased 45% from year-end 1999 and 16%
from March 31, 2000, even though market interest rates of the ten year U.S.
Treasury bond actually decreased approximately 40 basis points during this six
month period. With market interest rates declining, it would be expected that
market values of debt securities would increase. However, market values
actually decreased because of the substantial widening of the yield premium
for corporate bonds over comparable Treasury securities. Approximately 69% 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 relatively small effects on the Company's
financial statements. Also, the Company has the intent and ability to hold
these securities to maturity, and it is unlikely that sales of such securities
would be required which would realize market gains or losses.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve a predictable spread between
what is earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest risk through surrender
charges that are imposed to discourage policy surrenders. Interest rate
changes can be anticipated and risk may be limited due to management actions
regarding asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest changes
will likely be different from actual changes experienced, and the differences
may be material.
The Company's market risk-sensitive assets include debt securities, equity
securities which are almost entirely preferred stocks, mortgage loans, policy
loans, and index options. The Company does not maintain a securities trading
portfolio. Market risk-sensitive liabilities include policy liabilities for
deferred and immediate investment annuity contracts and supplemental
contracts. Sensitivity analysis expresses the potential gain or loss in fair
value, over a selected time period, from one or more selected hypothetical
changes in interest rates which are reasonably possible in the near term. The
Company performed detailed sensitivity analysis at December 31, 1999, for its
interest rate-sensitive assets. Based on the recent changes in market
conditions in the first six 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 $202,024,000 and
$183,902,000, or 6.2% and 5.7% of total invested assets, at June 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 June 30, 2000, and December 31,
1999, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
Geographic Region: 2000 1999
<S> <C> <C>
West South Central 55.2% 58.8%
Mountain 23.3 20.5
Pacific 9.8 11.0
South Atlantic 4.5 5.1
East South Central 3.8 4.2
Other 3.4 0.4
Totals 100.0% 100.0
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
Property Type: 2000 1999
<S> <C> <C>
Retail 60.3% 56.1%
Office 24.2 27.4
Hotel/Motel 6.4 7.2
Land/Lots 3.5 2.5
Nursing Homes 2.0 2.4
Apartment 1.0 1.6
Other 2.6 2.8
Totals 100.0% 100.0%
</TABLE>
As of June 30, 2000, the allowance for possible losses on mortgage loans was
$4,104,000. No additions were made to the allowance in the first six months
of 2000. 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
$3,031,000 and $3,014,000 at June 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 six months ended June 30, 2000, the
reductions in interest income due to nonaccrual and restructured mortgage
loans were approximately $155,000. For the six months ended June 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 $12,355,000 and $11,388,000 at June 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 $395,000 and $450,000 for the six
months ended June 30, 2000 and 1999. Also during the first six months of 2000
and 1999, the Company sold real estate properties resulting in realized gains
on investments totaling $207,000 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 six months ended June 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 JUNE 30, 2000 AND 1999
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the three months ended June 30, 2000 and
1999 is provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized gains
(losses) and index options $ 89,728 82,918
Index options (12,490) 5,952
Realized gains (losses) on investments (5,832) 873
Total revenues $ 71,406 89,743
Earnings:
Earnings from operations $ 11,384 11,630
Net realized gains (losses) on investments (3,791) 568
Net earnings $ 7,593 12,198
Basic Earnings Per Share:
Earnings from operations $ 3.25 3.33
Net realized gains (losses) on investments (1.08) 0.16
Net earnings $ 2.17 3.49
Diluted Earnings Per Share:
Earnings from operations $ 3.24 3.30
Net realized gains (losses) on investments (1.08) 0.16
Net earnings $ 2.16 3.46
</TABLE>
Consolidated Operating Results: Earnings from operations, excluding net
realized gains and losses on investments, totaled $11,384,000 for the quarter
ended June 30, 2000, compared to $11,630,000 for the second quarter of 1999.
Earnings for the current quarter were affected by the Company's equity-indexed
annuity business. These annuities combine features associated with
traditional fixed annuities, with the option to have interest rates linked in
part to an equity index, the S&P 500 Index. Volatility and declines in the
S&P 500 Index during the second quarter of 2000 resulted in lower earnings
from this block of business. However, universal life and annuity contract
revenues were significantly higher offsetting much of the impact from the
equity-indexed annuity business.
Revenues for the quarters ended June 30, 2000 and 1999 totaled $71,406,000 and
$89,743,000, respectively. The lower revenues in 2000 are due to realized
losses on investments and significant decreases in investment income from
index options which are used to hedge the Company's equity-indexed annuities.
The lower investment income was substantially offset by lower annuity contract
interest expense, which reflects the results of the Company's hedging policy
of this business. Excluding both realized gains and losses on investments and
income or losses from index options, as these items can be irregular and
variable in nature, revenues reflected significant growth totaling $89,728,000
and $82,918,000 for the quarters ended June 30, 2000 and 1999, respectively.
The Company recorded realized losses on investments, net of taxes, totaling
$3,791,000 for the quarter ended June 30, 2000, compared to gains of $568,000
for the second quarter of 1999. The loss in the second quarter of 2000 is
primarily due to a permanent impairment writedown for a specific debt security
which defaulted during the 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 cost is not expected. Overall, the Company's debt
securities portfolio remains high quality with minimal holdings of below
investment grade securities, particularly in comparison to life insurance
industry averages.
Universal Life and Investment Annuity Contract Revenues: Contract revenues
increased significantly during the quarter ended June 30, 2000 totaling
$25,384,000 compared to $20,658,000 for the comparable 1999 period. This
increase of over 22% is almost entirely due to higher annuity surrender charge
income. Surrenders for both single-tier and two-tier annuities were
abnormally high during the second quarter of 2000.
Net Investment Income: Net investment income decreased 24.6% from the second
quarter of 1999, primarily due to declines in fair values of index options
used to hedge the equity return component of the Company's equity-indexed
annuity product. The index options, which act as hedges to match closely the
returns on the S&P 500 Index, are reported at fair value in the accompanying
financial statements. The changes in the values of the index options and the
credited interest on policyholder liabilities for equity-indexed annuities are
both reflected in the statement of earnings. The reduction to investment
income from index options for the quarter ended June 30, 2000, totaled
$12,490,000 compared to income of $5,952,000 for the comparable period of
1999. This significant decline is directly attributable to the volatility and
decline in the S&P 500 Index. While net investment income was lower due to
these options, this reduction was substantially 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. A detail of net
investment income is provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 52,894 51,097
Mortgage loans 4,726 4,021
Policy loans 2,040 2,045
Index options (12,490) 5,952
Other investment income 2,790 2,720
Total investment income 49,960 65,835
Investment expenses 1,145 1,131
Net investment income $ 48,815 64,704
</TABLE>
Life and Other Policy Benefits: Policy benefits in the second quarter of 2000
increased 12.2% over the 1999 second quarter. The higher expenses were almost
entirely due to life insurance benefits claims which increased $1,044,000 as
indicated in the comparative detail provided below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 6,482 5,438
Surrenders of traditional products 2,658 2,513
Other policy benefits 361 514
Totals $ 9,501 8,465
</TABLE>
Universal Life and Investment Annuity Contract Interest: The Company closely
monitors its credited interest rates, taking into consideration such factors
as profitability goals, policyholder benefits, product marketability, and
economic market conditions. Rates are established or adjusted after careful
consideration and evaluation of these factors against established objectives.
As market interest rates fluctuate, the Company's credited interest rates are
often adjusted accordingly, while also taking into consideration other factors
as described above. Contract interest totaled $32.8 million and $45.0 million
for the quarters ended June 30, 2000 and 1999, respectively. The decrease is
primarily attributable to interest on the Company's equity-indexed annuity
products. Because of the volatility and decline of the S&P 500 Index during
the second quarter of 2000, the related contract interest of the equity-
indexed annuities also declined. Correspondingly, the income from index
options used to hedge these annuities also declined, substantially offsetting
the lower contract interest.
Other Operating Expenses: These expenses totaled $7,360,000 and $7,828,000 for
the quarters ended June 30, 2000 and 1999, respectively. Included in 1999
expenses is an additional accrual for state income taxes totaling $800,000.
While a portion of these taxes relate to 1999, the majority of this accrual
covers adjustments for previous years.
Federal Income Taxes: Federal income taxes include no unusual items as
effective tax rates for the quarters ended June 30, 2000 and 1999 were 34.0%
and 33.8%, respectively.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the quarters ended June 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:
June 30, 2000 $ 1,971 1,871 6,228 1,314 11,384
June 30, 1999 $ 716 2,185 7,384 1,345 11,630
</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 $1,971,000 and
$716,000 for the three months ended June 30, 2000 and 1999, respectively. The
increase in earnings in 2000 is primarily due to decreases in amortization of
deferred policy acquisition costs, policy benefits, and other operating
expenses.
A comparative analysis of results of operations for the Company's domestic
life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
Domestic Life Insurance Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 6,007 6,489
Net investment income 6,563 6,347
Other income 22 51
Total premiums and other revenue 12,592 12,887
Benefits and expenses:
Policy benefits 4,305 5,156
Amortization of deferred policy
acquisition costs 572 1,460
Universal life insurance
contract interest 2,418 2,436
Other operating expenses 2,297 2,757
Total benefits and expenses 9,592 11,809
Segment earnings before Federal income taxes 3,000 1,078
Federal income taxes 1,029 362
Segment earnings $ 1,971 716
</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 June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 3,037 2,947
Surrender charges 476 477
Policy fees and other revenues 170 335
Traditional life insurance premiums 2,324 2,730
Totals $ 6,007 6,489
</TABLE>
Actual universal life insurance deposits collected for the quarters ended June
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 June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 1,281 1,270
Renewal premiums 3,676 3,491
Totals $ 4,957 4,761
</TABLE>
Policy benefits were lower in the second quarter of 2000 totaling $4,305,000
compared to $5,156,000 for the comparable 1999 period. The decrease is due to
reductions in traditional policy liabilities which were partially offset by
higher life insurance benefit claims. Mortality claims experience fluctuates
from period to period, and such deviations are not uncommon in the life
insurance industry.
Universal life insurance contract interest remained relatively constant at
$2,418,000 in 2000 compared to $2,436,000 in 1999. This is consistent with
the relative stable to declining size of this block of business.
Amortization of deferred policy acquisition costs was significantly lower in
2000 totaling $572,000 compared to $1,460,000 in 1999. These expenses
represent the amortization of the costs of acquiring or producing new
business, which consists primarily of agents' commissions. The majority of
such costs are amortized in direct relation to the anticipated future gross
profits of the applicable blocks of business. The lower amortization costs in
2000 resulted from adjustments to deferred policy acquisition costs as
anticipated future gross profits on domestic blocks of business were revised.
Other operating expenses totaled $2,297,000 and $2,757,000 for the quarters
ended June 30, 2000 and 1999, respectively. Expenses for 2000 were lower as
1999 expenses include an additional accrual for state income taxes as
previously described.
International Life Insurance Operations
The Company's international life insurance operations focus marketing efforts
on foreign nationals in upper socioeconomic classes with substantial financial
resources. Insurance sales are primarily on insureds from countries in
Central and South America, the Caribbean, and the Pacific Rim. Policy sales
on insureds from numerous countries in these different regions provides
diversification that helps to minimize large fluctuations in sales that can
occur due to various economic, political, and competitive pressures that may
occur from one country to another. Historically, the top three countries in
insurance sales have often been Argentina, Chile, and Peru. Products sold in
the international market include both universal life and traditional life
insurance products. The Company minimizes exposure to foreign currency risks,
as almost all foreign policies require payment of premiums and claims in
United States dollars. Sales production from the international market is from
independent broker-agents, many of whom have been selling National Western
products for 20 or more years.
Earnings for the international life insurance operating segment were
$1,871,000 and $2,185,000 for the quarters ended June 30, 2000 and 1999,
respectively. Earnings in 2000 were somewhat lower due to higher life
insurance benefit claims, amortization of deferred policy acquisition costs,
and contract interest, partially offset by increases in universal life
insurance revenues.
A comparative analysis of results of operations for the Company's
international life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
International Life Insurance Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 11,022 10,516
Net investment income 5,769 5,460
Other income 2 41
Total premiums and other revenue 16,793 16,017
Benefits and expenses:
Policy benefits 4,144 3,705
Amortization of deferred policy
acquisition costs 3,794 3,283
Universal life insurance contract interest 3,956 3,461
Other operating expenses 2,049 2,268
Total benefits and expenses 13,943 12,717
Segment earnings before Federal income taxes 2,850 3,300
Federal income taxes 979 1,115
Segment earnings $ 1,871 2,185
</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 June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 7,667 7,292
Surrender charges 1,882 1,707
Policy fees and other revenues 919 887
Traditional life insurance premiums 554 630
Totals $ 11,022 10,516
</TABLE>
Actual universal life insurance deposits collected for the quarters ended June
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 June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 3,376 3,317
Renewal premiums 9,569 8,978
Totals $ 12,945 12,295
</TABLE>
Life insurance benefit claims, which are reflected in policy benefits for
segment reporting purposes, were higher in 2000 at $2,700,000 compared to
$2,163,000 in 1999. As previously described for domestic life insurance
operations, mortality claims fluctuate from period to period. These
deviations, which can at times be significant, are not uncommon in the life
insurance industry. Over extended periods of time, higher claims experience
tends to be offset by periods of lower claims experience. Additionally, the
Company utilizes reinsurance to help minimize its exposure to adverse
mortality experience. The Company's general policy is to reinsure amounts in
excess of $200,000 on the life of any one individual.
Universal life insurance contract interest increased from $3,461,000 in 1999
to $3,956,000 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 $6,228,000 and $7,384,000 for
the quarters ended June 30, 2000 and 1999, respectively. Earnings for 2000
were down from 1999 primarily due to lower earnings from the Company's equity-
indexed annuity business, offset significantly by higher annuity contract
revenues primarily from surrender charges.
A comparative analysis of results of operations for the Company's annuity
segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended June 30,
Annuity Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 11,255 7,034
Net investment income 34,246 50,864
Other income 115 35
Total premiums and other revenue 45,616 57,933
Benefits and expenses:
Policy benefits 41 (804)
Amortization of deferred policy
acquisition costs 6,927 5,692
Annuity contract interest 26,386 39,096
Other operating expenses 2,774 2,803
Total benefits and expenses 36,128 46,787
Segment earnings before Federal income taxes 9,488 11,146
Federal income taxes 3,260 3,762
Segment earnings $ 6,228 7,384
</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 76%
in 2000 compared to 1999 due to increases in surrender charges from both
single-tier and two-tier annuities. Actual policy surrenders for annuities
were abnormally high increasing 85% in the second quarter of 2000 from the
comparable period of 1999. This unusual rate of surrenders has slowed through
the first portion of the third quarter of 2000. A comparative detail of the
components of premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 5,414 3,924
Single-tier annuities 4,261 1,579
Total surrender charges 9,675 5,503
Payout annuity and other revenues 1,558 1,510
Traditional annuity premiums 22 21
Totals $ 11,255 7,034
</TABLE>
Actual annuity deposits collected for the quarters ended June 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 June 30,
2000 1999
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 27,083 44,289
Other 52,720 46,287
Total deferred annuities 79,803 90,576
Immediate annuities 6,275 6,043
Totals $ 86,078 96,619
</TABLE>
Although total annuity deposits for the quarter ended June 30, 2000, were
lower than the comparable 1999 period, the decline is primarily attributable
to equity-indexed annuities. Sales of the Company's other deferred annuity
products and immediate annuities reflect increases of 13.9% and 3.8%,
respectively.
While sales were 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 and
second quarters of 2000, which is consistent with volatility in the stock
market.
Net investment income for the second quarters of 2000 and 1999 totaled
$34,246,000 and $50,864,000, respectively. As previously described in Summary
of Consolidated Operating Results, the decrease in net investment income is
due to lower income from index options. Declines in fair values of index
options used to hedge the equity return component of the Company's equity-
indexed annuity products resulted in lower investment income for the second
quarter of 2000. The decline is directly attributable to the decline in the
S&P 500 Index over the same period.
Annuity contract interest was $26.4 million in 2000 compared to $39.1 million
in 1999, reflecting a decrease of $12.7 million. The decrease is primarily
due to lower interest credited on equity-indexed annuities due to the
volatility and decline in the S&P 500 Index. While 2000 contract interest is
lower, net investment income for 2000 was also $16.6 million lower than the
comparable 1999 second quarter. Most of the difference between the contract
interest and net investment income declines is related to the equity-indexed
annuity business. Although index options are used as hedges, 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
that 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
reserves related to minimum guaranteed interest rates.
Amortization of deferred policy acquisition costs represents the amortization
of the costs of acquiring or producing new business, primarily agents'
commissions, the majority of which are amortized in direct relation to the
anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level of policy surrenders. Amortization
for 2000 and 1999 was $6,927,000 and $5,692,000, respectively. The large
increase in amortization is directly related to the significant increase in
annuity surrenders in the quarter ended June 30, 2000, as previously
described.
Other Operations
Earnings for other operations totaled $1,314,000 and $1,345,000 for the second
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.
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 first year start up expenses
could generate minimum operating losses of approximately $600,000, before
taxes. Currently, operating losses from initial start up costs totaled
$240,000 for the period from inception to June 30, 2000.
Most of the income from the Company's other 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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the six months ended June 30, 2000 and 1999
is provided below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized gains
(losses) and index options $ 172,583 163,288
Index options (14,215) 7,527
Realized gains (losses) on investments (6,412) 5,678
Total revenues $ 151,956 176,493
Earnings:
Earnings from operations $ 24,094 22,610
Net realized gains (losses) on investments (4,168) 3,691
Net earnings $ 19,926 26,301
Basic Earnings Per Share:
Earnings from operations $ 6.88 6.47
Net realized gains (losses) on investments (1.19) 1.05
Net earnings $ 5.69 7.52
Diluted Earnings Per Share:
Earnings from operations $ 6.85 6.40
Net realized gains (losses) on investments (1.19) 1.05
Net earnings $ 5.66 7.45
</TABLE>
Consolidated Operating Results: For the six months ended June 30, 2000,
earnings from operations, excluding net realized gains and losses on
investments, totaled $24,094,000 compared to $22,610,000 for the same period
of 1999. This 6.6% increase in earnings is largely attributable to higher
universal life and investment annuity contract revenues. Additionally, while
life insurance benefit claims were significantly higher in the first six
months of 2000, this increase was largely offset by reductions in traditional
policy liabilities.
The Company recorded realized losses on investments, net of taxes, totaling
$4,168,000 for the six months ended June 30, 2000, compared to gains of
$3,691,000 for the first six 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 as previously described. The 1999 gains
were primarily from sales and calls of investments in debt securities totaling
$2,099,000, net of taxes. Also included in 1999 was a net gain totaling
$922,000 from the sale of investment real estate owned by one of National
Western's subsidiaries, NWL 806 Main, Inc.
As previously reported, the bankruptcy reorganization of the Company's wholly
owned subsidiary, The Westcap Corporation, was completed in the first quarter
of 1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the six months ended June 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 six months ended June 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:
June 30, 2000 $ 3,670 4,267 14,499 1,658 24,094
June 30, 1999 $ 2,798 3,595 14,751 1,466 22,610
</TABLE>
Domestic Life Insurance Operations
Earnings for the domestic life insurance operating segment were $3,670,000 and
$2,798,000 for the six months ended June 30, 2000 and 1999, respectively. The
increase in earnings is primarily due to lower policy benefits and other
operating expenses. A comparative analysis of results of operations for the
Company's domestic life insurance segment is detailed below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
Domestic Life Insurance Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 11,937 12,280
Net investment income 13,035 12,678
Other income 22 67
Total premiums and other revenue 24,994 25,025
Benefits and expenses:
Policy benefits 8,198 8,700
Amortization of deferred policy
acquisition costs 2,198 2,392
Universal life insurance contract interest 4,640 4,885
Other operating expenses 4,383 4,819
Total benefits and expenses 19,419 20,796
Segment earnings before Federal income taxes 5,575 4,229
Federal income taxes 1,905 1,431
Segment earnings $ 3,670 2,798
</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>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 6,060 5,784
Surrender charges 958 883
Policy fees and other revenues 613 643
Traditional life insurance premiums 4,306 4,970
Totals $ 11,937 12,280
</TABLE>
Actual universal life insurance deposits, which are recorded directly to
policyholder liabilities upon receipt, for the six months ended June 30, 2000
and 1999 are detailed below.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 2,891 2,375
Renewal premiums 7,344 7,260
Totals $ 10,235 9,635
</TABLE>
Consistent with the second quarter of 2000, policy benefits were lower for the
six months ended June 30, 2000, totaling $8,198,000 compared to $8,700,000 for
the comparable 1999 period. The decrease is due to reduction in traditional
policy liabilities which were partially offset by higher life insurance
benefit claims.
Other operating expenses totaled $4,383,000 and $4,819,000 for the six months
ended June 30, 2000 and 1999, respectively. As previously described for the
quarters ended June 30, 2000 and 1999, 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
$4,267,000 and $3,595,000 for the six months ended June 30, 2000 and 1999,
respectively. Earnings for 2000 were higher primarily due to increases in
universal life insurance revenues and lower policy benefits .
A comparative analysis of results of operations for the Company's
international life insurance segment is detailed below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
International Life Insurance Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 21,708 20,744
Net investment income 11,419 10,903
Other income 29 53
Total premiums and other revenue 33,156 31,700
Benefits and expenses:
Policy benefits 7,794 8,407
Amortization of deferred policy
acquisition costs 6,951 6,562
Universal life insurance contract interest 7,886 6,894
Other operating expenses 4,043 4,403
Total benefits and expenses 26,674 26,266
Segment earnings before Federal income taxes 6,482 5,434
Federal income taxes 2,215 1,839
Segment earnings $ 4,267 3,595
</TABLE>
A comparative detail of premiums and contract revenues, which reflects the
increase in universal life insurance revenues as previously described, is
provided below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 15,283 14,513
Surrender charges 3,773 3,663
Policy fees and other revenues 1,722 1,785
Traditional life insurance premiums 930 783
Totals $ 21,708 20,744
</TABLE>
Actual universal life insurance deposits collected for the six months ended
June 30, 2000 and 1999 are detailed below. Increases in current year premiums
are partially due to improved economic conditions during 2000 in the
international Central and South American markets.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 6,499 5,886
Renewal premiums 17,912 17,464
Totals $ 24,411 23,350
</TABLE>
Annuity Operations
Earnings for the annuity operating segment were $14,499,000 and $14,751,000
for the six months ended June 30, 2000 and 1999, respectively. Consistent
with the second quarter results as previously described, earnings for the six
months ended June 30, 2000, were lower than 1999 due to the Company's equity-
indexed annuity business. However, increases in annuity contract revenues,
primarily from policy surrender charges, mitigated much of this effect.
Higher amortization of deferred policy acquisition costs resulting from the
increased level of surrenders also tempered the revenue increases.
A comparative analysis of results of operations for the Company's annuity
segment is detailed below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
Annuity Operations: 2000 1999
(In thousands)
<S> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 17,914 14,958
Net investment income 79,342 96,760
Other income 203 157
Total premiums and other revenue 97,459 111,875
Benefits and expenses:
Policy benefits 108 (603)
Amortization of deferred policy
acquisition costs 13,029 11,052
Annuity contract interest 56,885 73,825
Other operating expenses 5,411 5,307
Total benefits and expenses 75,433 89,581
Segment earnings before Federal income taxes 22,026 22,294
Federal income taxes 7,527 7,543
Segment earnings $ 14,499 14,751
</TABLE>
Premiums and annuity contract revenues were up $2,956,000, or 19.8%, from
$14,958,000 in 1999 to $17,914,000 in 2000. This increase is due to higher
surrender charge revenues from single-tier annuities. As previously described
for the three months ended June 30, 2000, actual policy surrenders were
abnormally high during the second quarter of 2000 resulting in increased
revenues. However, this unusually high rate of surrenders has slowed through
the first portion of the third quarter of 2000. A comparative detail of the
components of premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 8,466 8,567
Single-tier annuities 6,428 3,408
Total surrender charges 14,894 11,975
Payout annuity and other revenues 2,984 2,944
Traditional annuity premiums 36 39
Totals $ 17,914 14,958
</TABLE>
Annuity deposits for 2000 reflect a decline of 11.1% compared to the same
period of 1999, resulting 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 June 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 6.1%
for 2000. Actual annuity deposits collected for the six months ended June 30,
2000 and 1999 are detailed below.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 61,322 89,919
Other 104,077 98,105
Total deferred annuities 165,399 188,024
Immediate annuities 14,000 13,667
Totals $ 179,399 201,691
</TABLE>
Net investment income for the six months ended June 30, 2000 and 1999 totaled
$79,342,000 and $96,760,000, respectively. Declines in fair values of index
options resulted in a reduction to net investment income totaling $14,215,000
for the six months ended June 30, 2000. For the comparable 1999 period,
increases in fair values of index options resulted in additions to net
investment income totaling $7,527,000. 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.
Annuity contract interest was $56.9 million in 2000 compared to $73.8 million
in 1999. As previously described for the quarter ended June 30, 2000, 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 six months ended June 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 June 30, 2000.
Amortization for the six months ended June 30, 2000 and 1999 totaled
$13,029,000 and $11,052,000, respectively. The increase in amortization is
directly related to the increase in annuity policy surrenders as previously
described.
Other Operations
As previously described for the six months ended June 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 $1,658,000 and $1,466,000 for the six months ended June 30, 2000 and
1999, respectively. Currently, most of the income from these operations is
from a life interest in the Libbie Shearn Moody Trust.
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 $77.1 million and $54.1 million for the six months ended June 30, 2000
and 1999, respectively. Net cash flows from the Company's deposit product
operations, which includes universal life and investment annuity products,
totaled $26.4 million for the first six months of 1999, but reflected cash
outflows of $44.8 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 the second quarter of 2000. While
increased surrenders may continue, this high rate of surrenders has slowed
significantly in the first portion of the third quarter. Premium deposits
have also been lower in the first six 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 during the second
quarter.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $39.0 million and $77.5 million for the six months
ended June 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 $482.9 million at June 30, 2000, reflecting an
increase of $7.4 million from December 31, 1999. The increase in capital is
primarily from net earnings of $19.9 million, offset by an increase in net
unrealized losses on investment securities totaling $12.9 million during the
first six 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 June
30, 2000, was $137.91.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 23, 2000, the stockholders voted upon the following matters at the
annual stockholders meeting:
(a) The election of Class A directors to serve one-year terms. The results of
the voting were as follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <C>
Robert L. Moody 2,730,195 33,800
Arthur O. Dummer 2,730,005 33,990
Harry L. Edwards 2,730,005 33,900
E. J. Pederson 2,730,205 33,790
</TABLE>
(b) The election of Class B directors to serve one-year terms. The results of
the voting were as follows:
<TABLE>
<CAPTION>
For Against
<S> <C> <S>
E. Douglas McLeod 200,000 -
Charles D. Milos 200,000 -
Frances A. Moody 200,000 -
Ross R. Moody 200,000 -
Russell S. Moody 200,000 -
Louis E. Pauls, Jr. 200,000 -
</TABLE>
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
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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: August 18, 2000 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: August 18, 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: August 18, 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 June 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 $ 7,593 12,198
Denominator:
Basic earnings per share -
weighted-average shares 3,501 3,499
Effect of dilutive stock options 18 31
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,519 3,530
Basic earnings per share:
Net earnings $ 2.17 3.49
Diluted earnings per share:
Net earnings $ 2.16 3.46
</TABLE>
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Six Months Ended June 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 $ 19,926 26,301
Denominator:
Basic earnings per share -
weighted-average shares 3,501 3,499
Effect of dilutive stock options 18 34
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,519 3,533
Basic earnings per share:
Net earnings $ 5.69 7.52
Diluted earnings per share:
Net earnings $ 5.66 7.45
</TABLE>
